Clients: Vendors Battle Over Supply Chain Issues

Client hardware, whether it is a notebook or desktop computer, is a cog in a very complex machine comprising a variety of servers, networking hardware, and client hardware and software that links users into a vast network of data.

For integrators and computer manufacturers, the shift toward client hardware becoming mainly a commodity item that has translated into razor-thin margins, forcing everyone to look at new ways of reducing costs and improving margin opportunities.

Many computer manufacturers are completely revamping their manufacturing processes to take advantage of supply-chain efficiencies and are adopting build-to-order models that streamline the cost of manufacturing.

"The margins on hardware are thinning, although the good players still know how to make money," says Marc Jourlait, director of marketing at Hewlett-Packard, Palo Alto, Calif. "Operational excellence is the key to making money in the personal computer business, given how big the volumes are and how commoditized the products have become. We need to streamline the financial, services and products flow to create an optimized ecosystem."

Dell Computer, for example, which beat out seven competitors in the client category in this year's Annual Report Card survey, has made a success of offering business users notebooks and desktop computers built exactly to their specifications.

The Supply-Chain Link

Products on the shelf translate directly into less profit. So, manufacturers are looking to maximize supply-chain efficiencies by reducing inventories.

"Some types of inventory degrade in price quickly, so we don't want to be holding inventory when prices drop," says HP's Jourlait, adding that some types of products, such as memory and processors, are particularly prone to fluctuating product values. "There's a fine balance between having enough strategic materials to build, but not so much that you are left holding inventory."

HP uses a centralized procurement approach,components are bought for the entire company, rather than each product line buying individual components.

IBM, Armonk, N.Y., invested more than $200 million in a new supply-chain implementation, which included a new customer front end to let customers buy directly from IBM, and re- designed manufacturing processes.

"We have significantly reduced our cost because, increasingly, margins are tightening," says Ralph Martino, vice president of marketing for IBM's Personal Systems Group. The company has also outsourced a portion of its manufacturing activity to contractors. "Efficiency is clearly going to be one of the keys going forward," he adds. "Our job is to make sure we are as efficient as possible and to find other partners who can work with us to do that."

Last December, NEC Computers, Sacramento, Calif., discontinued all in-house manufacturing and went to a completely outsourced model. In addition, the company is outsourcing all of its customer service and product maintenance, says Steve Boogar, COO at NEC.

Others are also outsourcing customer service. Acer America, San Jose, Calif., recently built a 60,000-square-foot building just outside of Austin, Texas, to house a centralized customer service center. The new location will be staffed 24/7 to handle technical support calls from customers and solution providers, and to handle hardware repairs.

IBM has also consolidated its customer-support capabilities to provide users with an integrated way of gathering information on available products and services, tracking orders and accessing technical support. "Increasingly, we are going to have to provide that sort of support in an integrated fashion across product lines, both with ourselves and our partners," IBM's Martino says. Clearly, outsourcing is gaining favor as a cost-cutting technique.

Online Advantage

Other manufacturers are leveraging the Web to reduce overhead. Acer America recently created a Web site for its U.S. customers that lets customers and solution providers compare various products based on performance and specifications. The channel section of the site also lets solution providers build and submit product configurations.

"This is a key tool for solution providers," says Stuart Carson, director of channels marketing at Acer America. "Basically, a reseller can go and build a system configuration and then submit it to the distributor of their choice for a price quote."

Compaq offers a similar capability on its Web site. The direct configuration feature lets solution providers create products on behalf of their customers and then have the computers shipped directly to the end user.

"[Solution providers] have been telling us that they want us to improve ease of doing business with us and add to their ability to execute their tasks," says Kyle Ranson, vice president of transactional business segment at Compaq, Houston.

The Solution Sale

Meanwhile, integrators are looking for various ways of packaging products to differentiate themselves from the competition. "Solution selling" is the term of the day, as solution providers and manufacturers alike scramble to provide differentiation in a marketplace where most manufacturers can match the specifications of the rest of the pack to the bit, byte or megahertz.

"We are finding that to be more competitive in an industry that clearly is competitive, we are doing more selling in the solution space," says John Thompson, vice president of Compaq's IT business segment. "We are working with more VARs to create vertical market products for customers."

Those solution packages have to include more than just hardware and software,they must also incorporate services and support options that directly relate to a concrete business problem.

"Most of our differentiation is not on the specs, but on the services and those things that surround the platform itself,from the speed of the bus or the size of the hard drive, to a conversation where the client is at the center," says Mike Stinson, director of product marketing for Gateway Business, Lake Forest, Calif.

The company reports that those conversations have led to increased sales of corollary products, including printers, scanners and notebook cases, as well as services, such as technical support and training.

"It needs to start with the problem that you need to solve," Stinson advises.