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Dell’s Working Capital
B.B.Chakrabarti Professor of Finance IIM Calcutta

The Questions
 How

was Dell’s working capital policy a competitive advantage?

 How

did Dell fund its 52% growth in 1996?

The Questions


Assuming Dell sales will grow 50% in 1997, how might the company fund this growth internally? How much would working capital need to be reduced and / or profit margin increased? What steps do you recommend the company take? How would your answer to the above question change if Dell also repurchased $500 million of common stock in 1997 and repaid the long-term debt?



Dell’s Competitive Advantage
1) Conservation of capital due to lower inventory holding Compaq Dell DSI in 95 73 32 Cost of sales of Dell in 95 = $2737 mn. (Ex.4) Additional inventory at Compaq’s DSI = $2737 * (73-32) / 360 = $312 million

Dell’s Competitive Advantage
2) Reduced obsolescence risk and lower inventory cost  Component cost can reduce by 30% a year as new technology is introduced.  Inventory as % of COS – Dell (8.9%) and Compaq (20.3%)  Inventory loss due to 30% reduction in price – Dell (2.7%) and Compaq (6.1% of COS)  Comparative increase in profit in Dell in 96 = $2.7 billion *(6.1%-2.7%) = $93 million

Dell’s Competitive Advantage
3) Quicker adoption of new technology  Dell’s low inventory levels resulted in fewer obsolete components as technology changed.  While Compaq had to market both new and older systems due to high levels of inventory, Dell could offer new and faster systems quickly due to low inventory and build-to-order models.

Funding 52% Growth in 1996
Facts to consider  95- Total assets = 46% of sales  95- ST investments = 14% of sales  95- Operating assets = 32% of sales  95- Net profit = 4.3% of sales  96- Dell would require 32% of increased sales in operating assets i.e. $(5296-3475)*32% = $582 million.

Funding 52% Growth in 1996
Facts to consider  96- All assets excepting ST investments will grow at...
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