Dell Computer Company
DELL’s Working Capital 1. How was Dell’s working capital policy a competitive advantage?
Dell has achieved low working capital by keeping its work-in-process and finished goods inventory very low. The competitive advantage Dell achieves from this is that its inventory is significantly lower than its competitors, it does not require large warehouses for stocking the inventories and Dell is also able to adapt the fastest to technology changes in the components. The competitors would find it difficult to adapt to technology changes in a short time because they have larger inventories than Dell does.
In short, Dell builds computers only when ordered and thus does not spend much capital as a result. The declining DSI means that Dell takes increasingly shorter days to sell its inventory.
2. How did Dell fund its 52% growth in 1996?
Dell needed the following amount to fund its 52% growth in 1996 (using exhibit 4&5):
Operating assets (OA) = total assets – short term investment
OA in 1995 = 1594 – 484 = 1110 Mil USD
Operating Asset to Sales ratio = 1110/3457 = 32%
Sales increased from 3457 to 5296 Mil USD in 1996. Multiplying the operating asset to sales ratio by the increase in sales 0.32 x (5296 – 3457) = 582 mil USD, which is the operating assets that Dell needed to fund its 52% growth. This increase in assets meant an increase in liabilities too, proportional to the sales. The increase in liabilities would be:
Liabilities in 1995 = 942 Mil USD
Liabilities to Sales ratio = 942/3475 = 27.1%
Increase in liabilities = 0.271 x (5296 – 3475) = 494 mil USD
So, Dell would have an increase in operating assets of 582 mil USD and an increase in liabilities of 494 mil USD.
The short investments would remain the same as it is not related to operations. Operational profit would increase with the Operating Profit to Sales ratio:
(net profit/sales) x (5296 - 3457) = (149/3457) x (5296 - 3457) = 227 mil USD
In all, we see that a
Dell has achieved low working capital by keeping its work-in-process and finished goods inventory very low. The competitive advantage Dell achieves from this is that its inventory is significantly lower than its competitors, it does not require large warehouses for stocking the inventories and Dell is also able to adapt the fastest to technology changes in the components. The competitors would find it difficult to adapt to technology changes in a short time because they have larger inventories than Dell does.
In short, Dell builds computers only when ordered and thus does not spend much capital as a result. The declining DSI means that Dell takes increasingly shorter days to sell its inventory.
2. How did Dell fund its 52% growth in 1996?
Dell needed the following amount to fund its 52% growth in 1996 (using exhibit 4&5):
Operating assets (OA) = total assets – short term investment
OA in 1995 = 1594 – 484 = 1110 Mil USD
Operating Asset to Sales ratio = 1110/3457 = 32%
Sales increased from 3457 to 5296 Mil USD in 1996. Multiplying the operating asset to sales ratio by the increase in sales 0.32 x (5296 – 3457) = 582 mil USD, which is the operating assets that Dell needed to fund its 52% growth. This increase in assets meant an increase in liabilities too, proportional to the sales. The increase in liabilities would be:
Liabilities in 1995 = 942 Mil USD
Liabilities to Sales ratio = 942/3475 = 27.1%
Increase in liabilities = 0.271 x (5296 – 3475) = 494 mil USD
So, Dell would have an increase in operating assets of 582 mil USD and an increase in liabilities of 494 mil USD.
The short investments would remain the same as it is not related to operations. Operational profit would increase with the Operating Profit to Sales ratio:
(net profit/sales) x (5296 - 3457) = (149/3457) x (5296 - 3457) = 227 mil USD
In all, we see that a