Dell's garden shed secret

Every few years or so I end up in a factory in Limerick. And every few years the factory seems to be about twice the size it was last time I visited. I've lost track of just how many football pitches the factory now covers, but one thing I know: with a new layer of fresh turf it would comfortably house the second round matches of the World Cup -- all played at the same time.

As it is, the factory turns out PCs. Lots of them. It is estimated that PCs and related sales from Dell's Irish operations contribute some 5.5 percent of that country's exports. The salary bill alone is pushing £70m -- almost as much as the combined England football squad's wage bill.

The most remarkable thing about Dell's factory is the room where the components come in -- it is little bigger than a garden shed. For a factory turning out thousands of PCs every day, you would expect the goods in area to be chock full of crate upon crate of cases, motherboards, hard disks and the other detritus that makes up a computer. Instead, a steady stream of trucks reverses up to one door, boxes are unloaded and almost immediately -- or so it seems to anyone standing there watching the process -- pass through the other door and out onto the assembly line.

This is just-in-time manufacturing at its best. But the benefits of just-in-time manufacturing go far beyond savings achieved by buying a 12 foot by 9 foot Yardmaster Shiplap shed with a 12-year anti-rust guarantee instead of building a huge goods-in warehouse.

The real benefit comes from the cost structure. Imagine this: suppose that, while browsing the QVC home shopping channel, you buy A Marie Osmond "Stephen Tiny" Tot Porcelain Doll for $39.75, as well you might. As far as I can gather these are only available in the US, so we'll work in dollars for a moment.

Now suppose that you manage to pull off several minor coups. First, you know QVC is so desperate to get rid of the disturbing-looking piece of tat that you negotiate 45-day payment terms. Second, as soon as you switch off the television you come to your senses, realise what you've done, and take it along to a car boot sale where, quite inexplicably, you manage to sell it for a cool £40 cash (we're back in the UK now where demand for Marie Osmond porcelain is very high).

Not only have you achieved something like a 30 percent markup, but that £40 can now sit in the bank collecting interest for 45 days before you have to pay QVC, so you're effectively earning interest on money that's not really yours.

This is exactly what Dell does, only on a larger scale. Many of its orders, which come from individuals and small businesses, are paid up-front, and the company is such an economic giant that it can dictate whatever terms it likes to its suppliers. In Europe, this position has only been strengthened by Gateway's ignominious retreat. Not even the combined might of Compaq and HP is making a dent in Dell's shipments.

But sometimes, where the big guns can fail to make an impact, there are often more subtle ways. Like rust. Or, in the case of Dell, the small computer resellers that are thriving out of the limelight on local business or by offering specialised services, such as customised PCs. Customised PCs are distinct from custom-made PCs -- which Dell makes -- because they are just plain weird.

There's a whole industry growing up out there built on blue, green and red cathode lights, neon string, window kits with biohazard etchings to make it look like there's something really potent inside your PC, and even etches of hamsters running round a treadmill. (As far as I can tell there are no Marie Osmond Stephen Tiny Tot etching kits yet, but mark my words; they will come.)

Dell has smelt an opportunity here. In the US, these small suppliers constitute a $3bn annual market, according to some estimates. Judging from the number of small and specialist suppliers popping up in the UK there is money to be made here too.

For Dell, it's a no-brainer to make a few 'white-box' PCs to ship out to these suppliers so they can re-badge, fill with hamsters or do whatever it is they do to cater for their markets. Certainly, it is much easier for Dell to use those left over bits in the back of the potting shed to make a few bog-standard PCs, than it will ever be for HP to gear up its entire -- and now disparate -- manufacturing lines to compete with Dell's just-in-time market.

Dell is onto a winner here; and of course in Dell's world it is not so much about margins as it is about slowing down that flow of money back to the suppliers, so that it spends more time in the bank on its way. The fact that there will be virtually no margin for Dell on these white box PCs becomes much less important. It can still make money, and it can still grab more market share without damaging its brand. And that garden shed can go, too.

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