Little Bow Bow

The success of Dell before 2002 depended on its "Direct Model".

While other competitors relied heavily on retailers, distributors and resellers to sell product, Dell dealt with end-customers directly. According to case, under the alignment with indirect channels, PC makers needed to buy back channel inventory which was not sold in the market and provide price protection. This kind of alignment increase PC makers' cost by approximate 2.5% of revenue. Moreover, since the competition in retail channels is fierce and shelf space in retail stores is quite limited. To ensure and motivate their products be displayed and recommended by their retail partners, PC makers usually need to sell their product in very low price to guarantee retail channel get profit from higher price mark up. According to the Exhibit 8 in the case, Dell can sells product for 100 dollar in direct channel while only for 88 dollars in retail channel. Selling products directly to end-customers enable Dell eliminate the mark-up of distributors and retailers and in turn gain higher gross margin than other competitor.

Dell produced products only when a customer order is received and confirmed. That means Dell has no finished goods inventory. Compared with competitors carrying 20-30 days of inventory, Dell carried only four days of inventory. Build-to-order inventory system not only decrease its inventory carrying cost but also lower risk of retaining inventory .

On the other hand, build-to-order system enable Dell to provide customized products to meet each customer's specification, especially for those corporate and institutional customers. Therefore, Direct Model help Dell to strengthen the relationship with its customer and foster customer loyalty.