...Dell’s Working Capital 1. How was Dell’s working capital policy a competitive advantage? Dell had very unique working capital policy compared to its competitors. The most important characteristic of Dell's working capital policy is that they were using build-to-order manufacturing system, meaning that they would not build the product until a confirmed order for product is received. This system gave them a competitive advantage because of several reasons: * Low finished goods inventory balances * Low WIP * Less costly to move quickly and improve (Dell was able to bring new coponents technologyto the market within an average of 35 days, a third of the time it took competitors to move a new product through indirect channels) * no excess stock taking up space and absorbing capital (Dell had 10% - 20% stock while competitors had 50% - 70%) Another characteristics of Dell's working capital policy is that they were selling directly to customers. They would contact the customers, receive the order and start manufacturing cycle. Dell was able to deliver a customized order within few days while his competitors were not able to do that. 2. How did Dell fund its 52% growth in 1996? Dell was using its internal resources to fund its growth. First thing we have to do to figure this out is determine how much fund did Dell actually need to fund its growth. The sales increased from 1995 to 1996 => 5296 – 3475 = $1,821M Increase in Current Assets (excluded...
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...Working Capital at Dell 1. How was Dell’s use of working capital a competitive advantage? Dell minimized its working capital as a result of its made-to-order manufacturing process. Dell focused on building computers to fit the orders placed by actual present and already-committed buyers. By building to order, Dell was able to significantly reduce its inventory on hand (in components, work in process and finished goods), accounts payable, and sunk labor costs thus reducing its working capital. By reducing those costs, Dell freed up funds not necessary to run the day-to-day business for other purposes such as expansion or investment. Those funds could also be used to ease/speed purchasing from suppliers as new technology, such as the Pentium chip, developed. Dell’s competitors, meanwhile, repetitively built several lines of stock computers in advance of any customer being identified, let alone committing to buy. As they compiled ever-aging/obsolescing inventory, labor costs, and accounts payable costs, in anticipation of customers that may or may not actually ever present to the company to make a purchase, Dell’s competitors tied up significant funds in working capital. By committing those funds, Dell’s competitors were prevented from using that cash for other purposes. Additionally, as technology improved, these firms were slowed from incorporating the new technology into their products due both to a lack of cash and an inventory of out-of-date products...
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...SEMINARIO DE CASOS AVANZADOS EN FINANZAS PROFESOR: JOSE GOMEZ VILLARREAL EGADE BUSINESS SCHOOL “Dell’s Working Capital” La compañía Dell ha demostrado ser un caso de éxito como modelo de negocios ya que reduce el capital de trabajo mediante la implementación de la una política “build to order”. En donde no hay inventario de producto terminado ya que todo se fabrica de acuerdo a las órdenes de los clientes. De la misma manera, Dell mantiene un nivel de inventario de materia prima muy bajo en comparación con el mercado, lo que le permite aprovechar mejor los recursos y aumentar el flujo de efectivo. La ventaja competitiva de Dell son sus bajos días de inventario, 32 días de ventas, comparado con 48 de IBM, 54 de Apple y 73 de Compaq. Esto lo logra debido a una alta integración de sus proveedores, muchos de estos reparten componentes de manera diaria. La siguiente tabla muestra los días de inventario de materia prima para Dell y sus principales competidores: Lo anterior, le proporciona a Dell una ventaja en el uso de sus recursos. Al invertir menos capital en inventario, se crea un excedente para poder invertir en distintos proyectos como nuevos productos, nuevos canales de venta y demás que le dan a Dell mayores ventajas competitivas y una mayor habilidad para atacar el mercado. Además de las ventajas a nivel de flujo de efectivo, la agilidad en la cadena de producción de Dell le permite minimizar costos por productos defectuosos y obsoletos. Por ejemplo...
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...Case Study of Dell’s Working Capital Jianduo Guo, Shihao Qi, Michael, Yitsik 1. Big picture: With or Without external financing to meet the need of rapid growth Timeline of Dell is showed as follows: Calendar Year Fiscal Year Note 1990 1991 Expand indirect distribution channels 1993 1994 August: loss from sell-off of excess inventory September: growth to liquidity & profitability 1994 1995 July: exit low margin indirect channel 1995 1996 Inventory control, notebook market, new tech 2. Analysis Benefit and Cost of just in time manufacturing system Thanks to just in time manufacturing system, Dell built its brand as an efficient and flexible company which keeps pace to leading technology. As Dell’s competitive advantages, this system benefits Dell a lot, along with some costs and limits. Internally, in time manufacture lowers inventory, which benefits in many ways. Smaller amount of inventory takes less space for storage, thus lower the PP&E. And computers are easy to depreciate just like groceries, so less inventory leads to reducing expenses of depreciation. Also, it shortens DSI and then indirectly shorten Dell’s CCC performance, benefiting its liquidity. In addition, this enables Dell to simplify its supply chain by cutting off some suppliers. This system at the same time brands Dell as a flexible company to the customers. Without the burden of large amount of inventory, Dell is able to shift flexibly...
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...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 corporation to face its current growth. The Just-In-Time inventory system and Sales built to order allowed, reduced the cash conversion cycle and minimized the amount of capital Dell needed...
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...EXECUTIVE SUMMARY This paper aims to discuss and 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...
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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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...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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...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 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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...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 in Cash, Working Capital and Fixed...
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...Q1) How was Dell’s working capital policy a competitive advantage? Dell’s Working Capital as competitive Advantage: * Build-to-order model: Dell was first in the industry to deliver customized products within a few days. While competitors were maintaining high levels of inventory to stock resellers and stock channels, Dell focused on customer customization of products and supply to them when they wanted it, thereby saving on huge inventory cost. * Ease of upgrading new parts and products. When the component cost was reducing, due to technological advancements (Price of components fell by an average of 30% a year, 1996) Dell was able to utilize it to pass on the savings to customers, by providing them comparative products at cheaper price. * After the launch of Pentium processors in 1994, Dell’s customer connect helped it anticipate demand for newly developed Pentium based system. It was able to get 75 % of its sales from product with Pentium models alone by FY 1996. It didn’t have to dismantle its existing PC’s, which made it less costly and move quickly to capture the market. * During Roll out of PC’s with new OS technology Dell was much faster than competitors. * In case of defective products, it had quicker time to market to replace the products. * Dell was also generating cash by maintaining low cash conversion cycle. * More sales could be stimulated on credit basis * Dell had a low inventory with low fixed assets which help it to achieve...
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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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...1. Is 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...
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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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