Dell Computer Corporation was founded in 1984 by Michael Dell. The company sold high performance personal computers, initially purchased from IBM and then upgraded them, directly to businesses by mail order. Soon Dell began distributing its own brand by manufacture, sell, service personal computers. Dell took advantage of its core strategy of build-to-order model, yielded low finished goods inventory, which was very competitive in the industry. The build-to-order model made Dell can have much lower investments in working capital (Most in inventory) than its competitors. It also enables Dell can benefit from lower obsolescence risk and introduce new products more rapidly and less costly. Since then, Dell has grown rapidly and has been used its working capital and profitability efficiently to finance growth internally.
The main working capital policies Dell used were build-to-order model, good customer service and low inventory management. These policies are very competitive. Dell used the build-to-order model that begins to produce only after the company receives customer’s order. Dell produce computers only when the customers wanted it. Therefore, Dell can make computers that can satisfy personal needs even without lots of inventory.
Low inventory policy led to lower finished goods inventory, lower carrying cost and shorter cash conversion cycle. Furthermore, Dell is in an electronic industry and technology changes very fast. Because of lower inventory Dell can take less obsolescence risk. The prices of components would fall 30% a year and it is less costly when they shift to apply the newest technology, such as the processor chips, which comprise about 80% of the cost of the computer. Dell can always offer faster systems at the same price in less time than the competitors.
Low inventory enables Dell to have lower DSI, which means Dell can sell its inventory