Michael Dell is on strange grounds. Sometimes apologetic and at times blustery, the doyen of supply- chain efficiency and his chief financial officer stumbled to find the right words to explain why Dell Inc. missed its fiscal fourth quarter revenue target.
Forget about the tortuous explanations that emerged from Dell's conference call with analysts Thursday (Feb. 28). What it boils down to is the difficulty Dell is having transitioning its business from a direct-sale system that relied on a single but highly efficient supply chain structure into a more diverse design, manufacturing and—direct and retail—sales system.
Creating such a system would be difficult for any company. For Dell, it is even much more daunting considering the company's background and evolution.
Until just two years ago, when Hewlett-Packard Inc. snatched its PC market leadership crown, Dell was content to market its product directly to customers, cutting out the complex layers of supply-chain partners that characterize such systems.
Forced to compete with HP, Apple, Lenovo and other technology OEMs on their turf, Dell is struggling to remake not just itself but also its entire product design system along with its new product introduction structure and all the components of its supply chain, including components procurement and supplier as well as contract manufacturer management.
"The first thing we're doing is...creating effectively more than one supply chain alternative for how products reach their ultimate destination," said Dell, chairman and CEO of the Round Rock, Texas, company during the analysts' conference.
"When I look at all the investments that we are making, we believe those are the right ones. Would we like to see results coming faster? Absolutely," Dell added.
To reach that goal, the company must build and establish lasting and advantageous relationships with local and global retailers, create a new supply chain structure and still use its current direct-sale model to service existing customers--all new requirements it didn't have to deal with a few quarters ago.
"Growth and profitability are not minor for Dell. We have definitive plans to increase profitability in our consumer business, certainly up to competitive levels," added Dell CFO Donald Carty during the the conference call. "That's going to be largely driven by changes to our product design, manufacturing and delivery models, significant and targeted reductions in operating expenses [and] an improved mix of product and services."
It's not that Dell hasn't already made considerable headway. In fact, the company's more recent revenue growth and strong performance in various market sectors, including consumer electronics, indicate it is pushing back on the competition.
Dell's problem is that it hasn't returned to its old days of heady growth. Additionally, the company has failed to curb operating expenses and has fallen behind in its quest to cut positions to boost profitability.
In Dell's just-ended fiscal 2008 period, for instance, Dell's revenue surged to $61.1 billion, a 6 percent improvement upon the $57.4 billion it reported for the preceding year. Net income rose during the same period to $2.95 billion, or $1.31 per share, from $2.58 billion, or $1.14 per share, in its fiscal 2007.
That's the good news.
The bad news is that Dell's operating structure is in rather poor shape, and the company hasn't quite figured out how to resize and reduce its expenses without negatively affecting sales in the new areas where it has been expanding.
Perhaps the most glaring example of the company's runaway cost structure is the category "selling, general and administrative expenses" (SG&A), which have surged several percentage points as Dell added more sales and marketing people to support its extended outreach into retail outlets.