Dell Working Capital

Dell’s Working Capital

Substantive Issues

Dell manufactures, sells, and services personal computers. The company markets directly to its customers and builds computers after receiving a customer order. This build-to-order model enables Dell to have much smaller investments in working capital than its competitors. It also enables Dell to enjoy more fully the benefits of reductions in component prices and to introduce new products more rapidly. Dell has grown quickly and has been able to finance that growth internally by its efficient use of working capital and its profitability.

Dell’s Competitive Advantage:

The extent of Dell’s working capital advantage over its competitors can be assessed using data contained in Table A of the case on days sales of inventory (DSI) for Dell and its competitors. In 1994 and 1995, Dell’s DSI was about half the level of its competitors. In January 1996, for example, Dell had inventory to cover 32 days of sales while Compaq Computer had inventory to cover 73 days of sales. One way for students to quantify Dell’s competitive advantage is to calculate the increase in inventory Dell would have needed if it operated at Compaq’s DSI level. Using Dell’s cost of sales (COS) for 1995 contained in Exhibit 4 and the information on DSI contained in Table A:

Additional inventory at Compaq’s DSI = ( Dell’s COS) (Compaq’s DSI – Dell’s DSI)/360 days = [($2,737)(73-32)]/360 = $312 million.

This $312 million, in perspective, represents 59% of Dell’s cash and short term investments, 48% of stockholder equity and 209% of its 1996 income.

Aside from the conservation of capital, Dell’s low inventory has other substantial advantages. Because the industry’s short product life cycles can caus ...
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