dell capital
Q1: How was Dell’s working capital policy a competitive advantage?
Dell had a policy of working with low inventory and it used to make inventory purchases based on the sale orders received. This led to following advantages: No obsolete goods.
Defects in raw material manufacturers were easily weeded out. New technological up gradations can be easily set into the system before the competition turns over the existing inventory. Thus Dell had a first mover’s advantage in being abreast with latest technological inclusion.
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High inventory turnover and low inventory days. This resulted in low cash conversion cycle. From Table A, Dell had Days Supply of Inventory (DSI) as
32 days while the competition average for is: DSI average = (54 + 73 + 48) / 3 =
58 days
Days inventory for the year is given by: DSI = 365 * Average Inventory / COGS
From Exhibit 4, the COGS for Dell for 1995 is $2737 and the DSI is 32 days. Hence the Average inventory comes out to $239mn, which is almost
$200mn less than the competitions average of $436mn for the same amount of COGS.
Q2: How did Dell fund its 52% growth in 1996?
When we compare Dell’s performance in 1996 as compared to 1995, the Sale grew from $3475 to $5296 reporting a growth of 52.4%. However, the total assets in 1995were $1594 i.e. 46% of sales and operating assets were total asset less short-term investment i.e. $1110 which is about 32% of sales. Thus when the sales grow by 52%, the operating assets need to grow in a similar proportion. Thus, the operating assets in 1996must be Operating Asset year 1996
= $5296mn * 32% = $1694mnThus the operating asset must increase by
$584mn
to meet the expenses, which will the additional funds that Dell must have procured. If we look at the sources of funds, the liabilities less accounts payable have increased by $500mn and the projected operational profit at 4.3% of projected increase in sale gives additional $230mn. Thus the firm can make sufficient funding
Dell had a policy of working with low inventory and it used to make inventory purchases based on the sale orders received. This led to following advantages: No obsolete goods.
Defects in raw material manufacturers were easily weeded out. New technological up gradations can be easily set into the system before the competition turns over the existing inventory. Thus Dell had a first mover’s advantage in being abreast with latest technological inclusion.
•
High inventory turnover and low inventory days. This resulted in low cash conversion cycle. From Table A, Dell had Days Supply of Inventory (DSI) as
32 days while the competition average for is: DSI average = (54 + 73 + 48) / 3 =
58 days
Days inventory for the year is given by: DSI = 365 * Average Inventory / COGS
From Exhibit 4, the COGS for Dell for 1995 is $2737 and the DSI is 32 days. Hence the Average inventory comes out to $239mn, which is almost
$200mn less than the competitions average of $436mn for the same amount of COGS.
Q2: How did Dell fund its 52% growth in 1996?
When we compare Dell’s performance in 1996 as compared to 1995, the Sale grew from $3475 to $5296 reporting a growth of 52.4%. However, the total assets in 1995were $1594 i.e. 46% of sales and operating assets were total asset less short-term investment i.e. $1110 which is about 32% of sales. Thus when the sales grow by 52%, the operating assets need to grow in a similar proportion. Thus, the operating assets in 1996must be Operating Asset year 1996
= $5296mn * 32% = $1694mnThus the operating asset must increase by
$584mn
to meet the expenses, which will the additional funds that Dell must have procured. If we look at the sources of funds, the liabilities less accounts payable have increased by $500mn and the projected operational profit at 4.3% of projected increase in sale gives additional $230mn. Thus the firm can make sufficient funding