Harvard Business School
August 16, 2000
Dell's Working Capital
Dell Computer Corporation had reported impressive growth for fiscal year 1996 with its sales up 52% over the prior year. Industry analysts anticipated the personal computer market to grow 20% annually over the next three years, and Michael Dell expected that his company, with its build-toorder manufacturing system, would continue its double-digit growth. Although Dell Computer had financed its recent growth internally, management needed a plan for financing the future growth.
Dell Computer Corporation was founded in 1984 by then nineteen-year-old Michael Dell. The company designed, manufactured, sold and serviced high performance personal computers (PCs) compatible with industry standards. Initially, the company purchased IBM compatible personal computers, upgraded them, then sold the upgraded PCs directly to businesses by mail order. Subsequently, Dell began to market and sell its own brand personal computer, taking orders over a toll free telephone line, and shipping directly to customers.
Selling directly to customers was Dell’s core strategy. Sales were primarily generated through advertising in computer trade magazines and, eventually, in a catalog. Dell combined this low cost sales/distribution model with a production cycle that began after the company received a customer’s order. This build-to-order model enabled Dell to deliver a customized order within a few days, something its competitors could not do. Dell was also the first in the industry to provide toll-free telephone and on-site technical support in an effort to differentiate itself in customer service.
Dell’s Inventory Management
Dell built computer systems after the company received the customer’s order. In contrast, the industry leaders built to forecast and maintained sizeable finished goods inventory in their stock or at their channel partners. Dell’s build-to-order manufacturing process yielded low finished goods inventory balances. By the mid-1990s Dell’s work-in-process (WIP) and finished goods inventory as a percent of total inventory ranged from 10% to 20%. This contrasted sharply with the industry leaders, such as Compaq, Apple and IBM, whose WIP and finished goods inventory typically ranged from 50% to 70% of total inventory, not including inventory held by their resellers.
Professor Richard S. Ruback and Research Associate Aldo Sesia prepared this case from published sources as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
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Dell's Working Capital
Dell maintained an inventory of components. The cost of individual components, such as processor chips, comprised about 80% of the cost of a PC. As new technology replaced old, the prices of components fell by an average of 30% a year.1 Dell ordered components based on sales forecasts. Components were sourced from about 80 suppliers in the mid-1990s – down from a high of 200 or more. Dell issued “releases” for a certain amount of product from a supplier’s inventory on a regular basis, depending upon the forecast.2 Suppliers, many of whom had warehouses close to Dell’s Austin Texas and Ireland plants, delivered parts to Dell, often on a daily basis.
As Michael Dell explained, “other companies had to maintain high levels of inventory to stock...
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