Dick Hunter doesn’t set small goals. At a July 18 meeting with his boss, Dell Computer CEO Michael Dell, Hunter, the company’s vice president of Americas Manufacturing Operations vowed to do the unthinkable: cut inventories from an industry-leading five days to an even tighter 2.5 days by January.
The benefit would be big savings in the cost and time it takes to bring new computers to market. So what was Michael Dell’s reaction? “Mike said, ‘Why isn’t it going to be two days?’” recalls Hunter. Everything “comes back to the notion of speed.”
That pretty much sums it up. In today’s troubled, increasingly commodotized PC market, where second-quarter sales declined for the first time in 15 years and prices continue to tumble, survival means running harder than the next guy. If your computers aren’t the best value for the money, buyers go elsewhere.
Up to now, Hewlett-Packard and Compaq Computer, which announced plans to merge on Sept. 3, have had little luck keeping pace with Dell, whose lean direct-sales model has made it the low-cost PC producer. Becoming more competitive will be among their biggest challenges as they try to convince a skeptical Wall Street their proposed $17 billion merger, which the companies got back to work on after a week of helping customers disrupted by terrorist attacks against U.S. targets last week, will pay off.
Nearly one-third of the combined company’s $87 billion in revenue will come from its “access” business, which includes PCs and handheld computers. It will be the company’s largest division and the one losing the most money. “There is no question that this is going to be tough,” says Compaq CEO Michael Capellas, who is to become president of the merged entity. “We’re going to have to do some very, very strong actions.”
Capellas and HP CEO Carly Fiorina have argued since announcing the merger that the deal will give them a needed boost against IBM and Sun Microsystems in the markets for high-tech services and high-performance business servers that run inside corporate networks.
But defending the combination of their personal-computer divisions has been more difficult – and Dell is the reason why. Since the Round Rock, Texas-based PC manufacturer kicked off its price war in December, losses at both Compaq’s and HP’s computer divisions have accelerated to more than $700 million (since the start of the year) and thousands of workers have been let go. A profitable Dell, meanwhile, passed Compaq to become the worldwide market leader with 12.8 percent share in the first quarter compared with Compaq’s 12.1.
Dell’s newest push to lower inventories will make matters worse for Compaq and H-P. Slim inventories save money on stocking costs. They also allow Dell to pass along prices decreases on PC components – which are down a steep one percent a week this year - to customers. HP and Compaq first have to discount machines sitting on retail shelves and take a hit on margins before shipping new products with lower prices.
As component prices dip even lower, “I will continue to pass that on to my customers, and it will feel like a (continuing) price war to my competitors,” vows Dell second-in-command Kevin Rollins, chief operating officer.
The situation is so dire at HP that the company considered exiting the market. “Don’t think we didn’t look at it, we did,” Fiorina admitted a few weeks ago, at the time of the announcement. But, she said, “It doesn’t make sense to get out of the PC business.” PCs, she reasoned, are still integral components of the broad package of technology products that H-P wants to sell its customers.
However, compared with Dell, the inefficiencies at HP and Compaq are startling. Compaq brought its inventories down $1 billion in the second quarter and anticipates hacking out another $300 million in the third quarter. Still, they stand at 6 weeks in the retail business – compared to Dell’s four days (the company cut inventories
