Dell's Working Capital

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3/27/13

Dell Working Capital

1. How was Dell’s working capital policy a competitive advantage? Dell’s core strategy in the 90’s, build to order business model, allowed the firm to work with minimum finished goods and work-in-process (WIP) inventory. As a result, Dell maintained low inventory costs and permitted the company to adjust to technological innovations in the market. Dell’s WIP and finished goods inventory as a percent of total inventory was about 10%-20%, compared to the industry rate of 50%-70%. This led the company have low accounts payable, low cash conversion cycle, and high inventory turnover (Dell DSI 32 days vs. 58 days). As Dell’s computers were assembled after the company received the sale order and, as the rate of innovation is high, by keeping low inventory levels, the company could easily adjust to the new technology whereas the competition incurs in high depreciation rate of approximately 40% per year on old hardware components (Source Dell Website) for old. Additionally, if any component was factory flawed, as in 1994 with the Pentium chip, the company could quickly manufacture computers with the new updated flawless chip. Moreover, the company could reach new technology or components to market in an average of 35 days compared to 100 days by the competition. This helped Dell to take first mover advantage. 2. How did Dell fund its 52% growth in 1996? The sales increased 52% owing to growth in sales of Pentium processor. Calculating the increase in Cash, Working Capital and Fixed Assets from 1995 to 1996, we can calculate the funding requirement for 1996: 1996 | ∆Cash | ∆Working Capital | ∆Fixed Assets | Funding Requirement | $119 Mn | $181Mn | $62Mn | To match the funding requirement, retained earnings grew by 83% ($259Mn), other liabilities by $46Mn and common stock by $74Mn – Total $379 Mn. The internally generated funds were sufficient to fund its 1996 requirements – change in retained earnings and externally (liabilities & common...
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