Dell’s build to order system created a very different balance sheet. We want to assess their competitive advantage in working capital at the time of the case, evaluate how they funded growth at the time (1996) and evaluate potential ways to fund projected sales growth of 50% in 1997 through use of internal funds. 1. Calculate their working capital advantage. To do this calculate days sales of inventory, payable days and receivables days to find their cash conversion cycle.
Days sales of inventory=365*(429+293)/(2*4229)=31.16
Cash conversion cycle=31.16+43.56-37.50=37.22
The cash conversion cycle measures how long a firm takes to convert resource inputs into cash flows. The shorter CCC, the less time capital is tied up in the business process.
2. Compare Dell’s CCC to that of Compaq – including focus on the inventory days.
In January 1996, Dell had inventory to cover 32 days of sales while Compaq Computer had inventory to cover 73 days of sales, much higher than Dell. The inventory days in three years of Compaq are all higher than those of Dell, which means that if other things equal, the CCC of Dell is lower than that of Compaq. It indicates that the liquidity risk is higher in Compaq than in Dell. At the same time, Compaq need more cash to maintain its business because .Dell had improved its inventory control as the inventory days were decreasing during three years.
3. What impacts arise from the short product life cycles in personal computers? Does Dell have advantages in obsolescence etc.? How might you quantify it?
As new technology replaced old, the prices of components fell by an average of 30% a year. Dell’s low component inventory reduces obsolescence risk and lowers inventory cost. In fact, Dell’s low inventory levels resulted in fewer obsolete components. These advantages may be partially quantified using