Dell

Case Questions

Dell’s Working Capital

(1) Explain how Dell’s working capital policy is a competitive advantage for the company?

Dell became a leader in the PC industry in the 1990s by having a direct selling strategy that enabled the company to achieve operating efficiency through its inventory management system. Dell maintained low work-in-process and finished goods inventory relatively to industry peers. As a result, the company was able to reduce the cost of holding inventory, minimize the loss from obsolete inventory, and increase the speed to equip products with new technology. Technology evolves at a very fast pace in the PC industry, companies compete on their ability to introduce new products with the latest technology, or provide similar products at a lower costs. Dell was able grow its sales as well as profits because of its working capital policy. Having a low inventory of processors with old technology allowed Dell to quickly install faster, more powerful processor chips in build-to-order PCs. In terms of DSI Figure in Table A, Dell’s DSI was about half the level of its competitors. If we compare other companies’ DSI level with Dell’s with using Dell’s CGS, we can easily find from our appendix that Dell might have needed more inventory (holding) value if it used other companies’ DSI value. Absolutely it will lead Dell’s business less competitive. In addition, since individual components make up a large percentage of cost of a PC and new technology decreases components cost, Dell was able to improve its operating margin by using upgraded components in the manufacturing process. Selling directly to customers and not relying on third party retailers also helped Dell to keep its inventory levels in control.

(2) How did Dell fund its 52% growth in 1996? Please be sure to distinguish between internal and external sources of funding, and to discuss the trade-off between the use of external funds in order to maintain high growth rates.

Dell funded its...