Outclassed and outsourcing
08 September 2008
Following stories in EMTww about the transforming EMS industry, it has been rumoured this week that Dell, the world’s second largest computer manufacturer, is to sell its factories and outsource production.
Dell’s business model of eliminating unnecessary stages and dealing directly with the customer proved to be popular. It meant that customers could order custom-built machines, and Dell’s inventory could be kept low as it utilised just-in-time techniques. But last year, in a bid to improve sales, the company began selling in American retail outlets such as Staples, Wal-Mart, and Best Buy. This necessitated the supply of similar models (rather than bespoke ones) that can be delivered instantly. The result of this is that Dell now has to make products in advance and carry the inventory costs. By abandoning the ethos of building computers to order and outsourcing production, it hopes that computers can be built efficiently and cost-effectively.
In a move reminiscent of Hewlett Packard (HP computers to be made in Russia), it is thought that Taiwanese company Hon Hai Precision may win the outsourcing contracts, whilst Flextronics is suspected to be a candidate for Dell’s notebook computer business.
Hon Hai Precision, as reported in EMTww on 21 July 2008 (Judicial battle over secrets), will soon be opening a 440-acre manufacturing plant in San Jeronimo, south of the Mexican border, employing 20,000 people and creating economic growth in southern New Mexico. Flextronics already performs procurement, supply chain management, manufacturing, assembly and testing for MPC at Flextronics’ manufacturing facility in Juarez, Mexico (Revenue growth for computer company, EMTww, 18 August 2008).
Since Michael Dell returned to the company as its Chief Executive in January 2007, it has been cutting costs by making jobs redundant. Dell owns 60 manufacturing and technology facilities across 20 countries; including India, China, Brazil, Malaysia and Poland. This news is going to affect its worldwide employees, including those in Ireland; one of its largest operations. The company employs approximately 4500 people in Ireland; 1300 at a sales and marketing plant in Dublin, and over 3000 in Limerick.
But this is the human side of the story. It should come as no surprise that a company as large as Dell is reviewing its financial situation. It has become a victim of a changing market. Years ago its competitors outsourced production, and now as demand shifts from desktop machines to laptops and notebooks, Dell has identified that its production methodology is no longer cost effective. Larger profits can be sourced by outsourcing production.
This week’s leader was written by Paul Wolfe, EMTww’s Assistant Editor.
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