Dell Working Capital

Dell Working Capital

Introduction:

Dell was established in 1984 as small PC company. Dell was primarily on in the business of purchasing IBM personal computers, but eventually due to lower margins, dell shifted to making and selling their own computers, directly taking orders from customers. The sales of Dell Corporation rose by over 52% in the year 1996. Dell had financed its growth but management needs a plan for financing future growth.

Dell had developed a unique selling strategy which was considered as a sure shot strategy for them, while in total reducing the overall cost. Dell started working on unique customization order which allowed them to reduce the cost, which its competitors couldn’t do. Industry leaders used to typically keep a 50-705 finished goods inventory, while Dell gained edge due to customized order for ranging the finished goods inventory to 10-20%.

Dell maintained the inventory of components, which comprised of 80% of the cost of the accumulated PC. They took the orders over toll free telephone lines, customized their PCs to the client’s means and had them delivered in days.

Some of the advantages of the new model adopted by them:

• Low inventory with less fixed assets which can lead to higher ROCE.
• It could generate cash for them with Low Cash Conversion Cycle.
• Low finished goods having low carrying cost.
• It can concentrate with the extra cash on developing better technology and higher spend on R&D.

Annual sales increased by 268% within two years, compared to industry growth of 5% which moved Dell into the top 5 companies in the world through market share. The goal of changing the business model came due to the reported loss of 1993 of $76 million. The company then took to restructuring to consolidate European business. Thus, in 1993 Dell shifted its focus from exclusively growth to liquidity, profitability and growth. Dell then exited low profit margin indirect retail channel.

Consecutively Dell focused on product line on new technology – Pentium. With this new technology Dell was able to offer faster systems with the latest technology which was a difficult task for competitors.

With these all changes and new developments, in 1996, Dell reported revenue of $5.3 billion with a net profit of $272 million. This fiscal year, average industry sales increased by 31% but revenue of Dell increased by 52%. Thus, the question here comes about the funding of this 52% growth in sales.

Five Critical Problems with the Dell:

1. Dell working Capital policy: The new policy led to component shortages in 1996.

The company should look into keeping more components inventory. Since Dell is focusing on customization, this would be an important aspect in growth, but it should consider the potential benefits of adopting alternative inventory policy. At present, due to the lowest inventory period, Dell has a lower holding cost of inventory as displayed in the table below: