...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. 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...
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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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...Dell Working Capital Q1: How was Dell’s working capital policy a competitive advantage? ( Dell had a policy of working with low inventory and it used to make inventory purchases based on the sale orders received. This led to following advantages: • No obsolete goods. • Defects in raw material manufacturers were easily weeded out. • New technological up gradations can be easily set into the system before the competition turns over the existing inventory. Thus Dell had a first mover’s advantage in being abreast with latest technological inclusion. • High inventory turnover and low inventory days. This resulted in low cash conversion cycle. From Table A, Dell had Days Supply of Inventory (DSI) as 32 days while the competition average for is: DSI average = (54 + 73 + 48) / 3 = 58 days Days inventory for the year is given by: DSI = 365 * Average Inventory / COGS From Exhibit 4, the COGS for Dell for 1995 is $2737 and the DSI is 32 days. Hence the Average inventory comes out to $239mn, which is almost $200mn less than the competitions average of $436mn for the same amount of COGS. Q2: How did Dell fund its 52% growth in 1996? ( When we compare Dell’s performance in 1996 as compared to 1995, the Sale grew from $3475 to $5296 reporting a growth of 52.4%. However, the total assets in 1995 were $1594 i.e. 46% of sales and operating assets were total asset less short-term investment i.e. $1110 which is about 32% of sales. Thus when 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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...* 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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...DELL'S STRATEGY IS AN UNCONVENTIONAL APPROACH. • 1984 The company becomes the first in the industry to sell custom-built computers directly to end-users, bypassing the dominant system of using computer resellers to sell mass-produced computers. • 1986 Dell unveils the industry's fastest-performing computer, pioneers the industry's first thirty-day money back guarantee, and offers the industry's first onsite service program. • 1996 The company's quiet bid to sell custom-built computers over the Internet quickly becomes a public revolution when the company announces that sales over www.dell.com have exceeded $1 million per day. Dell introduces also its first custom custom-made web links for customers. Called "Premier Pages", the links allow customers to tap directly into the company's own service and support databases. 1998 Dell establishes web-based connections with its suppliers to speed the flow of inventory and quality information ================================ THE THREE GOLDEN DELL RULES Disdain inventory Always listen to the customer Never sell indirect ===================================== DELL COMPETITIVE STRATEGIES • Speed to market • Superior customer service • A fierce commitment to producing consistently high quality, custom-made computer systems that provide the highest performance and the latest relevant technology to the customers An early exploitation of the INTERNET. ========================================== ...
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...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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...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 growth. 3. Assuming Dell sales will grow...
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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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...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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...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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...1. Ststement of Problem Dell is anticipating growth of 50% in 1997 and expects to beat the industry growth forecast. With this in mind we need to analyse how best we can arrange funding to support this growth. 2. Statement of Facts and assumptions: A few facts - Dell has been successful in sustaining competitive advantage and maintaining profitability for the following reasons: 1. It maintains the lowest inventory of FGI and WIP as it makes computers only on order. 2. As a result of item 1) it has substantial cost savings in terms of low inventory stocking costs and the fact that it can adopt new technology a lot more rapidly with minimal wastage of redundant outdated stock. 3. Another advantage of manufacturing just in time computers (other than configuration flexibility to match customer needs) Dell could keep its working capital in check. As can be seen from exhibit 2 in the dells working capital financial ratio. There is a steady decline of "Days sales of inventory". 4. Dell has witnessed a growth of 52.4% in 95-96 and has a gross margin of 20.5 percent. Assumptions: 1. The gross margin on sales would continue to remain 20.5 percent. 2. Dell will continue to operate with same efficiencies in operation. 3. Inventory levels of wip and FGI will continue at 10 to 20 percent of sales. 4. The average CCC will be at 41 days. 5. AR remains at 14% of sales and AP at 9 percent of sales. 6. Cash and short term investment remains at 12...
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...Cost of Capital at Ameritrade 1. What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why? 2. How can the Capital Asset Pricing Model be used to estimate the cost of capital for a real (not financial) investment decision? 3. What is the estimate of the risk-free rate that should be employed in calculating the cost of capital for Ameritrade? 4. What is the estimate of the market risk premium that should be employed in calculating the cost of capital for Ameritrade? 5. In principle, what are the steps for computing the asset beta in the CAPM for purposes of calculating the cost of capital for a project? 6. Ameritrade does not have a beta estimate as the firm has been publicly traded for only a short time period. Exhibit 4 provides various choices of comparable firms. What comparable firms do you recommend as the appropriate benchmarks for evaluating the risk of Ameritrade’s planned advertising and technology investments? 7. Using the stock price and returns data in Exhibits 4 and 5, and the capital structure information in Exhibit 3, calculate the asset betas for the comparable firms. 8. How should Joe Ricketts, the CEO of Ameritrade, view the cost of capital estimate you have calculated? Colorscope, Inc. 1. Why would any customer, let alone large advertising agencies and departmental stores, go to Colorscope rather than go to the large printers listed in Exhibit 3? ...
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...your critical thinking and problem solving skills; • Expand your understanding of financial theory and its application; • Improve your listening and cooperative learning skills. II. Learning Promises At the end of this course your will be able to… • Think like a financial manager; • Interpret a company’s financial health by evaluating the performance of its cash flow components and financial ratios; • Create financial forecasts with different scenarios; • Justify the acceptance or rejection of a loan based on credit analysis: • Learn to interpret loan covenants and the underlying collateral; • Discover the metrics that Moody’s uses to identify credit risk changes; • Explain how management...
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