Surprise, surprise
Two surprises greeted the Dell executives who were creating this new process.
First, as inventory dropped, lead-time performance improved. This happened because Dell was not simply carrying component inventory against forecasted sales, but rather was aligning inventory and sales, managing profitability on a daily, weekly and monthly basis.
Second, as inventory disappeared, the company's returns grew disproportionately. Not only did Dell avoid carrying costs and obsolete stock, but it was also saving enormous amounts of money on purchasing components because the component prices were dropping 3 percent per month.
The inventory in a channel is determined by the variance in supply and the variance in demand. Unless these variances are reduced, channel inventory can only be moved around--not eliminated. This can be thought of as the "waterbed effect." When you sit on a waterbed, it sinks in one spot and bulges in another. Though the water is redistributed, the amount stays the same.
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