...Introduction Dell Computer Corporation continues to have successful growth due to its innovative “built to order” business model and customer service focus which includes direct selling. Dell’s ability to maintain low levels of finished goods inventory minimized the cash conversion cycle to a high extent, thus minimizing the need for costly working capital. In past years, Dell has mainly financed its operations internally and secondly through the issuance of shareholder equity and small amounts of long term debt. Statement of Problem Being more flexible and responsive to market demands, Dell will bring new, superior products to market quicker than its competitors. This has created an expectation for large, double-digit growth in the upcoming year. Dell needs a plan for financing the large potential growth. Recommendations Dell has working capital advantages over its competitors which it should continue to pursue. Dell funded its FY 1996 growth both from internal and external funds. It was wise to seek external funding to support Dell’s healthy growth. If Dell were to grow by 50% in FY 1997, it is recommended to seek external funding for the amount not funded internally. Dell should issue debt and continue to take advantage of its strong internal cash conversion cycle to fund its continued growth. Dell should not reduce its external funding as it will limit its growth. Methods of analysis & Discussion (Q1) Dell’s advantageous working capital policy enabled the...
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...Dell Working Capital 1. How was Dell’s working capital policy a competitive advantage? Dell’s core strategy in the 90’s, build to order business model, allowed the firm to work with minimum finished goods and work-in-process (WIP) inventory. As a result, Dell maintained low inventory costs and permitted the company to adjust to technological innovations in the market. Dell’s WIP and finished goods inventory as a percent of total inventory was about 10%-20%, compared to the industry rate of 50%-70%. This led the company have low accounts payable, low cash conversion cycle, and high inventory turnover (Dell DSI 32 days vs. 58 days). As Dell’s computers were assembled after the company received the sale order and, as the rate of innovation is high, by keeping low inventory levels, the company could easily adjust to the new technology whereas the competition incurs in high depreciation rate of approximately 40% per year on old hardware components (Source Dell Website) for old. Additionally, if any component was factory flawed, as in 1994 with the Pentium chip, the company could quickly manufacture computers with the new updated flawless chip. Moreover, the company could reach new technology or components to market in an average of 35 days compared to 100 days by the competition. This helped Dell to take first mover advantage. 2. How did Dell fund its 52% growth in 1996? The sales increased 52% owing to growth in sales of Pentium processor. Calculating the increase...
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...Q1) How was Dell's working capital policy a competitive advantage? * Dell’s built-to-order manufacturing process yielded low finished goods inventory balances * By the mid-1990s Dell’s WIP and finished goods inventory as percent of total inventory ranged from 10% to 20% in contrast to its competitor’s range was from 50% to 70%. * Supply of inventory of Dell was significantly lower than its competitors. * Manufactured PCs with latest OS and processor much before its competitiors. * Maintained low Cash Conversion Cycle. Q2) How did Dell fund its 52% growth in 1996? Dell had 52% growth in 1996 and this growth was possible by investing substantially in operating assets. Operating assets in 1995 = Total assets – short term investments = 1,594 – 484 = 1,110 Percentage of Operating assets in sales = 1,110/3,475 = 32% Operating assets required in 1996 for 52% growth = 0.32*5,296 = 1,695 So, increase in operating assets in 1996 to obtain 52% growth = 1,695 – 1,110 = 585 From balance sheet of 1996, operating assets = 2,148 – 591 = 1,557 So actual increase in operating assets in 1996 = 1,557 – 1,110 = 447 With efficient management of total assets, Dell had reduced its required operating assets by $138 Also, increase in current liabilities in 1996 = 939 – 752 = 187 Net profit in 1996 = 272 Total funding through current liabilities and net profit = 187+272 = 459 Dell had funded its 52% growth in 1996 internally as total...
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...para necesidades de capital de trabajo). Además hay que mencionar que el precio de los componentes de un PC iba bajando 30% a medida que aparecían nuevas tecnologías y como Dell tenia un sistema de fabricación a pedido, no acumulaba inventario de componentes de la misma manera que la industria, de esta forma sus costos incurridos en componentes individuales (cerca a un 80%), se iría reduciendo el costo de su inventario. También en 1996 el margen neto de ganancia subió a 5.2% de 4.1% del año anterior y el pasivo circulante incrementó en 187MM. Todo lo mencionado demuestra que Dell pudo autofinanciar su crecimiento y que no tuvo déficit de financiamiento. En Síntesis, el saldo de capital de trabajo de 1995, mas el aumento en pasivo circulante, mas las utilidades esperadas de 1996, son suficientes para financiar el capital de trabajo del 1996: Necesidades para 1996 según 1995 | Según proyección | | | | | | Capital de Trabajo | $1,094 | | | | | Disponible de 1995 | | Capital de Trabajo | $718 | | Pasivo Circulante | $187 | | Utilidad Operacional | $227 | | | | | | | | Neto | | | | | | Capital de Trabajo | $-38 | | Si las ventas creciesen un 25% o un 50%, la empresa podría financiar internamente, al igual que el año anterior, su aumento en necesidad de trabajo. Necesidades para 1997 según 1996@25% | Según proyección | | | | | | Capital de Trabajo | $1,273...
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...* Explain how Dell’s working capital policy is a competitive advantage for the company? Dell uses a just in time order fulfillment policy and accurate forecasting of sales to minimize inventories. This allowed Dell to hold inventory of finished products far below levels of their competitors (10-20% compared to 50-70% industry level) and furthermore allowed them to quickly implement changes to their product lines as new technologies became available. This quick inventory turnover also allowed Dell to retain more capital. Finally, this policy enabled Dell to respond immediately to technological progress in components and deliver state of the art new finished products (e.g. Pc’s holding the newest Pentium microprocessors) while competitors are still selling inventory of products not containing newest technology. When comparing Dell’s 1995 DSI to its competitors you can see the competitive advantage taking shape: Company: DSI (1995): Inventory Savings at competitors DSI: Dell: 32 0 Apple: 54 $167.3 million Compaq: 73 $311.7 million IBM: 48 $121.6 million * 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 uses of external funds in order to maintain high growth rates. Dell funded its 52% growth in 1996 internally by increasing sales, lowering sales/operating expenses by 1%, which led to an increase in profit margin (net profit/sales)...
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...1. COMPANY BACKGROUND * Founded in 1984 by Michael Dell * First, Dell company purchased IBM compatible personal computers, upgraded rgem, then sold the upgraded PCs directly to business by main order. * Subsequently, Dell began to market and sell its own brand personal computer, taking orders over a toll free telephone line, and shipping directly to customers. 2. DELL’S WORKING CAPITAL POLICY AS A COMPETITIVE ADVANTAGE * Industry Strategy Assembled to forecast, retaining a substantial finished goods inventory. (Dell ordered components based in sales forecasts). * Dell’s Main Strategy Build-to-order model that causes: * Selling straight to customer and manufacturing cycle that started after a buyer’s order * A personalized purchase within a small amount of time (Dell combined this low cost sales/distribution model with a production cycle that began after the company received a customer’s order. This build-to-order model enabled Dell to deliver a customized order within a few days, something its competitors could not do. Dell also provide toll-free telephone and on-site technical support in an effort to differentiate it self in customer service). * Small finished goods inventory balance, proven by DSI amount. There is no excess stock doesn’t take up room and absorb capital. Low inventory with low fixed assets gives Dell a higher return on capital employed. (Dell had 10%-20% stock while competitors had 50%-70%. TABLE A Days Supply Inventory...
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...Finanzas I; Caso 2: Dell”s Working Capital 1. ¿De qué manera la política de capital de trabajo fue una ventaja competitiva para Dell? En primer lugar, la política de capital de trabajo que implementó Dell le permitió tener menos niveles de inventario, y por ende, menos capital de trabajo inmovilizado. Estos bajos niveles de inventario que presentaba Dell se debían a que en esta compañía se vende cuándo y cómo los clientes quieren (sistema pre-venta). No así su competencia, como vemos a continuación con un ejemplo, Cantidad de días inventario trimestral 2005: Compañía | Dell | Compaq | Apple | Año 2005 (tomado como ejemplo) | 32 | 73 | 54 | Consideramos estos datos y luego multiplicamos estos números por el costo de venta “diario” en 1995 (costo de venta del 2005/360). Si se hace un análisis comparativo de Dell con sus competidores vemos el costo adicional diario que deben afrontar los competidores a diferencia de Dell: Costos diarios adicionales de Compaq v/s Dell: (73-32) x 7,602= $311,713 millones.Costos diarios adicionales de Apple v/s Dell: (54-32) x 7,602= $167,261 millones. | Estos costos pueden provenir del costo directo de los insumos, como también costos de almacenamiento, seguros por daños o robos, etc. Otra ventaja que presenta esta política de capital de trabajo es que se reducen los riesgos de quedar con tecnologías obsoletas, esto porque puede poner productos en venta con gran rapidez, pues no posee un stock de productos muy grande que deba vender...
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...CASO DELL WORKING CAPITAL 1. Representa el manejo de capital de trabajo una ventaja competitiva? En qué sentido? Tiene algún problema la forma en que Dell administra su capital de trabajo? Representa el manejo de capital de trabajo una ventaja competitiva? En qué sentido? Representa una ventaja competitiva el manejo de capital de trabajo en los siguientes aspectos: La manera en que Dell Working Capital manejaba su inventario hacia que los saldos de inventarios de bienes en proceso y acabados disminuían, ya que su proceso de fabricación era contra pedido. Mayor flexibilidad ante los constantes cambios tecnológicos. En cierta manera sus inventarios no dependían completamente de pronósticos de ventas. Cantidad de días inventarios menor que los competidores, lo cual reducía los costos de espacio y menor requerimiento de capital. Parte de la ventaja competitiva de Dell es la de poder financiarse a través de sus clientes y proveedores. Tiene algún problema la forma en que Dell administra su capital de trabajo? Si tiene problema la manera en que Dell administra su capital de trabajo en los siguientes aspectos: Debido a que inicialmente la forma de venta era contra pedido, esto limitaba el crecimiento debido a que no existían otros canales de venta. ...
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...Dell´s Working Capital – Richard Ruback 1- Briefly explain DELL´s strategy. Do you consider this strategy reasonable? 2- What is your assessment of DELL´s performance? Please refer to the financial statements and calculate the financial ratios used in class to strengthen your analysis. 3- Calculate DELL´s Free Cash Flows. What is your assessment of the quality of these cash flows? ------------------------------------------------- 1- Dell, one of the best worldwide computer producer and one of the most successful organizations in the world, attribut the success to quality products and strategic management. Dell manufactures, sells, and delivers personal computers directly to the customers by a build-to-order model, which enables Dell to have much smaller investments in working capital than its competitors and 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 management principles as well as its supply chain (including inventory) is founded in “Build-to-Order” philosophy, and this philosophy is lies of exchanging inventory for information, because information is easier to store, to move, to discard and less expensive than inventory. Graphic 1 shows Dell´s working capital advantage over competitors by the DSI (days sales of inventory). In 1994...
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...Dell's working capital management a competitive advantage? Dell introduced built-to-order manufacturing to the PC industry. This manufacturing process allowed for customers to have customized PCs with the latest technology, and Dell was able to keep its work-in-process (WIP) and finished goods inventory at very low levels. So less capital is spent in inventory and storage. WIP and Finished goods percent to total inventory was 10-20 while IBM e.g. 50-70. See Exhibit 2 DSI is constantly reducing and therefore storage cost as well which affects finally reducing CoGS The company markets its computers directly to its customers and builds computers after receiving a customer order. This build-to-order model enables Dell to have much smaller investment in working capital than its competitors. (same as Just in Time) It also enables Dell to more fully enjoy the benefits of reduction in component prices and to introduce new products more quickly. Low Inventory led to quick adoption of changing technology- e.g. flaw in Intel chip. Dell has grown quickly and has been able to finance that growth internally by its efficient use of working capital and its profitability. 2. How did Dell fund its 52% growth in 1996? ews In 1996, their operating margin increased from 4% to 5% (in 1996)…Operating assets as percentage of sales also reduced….from 31.94% to 29.40% (in 1996)…(operational efficiency) so sales increased using less assets, this generated extra working capital to fund...
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...1. How was Dell`s Working Capital Policy a Competitive Advantage? Dell used its working capital policy as a competitive advantage by reducing the amount of WIP and finished goods inventory in its system. As a result of maintaining a minimum amount of inventory, Dell reduced its need for inventory financing, warehousing and inventory control. Dell kept its accounts payable (A/P) account to a minimum volume by waiting until the customers order was received before placing the “release” order with their suppliers. Dell’s suppliers were all located very close to Dells manufacturing plants, and made daily deliveries to Dell based on just-in-time delivery. By not receiving the parts until the last minute, Dell kept both its inventory and its accounts payable to a minimum. On the sales side, Dell took orders directly from consumers who normally pay with a credit card online, or over the phone. Because Dell waited until they received the order from the customer to start building the computer, Dell kept the CCC (cash conversion cycle to a minimum). If Dell were to operate at Compaq’s DSI level, we estimate that Dell would have to increase its 1995 inventory from $293m to $668m, which is an increase of $375 million. This would mean that Dell would have needed to invest in $668 million in inventory. I believe that the main reason that Dell was able to maintain such a low level of inventory compared to their competition has a direct result of their competitive strategy to maintain a minimum...
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...Dell Computer Corporation designed, manufactured and sold high performance personal computers. Initially it started by upgrading IBM computers then they began to market and sale its own brand. They followed built-to-order model which enabled Dell to have a much smaller working capital requirement compared with its competitor. It also allowed Dell to offer its products at a very competitive price and introduce the new technology more quickly than its competitors. SWOT analysis Strengths * Since the company followed its built-to-order model it did not spend a lot of capital in the business. * Low inventory which allowed the company to have very competitive prices and the introduction of newer technology at 1/3 the time taken by its counterparts. * Since Dell inventory it’s so low, it dramatically reduces the cost of storing inventory, which is part of the Cost of Goods Sold. * The Defects in raw material were easily pick over * High inventory turnover and low inventory days which means low cash conversion cycle. Weaknesses * Large dependence of suppliers * Small compared to its competitors Opportunities * Expansion of business activities due to globalization. * Increasing need of personal computers which will be reflected in an Increment in the demand of personal computers. * Change of the millennium * Adoption of new technology * Internet Threats * Rapid upgrade of new technology * Larger competitors Now I am going...
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...analyze the possible alternatives of Dell Computer Corporation in funding its future growth and expansion from the point of view of its top management. Given the company’s financial statements, projected growth in sales, and its working capital financial ratios, this paper forecasted Dell’s balance sheet and income statement for 1997 to trace the external fund needed, if any, and which type of funding is most optimal to fund its future operations and growth. The forecast used a set of assumptions based on the company’s historical data and company policies. After experiencing its first loss late 1993, the company dedicated itself to bringing back its efficient operations to keep up with the fast growing computer industry, minimizing middlemen retailers and shifting the company’s focus to the growth of their liquidity, profitability, and overall growth. The company eventually recovered through its new and improved internal systems of inventory control and vendor certification, ensuring that its products are always of the highest quality. Ensuring its foothold in the market, Dell was the pioneer in manufacturing Pentium-based products and transforming its major product line to Pentium technology. In 1995, Dell was able to ship its new system that was equipped with Microsoft’s Windows 95 on the same day that Microsoft released their operations system. Now, Dell is again atop the industry outpacing revenue growth and increasing its net income. Dell in the recent years has always financed...
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...Below is a free essay on "Dell's Working Capital" from Anti Essays, your source for free research papers, essays, and term paper examples. Group Case: Dell's Working Capital Fundamentals of Managerial Finance 1) How was Dell's working capital policy a competitive advantage? Dell Computer Corporation in the mid-90s was using a just in time order fulfillment system and accurate forecasting to reduce its inventories to the lowest possible levels in the highly competitive PC market where profit margins are very small. This working capital policy allowed Dell to achieve higher levels of liquidity and inventory turnover than its competitors. As a result Dell was able to have a quicker response than its competitors every time the computer industry released new microprocessors and operating systems which proved to be key in obtaining a privileged competitive advantage over major PC manufacturers of the time, such as Apple, IBM, and Compaq. 2) How did Dell fund its 54% growth in 1996? Dell decided to incorporate key performance metrics such as growth, liquidity, and profitability to monitor and adjust its operating procedures to meet its ROIC (Return on Invested Capital) and CCC (Cash Conversion Cycle) goals. In 1996 Dell reduced its days sales of inventory from 34 to 31, improved they accounts receivables from 47 down to 42 days, and maintained low liquidity risks by keeping cash conversion cycle on an average of 40 days. Dell was able to fund its 54% growth maintaining...
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...Dell’s Working Capital In 1996, Dell’s net working capital, which is total current assets minus total current liabilities, was in a positive position with $1,018 million. For the past three years from 1994 to 1996, net working capital has been increasing significantly each year. Looking at the information on Table 1, it is very simple to detect this increase. The trend starts at $510 million in 1994 to $718 million in 1995 to $1,018 million in 1996 of net working capital. That makes a 40.78% increase from 1994 to 1995 and a 41.78% increase from 1995 to 1996. This increase can be perceived as either a good or a bad thing depending on the situation at hand. On one hand, it shows a measure of the Dell’s efficiency and its short-term financial health is in a good place. One the other hand, it could indicate that there is too much inventory. In this case, the inventory is never kept at a high volume, so we can say that the increase in working capital is a good thing. Now, we need to look at the percentage change for each current asset and each current liability in comparison with the increase in the working capital trend. We may notice that each one plays a part in it. One asset that may stick out more than any of the others is the percentage change in inventory. If we take a look at Table 2, we will notice that, for the most part, the percentage change decreased from 1995 to 1996 compared to 1994 to 1995. For inventories, this percentage jumped from 33.18% to 46.42%. This big of...
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