Dell Case Study Solution

deDell Case Study – Harvard Business School

Question 1: Dell’s working capital competitive advantageOne of the biggest advantages that Dell enjoys is its competitive advantage in not havingto spend as much capital in its inventory and storage. As indicated in the case study, Dellbuilt computer systems after the company receives orders from its customers. As a resultof this prudent practice, Dell’s work-in-process (WIP) and finished goods inventory as apercent of total inventory in the 1990s was approximately 10% to 20%. Conversely, other leaders in the industry such as IBM, Apple, Compaq, etc., had WIP and finished goodsinventory that ranged from 50% to 70% of total inventory, which did not even include theinventory held by their resellers. Dell’s practice is commonly referred to as the “build-to-order” model, and it allowed Dell to deliver a customized order within a very shorttimeframe, which was something that its competitors could not do.Put simply, because Dell only built computers when ordered and needed (very similar toToyota’s Just-In-Time, a.k.a. JIT, system), Dell did not have to spend as much capital as aresult. The result of this system is evident in the working capital financial ratios as shownin Exhibit 2. As one can see, starting from Q1 1993 until Q4 1996, Dell’s DSI (Days Salesof Inventory) shows a steady decline. What this means is that Dell has been takingincreasingly shorter days to sell its inventory, which adds a tremendous amount of advantages to its working capital. Additionally, since Dell’s inventory level is so low, itdramatically reduces the cost of storing the inventory, which is part of the cost of goodssold (COGS) of the product.Last but not least, Dell’s low level inventory has the benefit in allowing Dell to have quicker adoption of new technology. For example, in July 1995, Dell was the first manufacturer toconvert its entire major product line to the Pentium technology. Its competitors would havemuch difficulty in making such...