Excerpts from a recent report from the investment bank Deutsche Bank, with some interpretation from VentureOutsource.com, follow below on Dell’s recently announced changes.
Deutsche Bank believes that while cutting operating expenses is an important part of Dell’s turnaround, fixing Dell’s product line and manufacturing model is more essential to securing Dell’s longer-term health and reaching its cost reduction goals.
Of the expected $3 billion in cost savings, Deutsche Bank estimates headcount cuts account for roughly $750 million, or about 25% of the plan.
This translates to the remaining $2.2+ billion coming from a significant overhaul of Dell’s product design, development and manufacturing model- resulting in harder but more enduring cost savings.
Dell must move quickly to cut its high-cost manufacturing capacity and shift to a lower configuration, high volume / low-cost manufacturing model to match the growth opportunities in the PC market (notebooks, consumer, and emerging markets).
Deutsche Bank continues by stating in two to three years time, Dell could migrate as much as 25 percent to 35 percent of its full system production to contract manufacturers while simultaneously cutting its own manufacturing capacity by 25 percent.
Closing the Austin desktop manufacturing plant was the first step in what Deutsche Bank expects to be a dramatic restructuring of Dell’s manufacturing footprint. Successful execution of Dell’s plan could significantly lower Dell’s ongoing cost structure and sharply increase competition across the PC industry.
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Existing manufacturing footprint
As highlighted in the table below, Dell currently has 5.7 million square feet of worldwide manufacturing, distribution and design capacity in addition to 1.5 million of leased facilities.
Dell manufacturing footprint, square footage
Further, Dell has 4.4 million square feet in the United States (3.6 million owned and 800,000 square feet leased). The recently announced closure of the Austin facility represents 10 percent of Dell’s U.S. manufacturing, distribution and design capacity (*6% of worldwide capacity).
Deutsche Bank anticipates Dell to consolidate a significant portion of its U.S. manufacturing footprint over the next 12 to 24 months in conjunction with its adoption of an outsourced electronics manufacturing model.
Significant overhaul on the horizon
Dell’s mix of business will increasingly shift towards high volume products over the next three years. In conjunction with this shift, Deutsche Bank believes Dell will significantly reduce its high-cost manufacturing and distribution footprint (predominately in the U.S. and Europe) over the next several years as existing high-volume products are increasingly outsourced. (Read about challenges with low-volume / high-mix EMS)
Mike Cannon and his global operations team need to act fast and dramatically cut Dell’s local manufacturing. As highlighted below, it is believed cost savings associated with China-based assembly can be dramatic.
Deutsche Bank estimate of Chinese cost savings
It is estimated headcount / labor represents 10 percent to 15 percent of total costs in PC assembly and, wage rates in China are at least 75 percent lower than comparable rates in Texas. Further, lower materials and overhead costs translate to a 20 percent cost advantage in low cost geographies such as China. It’s anticipated Dell will be sacrificing configurability and time-to-market to realize such savings, factors that are less significant for consumer and emerging market customers.
Source: Deutsche Bank, VentureOutsource.com
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