Dell working capital case
Dellâ€™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.
The advantage of working capital:
1. It helps the business concern in maintaining the goodwill
2. It can arrange loans from banks and others on easy and favorable terms
...view middle of the document...
In addition, from the chart, we can find that the DSI of Dell has been decrease from 1993 to 1995, from 55 days to 32 days, while that of Compaq has been decrease from 1993 to 1994, from 72 days to 60 days, and increased excess that in 1993 in 1995, 73 days. The clue also proves that the build-to-order strategy of the Dell was very efficient and Dellâ€™s inventory management is more efficient than Compaqâ€™s.
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?
The impacts arise from the short product life cycles in personal computers:
1. Deteriorating in inventory. People want to chase the new computer which will decrease the purchase of the old computer, and cause the loss
2. Longer lead time. Because the computer was totally new, there may be not efficient machines to produce the new computer, which will decrease the productivity, and increase the time of the production.
3. Strong uncertainty of demand. People may very interested in the new computer, and the company can earn a lot of money, or people do not like the new computer, the company will loss a huge amount of money, such as research and development fees, inventory and others,
4. Multi-product environment. More products mean more choices, and customers can choose what they want most.
The industryâ€™s short product life cycles can cause the results above; in addition, it can make component prices to drop 30% on average because of the introduction of new technology. Dellâ€™s low component inventory reduced obsolescence risk and lowered inventory cost. In fact, Dellâ€™s low inventory levels resulted in fewer obsolete components in inventory when technology changed and others with high levels of inventory, such as Compaq, had to market both new and older systems. Older systems were discounted, taking away sales from newer, higher margin systems. Also, the build-to-order model makes Dell to have much smaller investment in working capital than its competitors.
These advantages may be partially quantified using the DSI data in 1995 in question 2: Dellâ€™s inventory was about 32/360=8.9% of its COGs while Compaqâ€™s inventory was about 73/360=20.3% of its COGs. If technological change reduced the value of inventory by 30%, Dell would incur an inventory loss of about 8.9%*30%=2.7% of COGs and Compaq would incur a loss of 20.3%*30%=6.1% of COGs. The lower inventory losses for Dell imply higher profits. Based on Dellâ€™s 1995 COGs of $2737million, the effect of the component price reductions contributes about $2737*(6.1%-2.7%)=$93.06million to profits.
4. Evaluate their 1996 funding â€“ look at asset efficiency rates for Dell. Assume operating assets grow based on percent of sales. How did they manage to fund 52% growth.?
First of all, we should figure out how many assets we need to fund the 52% sales growth. In 1995, total assets were $1594/3475=46% of...