Dell Working Capital Hbs Case
* Explain how Dell’s working capital policy is a competitive advantage for the company?
Dell uses a just in time order fulfillment policy and accurate forecasting of sales to minimize inventories. This allowed Dell to hold inventory of finished products far below levels of their competitors (10-20% compared to 50-70% industry level) and furthermore allowed them to quickly implement changes to their product lines as new technologies became available. This quick inventory turnover also allowed Dell to retain more capital. Finally, this policy enabled Dell to respond immediately to technological progress in components and deliver state of the art new finished products (e.g. Pc’s holding the newest Pentium microprocessors) while competitors are still selling inventory of products not containing newest technology.
When comparing Dell’s 1995 DSI to its competitors you can see the competitive advantage taking shape:
Company: DSI (1995): Inventory Savings at competitors DSI:
Dell: 32 0
Apple: 54 $167.3 million
Compaq: 73 $311.7 million
IBM: 48 $121.6 million
* How did Dell fund its 52% growth in 1996? Please be sure to distinguish between internal and external sources of funding, and to discuss the trade-off between the uses of external funds in order to maintain high growth rates.
Dell funded its 52% growth in 1996 internally by increasing sales, lowering sales/operating expenses by 1%, which led to an increase in profit margin (net profit/sales) from 4.3% to 5.1%, increasing financing & other income by $42 million, while short term investments increased by 22%, accounts payable increased by 15% (“free” financing from vendors) and Long Term Debt stayed the same. Dell supported this growth externally by issuing an additional $74 million of common stock (the conversion from preferred to common stock is included in this calculation). Using internal sources of funding by becoming more efficient was a preferred route by Dell. This
Dell uses a just in time order fulfillment policy and accurate forecasting of sales to minimize inventories. This allowed Dell to hold inventory of finished products far below levels of their competitors (10-20% compared to 50-70% industry level) and furthermore allowed them to quickly implement changes to their product lines as new technologies became available. This quick inventory turnover also allowed Dell to retain more capital. Finally, this policy enabled Dell to respond immediately to technological progress in components and deliver state of the art new finished products (e.g. Pc’s holding the newest Pentium microprocessors) while competitors are still selling inventory of products not containing newest technology.
When comparing Dell’s 1995 DSI to its competitors you can see the competitive advantage taking shape:
Company: DSI (1995): Inventory Savings at competitors DSI:
Dell: 32 0
Apple: 54 $167.3 million
Compaq: 73 $311.7 million
IBM: 48 $121.6 million
* How did Dell fund its 52% growth in 1996? Please be sure to distinguish between internal and external sources of funding, and to discuss the trade-off between the uses of external funds in order to maintain high growth rates.
Dell funded its 52% growth in 1996 internally by increasing sales, lowering sales/operating expenses by 1%, which led to an increase in profit margin (net profit/sales) from 4.3% to 5.1%, increasing financing & other income by $42 million, while short term investments increased by 22%, accounts payable increased by 15% (“free” financing from vendors) and Long Term Debt stayed the same. Dell supported this growth externally by issuing an additional $74 million of common stock (the conversion from preferred to common stock is included in this calculation). Using internal sources of funding by becoming more efficient was a preferred route by Dell. This