So in 2010, Gladden says, Dell stepped up its efforts to make sophisticated predictions about every element in its supply chain. The company has analysts who specialize in such things as LCD prices, memory prices, even the efficiency of a particular factory. Data from each analyst is fed into a larger model that higher-level managers can see as they negotiate prices with retailers and other large customers. The model also lets Dell rapidly adjust the computer configurations it highlights for people who are ordering custom-built PCs on its website; it might recommend two gigabytes of RAM in a PC one day and four the next.
How well have the changes worked? It’s too early to know whether Dell avoided another bad holiday quarter, but in the first three quarters of calendar 2010 the results were mixed. Dell’s gross profit margin, which is the percentage of revenue left over after stripping out production costs, slumped again in the first half. Brian Marshall, an analyst with Gleacher, says that Dell gobbled up memory chips earlier this year for fear that prices would go higher still.
Meanwhile, Dell’s main rival, Hewlett-Packard, largely held off on buying the same components for an extended period over the summer when its own Procurement Risk Management system predicted that prices would eventually fall. The system, which has been in place for a decade and has been the subject of case studies at the Stanford Graduate School of Business and other business schools, turned out to be right. Marshall estimates that the decision guided by its more mature model saved the company $15 per computer.
More recently, Dell seems to have bounced back—at least for now. In the fiscal quarter that ended October 29, the company had its highest gross margin since 2008 (see chart). The head of the company’s consumer business, Steve Felice, told analysts in a conference call that Dell has been making “great progress in matching our supply chain with retail buying seasons.” But analysts remain skeptical that the recent results are more than a blip. “I don’t really think we’ve seen any optimization of [Dell’s] supply chain,” Marshall says. “At the end of the day, where is the proof?”
And even if Dell can master modeling, the PC industry doesn’t give it much room to maneuver in response to price predictions. Ashok Kumar, an analyst with Rodman & Renshaw, points out that companies like Dell are often at the mercy of their suppliers. “They can model microprocessor prices all they want,” Kumar says. But “the fact is, Intel can decide to price it and Dell has to take it.” Its only alternative is to decide that advance order prices are too high and wait until the last possible moment to lock in its rate.
In other words, predictive modeling in the computer industry often functions more as a risk management tool than a driver of profits. It won’t make you rich, but you need it to reduce the chance of being waylaid by nasty surprises.