Dell Electrical Case

Dell Case Study

Dell Computer manufactures sells and services personal computers. The company markets directly to its customers and builds computers after receiving a customer order. Dell had reported impressive growth for fiscal year 1996 with a sales increase of 52% higher than the prior year. Industry analysts predicted the market to grow by 20% annually over the next three years. In prior years, Dell had financed its growth internally, however, in 1995; Dell’s management decided they needed a plan for financing the future growth.

1) How was Dell’s working capital policy a competitive advantage?

One must understand the history and position of the company in order to make assumptions about its future. The key issue addressed in this case is Dell’s working capital policy and how it has created a competitive advantage for the corporation. The extent of Dell’s working capital advantage can be understood by reviewing the data contained in Table A on days sales of inventory (DSI) for Dell and its competitors, in the mid-1990s Dell’s work-in-process (WIP) and finished goods inventory as a percent of total inventory ranged from 10% to 20%. Competitors at the time were average 50-70% finished goods inventories and Dell’s DSI was about half the level of its competitors. As a result, Dell’s competitors were exposed to changing market conditions and changing consumer interests. Hence, Dell’s low inventory levels resulted in fewer obsolete components in inventory when technology changed. Because of its low inventory and build-to-order models, Dell was able to grow sales by offering faster computer systems at the same price of competitor’s slower machines. Aside from the conservation of capital, Dell’s low inventory has other advantages; their DSI is much lower than competitors and their most recently reported cash cycle is only 40 days long which means Dell can turn inventory into cash in an effective timeframe and faster than their competitors. Because their cash...