Channeling Sales

Nice article in the New York Times today on some of Dell’s problems.  Putting aside the customer service issue, which is mostly a problem they created themselves, and can likely fix relatively quickly, the article picked up on an overlooked issue in assessing Dell’s competitiveness.  As the market has shifted from desktops to notebooks the cost and manufacturing advantage Dell has had in building its PCs has disappeared.  The reason is that almost all OEMs design, assemble and ship their notebooks through contract manufacturers in
Asia.  While Dell may have some volume purchasing advantages due to its sales there isn’t a lot Dell can do to reduce costs on notebooks when much of the supply chain is out of their control.  So everybody gets basically the same price on having their notebooks built in
Asia but that erodes Dell’s cost advantage.  And they have milked that issue by continuing to focus sales on desktops long after others moved on to the notebook.  In fact Dell probably has the highest proportion of desktops to notebooks (either to enterprises or to consumers) of any major PC company, and that benefits them.  However the tidal wave of sales focused on notebooks means their supply chain cost advantages are rapidly being erased and they need to rely more and more on the direct model cost advantages.  And since those are also being rapidly eroded by better retailing, more OEMs selling a portion direct and a decline in upselling that fueled the direct advantage Dell is more and more in a position, especially against HP, of having its cost advantages being whittled away across the board.