Michael Dell, Meet Jørgen Vig Knudstorp

By Kevin Meyer

Sometimes I really wonder if the wunderkinds of yesteryear are really that smart or just lucky in the moment.  Michael Dell was one such prodigy, creating an incredible computer company out of his dorm room.  His secret?  A radical new business model eventually coupled with an exceptional manufacturing operation and incredible supply chain that let him receive cash before building a product.  Something rarely, if ever, done on a mass-market product.  Dell's operations weren't truly lean, but they were, uh, innovative (squirm).  For years the company printed money.

Dell's competitors didn't sit around.  They also revised their business models, not necessarily duplicating Dell's, but effectively narrowing the perceived quality and value gaps.  How did Dell react?  Did they further refine their exceptional supply chain and other operations?  Nope, they folded. 

In April of last year we told you how they decided to close their Austin manufacturing operations.  Last summer they decided to change their fundamental business model and chase IBM and HP into the IT services realm.

Now they've decided to actually outsource their core manufacturing by selling a factory to Foxconn.

Dell Inc. said it reached a deal to sell a personal-computer factory in Poland to Taiwanese electronics giant Foxconn, a division of Hon Hai Precision Industry Co.  The deal is the latest example of how Dell has abandoned its once
industry-leading strategy of building PCs to order in its own factories.  In addition to getting rid of the Poland plant, Dell this year has
closed its factories in Ireland and North Carolina. Last year it closed
a plant in Texas.

Terms of the deal, in which 1,600 Dell employees will be transferred to
Foxconn, weren't disclosed. Foxconn will continue building Dell
computers at the plant, Dell said.

Of course the analysts applauded the move, which should chill the hearts of anyone who knows anything about real business.

"They've been trying to get rid of plants for some time," said Shaw Wu,
an analyst at Kaufman Bros. who said the deal is "positive" for Dell
since owning factories can be a drain on PC makers' bottom line. "It's
just become overhead for them."  Competitors like H-P also found that by outsourcing PC production to
Asian manufacturers like Foxconn, they could build huge volumes of PCs
for retail stores more cheaply than they could on their own.

Yeah, whatever.  How much is the inventory sitting on the high seas worth?  When will you get paid for it?  I bet it's not 2.3 days before you actually build the product as in the olden days.

Regular readers know that we've been following another company for many years: Lego, run by Jørgen Vig Knudstorp.  Back in 2006 Bill told you how he decided to follow the groupthinking lemmings and outsource a key capability of his company to Flextronics.

The only trick the ponies from McKinsey know is outsourcing, which is exactly what [CEO] Jørgen Vig Knudstorp
did.  The work in the U.S. plant in Connecticut is being sent off to
Mexico.  The Danish town of Billund where Lego is headquartered and the
factory has long been the biggest employer in town, is being decimated
as most of the work is being farmed out to Flextronics to do in the
Czech Republic.

It didn't take long for the problems to appear.

The
Lego corporation's large scale outsourcing has created so many problems
that there will not be any downsizing of jobs in Danish factories in
2007. The plan was to cut the workforce in Billund from 1200 to 300,
and outsource the jobs to their partner Flextronics in Kladno Czech
Republic.

Fortunuately Mr. Knudstorp is a bright fellow, and he began to realize his mistake.

Lego
drops partnership with Flextronics – Quality and effectiveness have
simply not been good enough for the production that was outsourced to a
Czech factory.

By March of this year, less than three years after his outsourcing adventure began, Jørgen Vig Knudstorp had learned from his painful and costly decision. 

The recipe for the good result is, according to Lego's CEO Jørgen
Vig Knudstorp two significant ingredients: Insourcing and intellectual
capital.

Lego is a lesson, but not a model.  Yes they brought manufacturing back in house, but to their own facilities in low wage countries… still chasing cheap labor and building far away from their customers.

So… Michael.  Interested in brunch with Jørgen?  You might want a heads up on what's ahead.