Dell, IT, Outsourcing

Dell bucks the outsourcing trend

21 Dec 2004 | (Case Study)

Dell's dazzlingly efficient assembly plant here may be the best hope for keeping blue-collar jobs in the United States rather than exporting them. Inside Dell, the world's largest computer maker, executives study the assembly process with great intensity. They wheel in video equipment to examine a work team's every movement, looking for any extraneous bends or wasted twists.

Designers congratulate each other for eliminating even a single screw from a product, because that represents a saving of roughly four seconds for each machine built - the time that it takes an employee, on average, to use the pneumatic screwdriver dangling above his or her head.

Computer software clocks the assembly-line performance of workers, whether they are putting together PCs or the servers and storage equipment that Dell sells to large companies. The most able are declared "master builders" and then videotaped so that others may watch and learn. The weaker ones are told that it takes a special set of talents to cut it on the Dell factory floor - and shown the door.

That sounds steely-eyed cold, but with economists and politicians fretting over the future of American manufacturing, Dell is not just defying a global trend - it is helping to set the standard.

"When everybody is outsourcing, Dell continues to manufacture in the United States because over two decades of fine-tuning, they've figured out how to do it cheaper and smarter," said Charles Wolf, an analyst at Needham & Co. who has been following Dell since 1991. (He has also been reaping the financial rewards as a longtime Dell shareholder, seeing a 33-fold return on his investment.) "They're truly in the 21st century when it comes to manufacturing."

No other major computer maker produces computers in the United States. Long ago, Dell's top rival, Hewlett-Packard, outsourced the assembly of its PCs to third parties, primarily based in Asia, as did International Business Machines, the world's third-largest PC maker. And IBM, which created the PC market in 1981, is leaving the business, announcing this month that it is selling its PC unit to Lenovo, the Chinese computer giant.

"It's been a long time since one of our competitors actually made a computer," said Michael Dell, the founder and chairman of Dell.

His company, by contrast, operates three giant assembly plants in the United States - two in Austin and the third near Nashville, Tennessee. Each is large enough to house six contiguous football fields. Last month, the company announced that it would build a fourth plant, twice as big as the others, near Winston-Salem, North Carolina. Inside the company, executives talk about opening a fifth.

At a White House conference on the economy on Wednesday, the Dell chief executive, Kevin Rollins, said the company made all of its desktop computers in the United States.

"None is outsourced," Rollins said. "None is made in other countries and shipped in."

Dell's decision to expand its American manufacturing presence, however, has nothing to do with patriotism. Executives here say their decisions are based on the bottom line as well as on geography; it is simply more efficient to stamp out computer equipment closer to the customer.

"The reason we continue to manufacture in the United States is that it's the optimal place to do so, and we can do it most cost effectively," said John Hamlin, who oversees Dell's consumer line.

Few rivals know that better than Lenovo itself. The questions that many analysts have been asking in the wake of the IBM deal is how well Lenovo, which is based in Beijing, can compete with Dell outside China, given how cheaply Dell can make its machines.

Dell has run a factory in Xiamen, China, since 1998 - but to produce computer equipment that the company sells to its Asian customers. Similarly, Dell's factory in Limerick, Ireland, makes machines for Europe. This month, Dell announced that his company would probably build a second European plant soon.

Dell is also bucking global trends on another front. In an era when a call center is more likely to be in India than Indiana, the company has announced that it is building a customer assistance facility in Oklahoma City. This year, it opened a call center in Edmonton, Alberta. And while Dell's laptops are produced in Malaysia, they are built by Dell employees working inside a Dell-owned factory.

"I tell employees all the time that we're in a race on costs," said Dick Hunter, the Dell executive who oversees manufacturing in the United States. "When we lose the race on costs to Asia or wherever, that puts our own security in jeopardy."

Ever since 1984, when Michael Dell began selling personal computers from his University of Texas dormitory room, his company has been able to sell cheaper PCs by cutting out the middleman, selling directly via the phone or, nowadays, the Internet. But the reason Dell continues to dominate as a low-cost leader - whether selling a PC, a server or, more recently, plasma televisions and portable music players - is its fanatical determination to save every penny it can. Dell may not quite be the Henry Ford of our time, but his company is certainly the Wal-Mart of the high-technology industry, for better or worse.

The labor costs of a PC are "roughly 10 bucks," Rollins said, meaning that payroll costs account for maybe 2 percent of the cost of the typical Dell PC. Five years ago, it took two workers 14 minutes to build a PC; it now takes a single worker roughly five minutes.

Research and development is one way Dell tamps down costs. The company devotes 2 percent of its bottom line to this area, much less than its rivals. Innovation inside Dell is instead more about how one produces, packages and markets a product than it is about improvements in the product itself.

"We have some competitors who are spending 5 or 6 or 8 percent on R&D," Rollins said, "but our financials suggest our R&D model is the right model."

Meanwhile, Shayne Myhand, a factory day-shift manager, does a lot of chaperoning. As many as four or five times a day, he finds himself playing host to corporate chieftains and midlevel scouts who come to marvel at the plant.

Myhand begins each tour the same way, moving to a display case and grabbing an unimpressive wooden plaque commemorating Dell's production of 49,269 personal computers in the last three months of 1991.

"On a good day, during peak demand, we'll exceed that number by lunchtime," he said with a slight nod, a faint smile gracing his lips.

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