Sr.Pablo
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 52%
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 52%