Dells Working Capital

Case Overview

Dell Computer Corporation found in 1984 by Michael Dell

Build to order enabled Dell to deliver a customized order in a few days

i.e. Dell built its computer systems after the consumer received the
customers order

1990 Dell had only 1% of U.S pc market share.

A decision to go for a big growth in 1990

Annual Sales increased by 268% within 2 years

!993 a $76 million dollars loss due to the cost of scrapping a

disappointing notebook computer line and sell off of excess inventory.

Case Overview

With $32 million in cash and cash equivalents analysts thought dell had
enough cash and credit to last at least another year, but did it have the
resources to keep pace the growing battle for market share intensity

Early adoption of pentium chip and to convert major product line to

pentium technology

Key Take away

Selling directly to customers was Dells core strategy

Dell provided customization to the wants of their customers

They followed build-to-order manufacturing process

Dells Work in progress and finished goods inventory as a percent of

total inventory ranged from 10%-20%.

Key Questions

How was Dells working capital policy a competitive advantage

How did Dell fund its 52% growth in 1996

Assuming Dell sales will grow 50% in 1997, how might the company
fund its growth internally? How much would the working capital need to
be reduced and / or profit margin increased? What steps do you
recommend the company take

How would you answer to Q3 change if Dell also repurchased $500

million of common stock in 1997 and repaid its long-term debt

1.Competitive Advantage of DELLs

Working Capital
The main advantage of the Dells working capital is its operation of
maintaining low inventory levels in its finished goods and work in progress
goods. Some of the advantages created due to this were:

Able to cope up with changing technologies at a faster rate than

competitors do and was able to gain the first mover advantage in the
market.

Easy maintenance of the inventory products as they always kept low

and this enabled to have less defective raw materials.

No idle and obsolete goods.

1.Competitive Advantage-Contn..

These activity heavily affected and supported the firm with low number
of inventory conversion cycle or the Days sales of Inventory(DSI).

The DSI for 1995 shows that Dell had about 32 days and other
competitors had higher DSI with 54, 73 and 48 days with an industrial
average of about 58 days.

2.Funding The 52% Growth

The operating Assets decides the need for increased operation and as per
1995 the operating asset is $1110 million which is 32% of sales and hence
the operating asset for the year 1996 is $1694(32% of sales in 1996).

But the actual is $1557 and saved about 137 million.

Hence to meet expenses the increased requirement of asset for the year
is 447(1694-1110-137)

The sale of Dell increased from $3475 to $5296 resulting in a 52% growth of
the organization. Dell could have financed through various methods such as:

Dells preferred stock converted to common stock in fiscal year 1996

which resulted in increase of common stock from $242 to $430 million

2.Contn..

The Accounts receivable is about 15.48% on 1995 and with the same it
should have increased to around 800 million but 1996 had only around
700 million which saved some cash for operations.

The profit earned(272 million) also supports the increasing of sales and
Dell didnt go for any long term loans as it was able to finance it
internally.

The net profit and total liabilities is higher than the required operating
asset and so it can source funds internally.

3.What if The Company grows 50%

4.What If Dell Repurchases its Common

Stock and Repay its Long Term Debts

If the company goes in for repurchase and repayment of long term

loans then the increased requirement will be (500+113+779) $1392
Million.

To finance this we have to increase our profit margin and make changes
in the cash conversion cycles.

The Inventory Conversion period, Receivable conversion period and the

payable deferred period can be altered to manage the excess $92
million in the needed requirement.