dell's working capital
201-029
Dell’s Working Capital
2
Dell maintained an inventory of components. The cost of individual components, such as processor chips, comprised about 80% of the cost of a PC. As new technology replaced old, the prices of components fell by an average of 30% a year.
1
Dell ordered components based on sales forecasts.
Components were sourced from about 80 suppliers in the mid-1990s – down from a high of 200 or more. Dell issued “releases” for a certain amount of product from a supplier’s inventory on a regular basis, depending upon the forecast.
2
Suppliers, many of whom had warehouses close to Dell’s
Austin Texas and Ireland plants, delivered parts to Dell, often on a daily basis.
As Michael Dell explained, “other companies had to maintain high levels of inventory to stock reseller and retail channels. Because we built only what our customers wanted when they wanted it, we didn’t have a lot of inventory taking up space and soaking up capital.”
3
As such, Dell’s supply of inventory was significantly lower than its competitors, providing a competitive advantage.
Table A
Days Supply of Inventory (DSI) a 1993 b 1994 b 1995 b Dell
Computer
55 33 32
Apple
Computer
52 85 54
Compaq
Computer
72 60 73
IBM
64 57 48
Source:
Dell Computer Corporation Fiscal 1993-1995 Annual Reports; case writer estimates from Apple Computer, Compaq
Computer, and IBM Fiscal 1992-1994 Annual Reports. a DSI = (Net Ending Inventory)/(Quarterly COGS/90 Days) b Dell’s fiscal calendar ends in January; Apple’s in September; Compaq and IBM’s in December. The DSI for 1995 represents
Dell’s DSI for the quarter ended on 1/29/95, Apple’s on 9/30/94, and Compaq’s and IBM’s on 12/31/94.
September 1990 - August 1993
In 1990, Dell had only 1% of the U.S. PC market share.
4
Michael Dell anticipated that the fragmented PC industry was ready for a consolidation and that Dell was
Dell’s Working Capital
2
Dell maintained an inventory of components. The cost of individual components, such as processor chips, comprised about 80% of the cost of a PC. As new technology replaced old, the prices of components fell by an average of 30% a year.
1
Dell ordered components based on sales forecasts.
Components were sourced from about 80 suppliers in the mid-1990s – down from a high of 200 or more. Dell issued “releases” for a certain amount of product from a supplier’s inventory on a regular basis, depending upon the forecast.
2
Suppliers, many of whom had warehouses close to Dell’s
Austin Texas and Ireland plants, delivered parts to Dell, often on a daily basis.
As Michael Dell explained, “other companies had to maintain high levels of inventory to stock reseller and retail channels. Because we built only what our customers wanted when they wanted it, we didn’t have a lot of inventory taking up space and soaking up capital.”
3
As such, Dell’s supply of inventory was significantly lower than its competitors, providing a competitive advantage.
Table A
Days Supply of Inventory (DSI) a 1993 b 1994 b 1995 b Dell
Computer
55 33 32
Apple
Computer
52 85 54
Compaq
Computer
72 60 73
IBM
64 57 48
Source:
Dell Computer Corporation Fiscal 1993-1995 Annual Reports; case writer estimates from Apple Computer, Compaq
Computer, and IBM Fiscal 1992-1994 Annual Reports. a DSI = (Net Ending Inventory)/(Quarterly COGS/90 Days) b Dell’s fiscal calendar ends in January; Apple’s in September; Compaq and IBM’s in December. The DSI for 1995 represents
Dell’s DSI for the quarter ended on 1/29/95, Apple’s on 9/30/94, and Compaq’s and IBM’s on 12/31/94.
September 1990 - August 1993
In 1990, Dell had only 1% of the U.S. PC market share.
4
Michael Dell anticipated that the fragmented PC industry was ready for a consolidation and that Dell was