Dell's Refusal to Admit Hardware Problems Could Spell Big Trouble

Last Updated Jun 29, 2010 12:22 PM EDT

Dell (DELL) was once famous for its masterful control of the supply chain, a model so revered it was taught at Harvard Business School. But newly unsealed court documents show this tightly wound process left Dell with few options when important components went bad, and may have exposed it to a wave of future lawsuits.

The filings, first reported by Ashlee Vance of The New York Times, are part of a three-year-old civil suit brought against Dell by Advanced Internet Technologies, which claims it lost millions of dollars because Dell refused to acknowledge problems with computers it sold to the company. Similar computers were sold to customers like Wal-Mart (WMT) and Wells Fargo (WFC).

Poorly made capacitors from an Asian supplier caused the problem, especially in Dell's OptiPlex line, which Dell sold to government and corporate customers. These same troublesome components made their way into machines from rivals like HP (HPQ) and Apple (APPL). But Dell made the problem worse by pretending it didn't exist.

An internal Dell study found these computers were likely to go bad 97 percent of the time over a three year period. But a contractor Dell hired to investigate the issue found the company, which kept a famously tight inventory, was simply replacing one faulty part with another.

According to The New York Times, this could lead to major new liabilities.

But, as Dell did not recall the computers, many of Dell's OptiPlex customers may be unaware that they had problematic computers or realize why their computers broke. A.I.T. says in court documents that the faulty capacitors touched off a variety of other problems that were often misdiagnosed. Dell could potentially face a raft of new complaints from some of its biggest customers.
Dell should have been proactive once it knew that almost all its OptiPlex computers would experience some problems. Instead it tarnished its brand by replacing one faulty computer with another. Now, struggling to return to growth, Dell has exposed itself to future lawsuits from customers with deep pockets.

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  • Ben Popper

    Ben Popper writes at the intersection of culture and technology. His work has been published in the NY Times, Washington Post, Fast Company, Rolling Stone, The Atlantic and many others. He lives at