Dell Working Capital

Dell’s Working Capital

Intro

Dell Computer Corporation was setup in 1984 by Michael Dell. The company designed, manufactured, sold and serviced high performance personal computers. Initially the company’s business model was built around purchasing IBM’s PC and then upgrading them. They sold the upgraded PC to business by mail order. Subsequently, they started marketing and selling their own brand personal computer by taking orders over the telephone line and shipping directly to the customers.

Business Model

The company’s core strategy was to sell the PC directly to the customer. They did their advertising through trade magazines and catalogs.  Dell’s sales distribution model was to aimed towards keeping a low inventory. Their production cycle began after the company received customer orders. PC’s by Dell were BUILT – TO – ORDER. They were the first company to provide a toll free number to call for orders and had an On Site technical support.

Inventory Management

Dell build systems after receiving orders while other companies in the industry built to forecast and maintain sizeable finished goods in the their inventory. Dell maintained a very low inventory. Their Work In progress and finished goods to total inventory was about 10-20% as compared to other companies that maintained about 50-70% of the same. And this did not include resellers. Dell held an inventory of components, which constituted 80% of the cost of the PC. Prices fell for these components by 30% on an average every year. Dell sourced these components from 80 suppliers in the mid 1990s. These components were ordered on a daily basis, depending on the forecasts.

Days supply of Inventory.

September 1990 – August 1993

In 1990, Dell’s market share was 1%. According to Michael Dell, the fragmented PC industry was ready for consolidations and the company as of now was to small to survive that.

As a result, the company decided to grow by selling its PC through CompUSA. In the following 2 and half years, Dell expanding is indirect distribution channel by adding more retailers and started marketing with precision line exclusively through Price Club. In foreign markets, it relied on resellers where timing or infrastructure was a limitation. Dell saw an increase in sale of 268% in 2 years while the industry grew by 5%. EXHIBIT 1.

In August 1993, Dell reported a $76 million loss. This was related to

• $71 million of charges related to the sell of of excess inventory
• Cost of scrapping a disappointing notebook computer line.
• Restructuring charges to consolidate redundant and inefficient European operations.

At this point, Dell’s Cash and Cash equivalents were $32 million, and analysts projected enough cash and credit to last at least another year.

September 1993 – January 1996

Dell shifted its focus towards liquidity, profitability and growth. It adopted company wide metrics arudn the new focus, requiring each business unit to provide profit and loss statements. A year later it exited the low margin retail channel where they were making no profits.

In 1995, Dell instituted goals on Return on Invested Capital(ROIC) and Cash Conversion Cycle(CCC). EXHIBIT 2 To improve the internal system for better forcasting, reporting and inventory control, the company employed a new Vendor Certification program, reducing the number of suppliers, ensuring component quality and improving delivery performance. They alos bought in seasoned managers to lead the company.

These changes  along with the company’s re-entry in notebook market and its rapid introduction of computer systems based on Intel’s new processing chips helped the company recover. The company’s direct contacts with customers helped anticipate demand for the new Pentium Based systems and low inventory model allowed them to move quickly. They were the first in the industry to achieve volume production of the systems with the 120Mhz Pentium processor. Exhibit 3