A report on FT.com on Friday indicated that Dell is now considering a plan to outsource some of its factories to a contract manufacturer.  I wasn’t at all surprised by this announcement given the fact that the leadership for driving Dell’s current supply chain remake comes from Michael Cannon, the former CEO of contract manufacturer Solectron, who is obviously quite familiar with this type of supply chain network model.

In a previous post, (Dell Moves to Reengineer its Supply Chain- Is it Cost or Service?) I indicated that while I do not chose to judge and I offer no predictions pro or con about Dell’s current supply chain restructuring moves, that previous outsourcing decisions around Dell’s service and customer support operations seemed to have confused the tradeoffs of needs for cost reduction vs. service level to customers. This current reengineering of Dell’s supply chain includes a move toward more fixed configuration product models sold more directly by retailers vs. Dell’s previous web site ala-carte product offerings for consumers and businesses. And now with a move toward more outsourcing of factories, the notion of the end model becomes somewhat fuzzy. Keep in mind that Dell’s current supply chain information technology capabilities were custom designed under a in-house factory ownership model.

While Dell is no doubt pleasing the Wall Street analyst crowd by its current efforts to eventually emulate the contract manufacturing model implemented by competitors like HP and Lenovo, there were obvious advantages for businesses and consumers in the Dell delivery model.   In my view, it was product choice, service and responsiveness that often differentiated Dell in the market.

Each of Dell’s competitors experienced challenges in their journeys to outsource manufacturing, from a process, information and collaboration perspective.  Lenovo acquired all of the PC and laptop manufacturing of IBM and that company initially struggled for many quarters to find the right balance global manufacturing and distribution, along with profitability.  Lenovo has since invested in more adaptive capabilities and has improved its supply chain responsiveness, but not without some pain along the way.  HP in turn recognized that its diversified product offerings from complex servers and storage to cameras and desktop printers demanded multiple supply chain production, delivery and cost models of capability, to respond to different levels of customer expectation.

The answer to whether outsourcing of factories is a good move for Dell is really a work-in-progress. It is highly dependent of whether Dell’s obvious desire to cut $3B in annual supply chain costs in the next three years, can be balanced with the need to provide product, process, information and supply chain differentiation in the customer’s eye.  Obviously, there are more chapters to follow, and I trust that Dell will successfully navigate itself across these new waters.

 Bob Ferrari