Case Background

Dell Computer Corporation, founded in 1984 by Michael Dell started with the business
model of Build-To-Order in the Personal Computer section. This model was a success as the
company could keep the inventories low, upgrade the technology at a faster pace. The
company was growing in double digits in mid 1990s while its competitors where growing in
single digit.

Initially the company has been able to meet the finances internally. The company use to take
advances from the customers. But with the growing company, this was not manageable and
the company needed new ways to sustain the high growth for longer period. The company
needed plan to manage the Working Capital in future.
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Dell
 Designed, manufactured, sold and services high performance personal computers
compatible with industry standards
 Initially purchased IBM compatible PCs, upgraded the, then sold the PCs directly to
businesses by mail order
 Subsequently, began to market and sell its own brand PC, taking order over a toll-free
telephone line, and selling to customers directly.
 Sales primarily generated through advertising in computer trade magazines and,
eventually in a catalogue
 Low cost sales/distribution model
 Production began after the company had received a customer’s order
 Customized order serviced within a few days, which could not be done by its competitors
Compaq, IBM, Apple
 Differentiated customer service with first in industry to provide telephone and on-site
technical support

Inventory Management
 Dell was Built-to-Order, whereas competitors were Built-to-Forecast
 Competitors had to maintain sizeable finished-goods inventory at their channel partners
 Dell’s WIP & Finished goods inventory as percent of total inventory ranged from 10% to
20%, contrasting to competitors who had range of 50% to 70%
 Dell maintained inventory of components
 Cost of individual components comprised 80% of the cost of a PC
 Prices fell by 30% each year with new technologies replacing old
 Dell ordered components based on Sales forecasts
 Components sources from ~80 suppliers
 Many suppliers had warehouses close to Dell’s Austin Texas and Ireland plants
 Suppliers delivered parts on daily basis
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Timeline
September 1990-August 1993
 Market share of 1%
 Dell decided to break from its direct-only business model to selling PCs through
CompUSA
 Expanded indirect distribution channel by adding other mass market retailers (e.g.
Staples, Inc.)
 Precision line marketed exclusively through Price Club
 Sales increased by 268% in 2 years, compared to industry growth rate of 5%
 $73 million loss in Aug’93 tied to $71 million in charges relating to the sell-off excess
inventory, cost of scrapping a disappointing notebook computer line, European
operations restructuring
 Profit margin fell by 2%, well below company target of 5% that they had achieved or
exceeded for 11 consecutive quarters
 Cash balance of $32 million with which it could last one year, but future was not
promised

September 1993-August 1996

 Shifter focus from exclusively growth to liquidity, profitability, and growth
 Adopted company-wide metrics around the new focus
 Each business unit required to provide detailed profit & loss statements
 Exited low margin indirect retail channel
 Measures taken to improve forecasting, reporting, and inventory control
 New vendor certification program to ensure component quality & delivery performance
 Re-entry into notebook market
 Rapid introduction of PCs based on Intel Corporation’s new Pentium
microprocessor
 Direct contact with customer helped to anticipate the demand for newly developed
Pentium-based systems, and keep inventory of 386 & 486 technology low
 First in industry to achieve volume production with the 120 mhz Pentium processor
 First producer to convert its entire major product line to the Pentium technology
 Dell could offer faster systems at the same price that rivals were marketing older
Pentium technologies
 Felt no need to dismantle PCs to replace microprocessor due to fault identified by Intel
 Dell could quickly manufacture systems with updated Pentium chip, while others were
still selling flawed systems
 Dell could sell Dell Dimension systems equipped with Window 95, the same day this OS
was launched.
 Dell being direct marketer, could bring new technology within an average of 35 days
– a third of time it took competitors to move a new product through indirect channels.

Question
Whether Dell could manage with the working capital in the coming future?
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Cash Cycle

Cash Conversion Cycle = Accounts Receivable Days + Inventory Days – Accounts Payable Days

Accounts Receivable Days = Accounts Receivable / Average Daily Sales

Inventory Days = Inventory / Average Daily Cost of Goods Sold

Accounts Payable Days = Accounts Payable / Average Daily Cost of Goods Sold

1996 – Internal Financing

Requirement
   
1995
Total Assets 1594
Short Term Investments 484
Operating Assets (Total Asset - Short Term Assets) 1110
Sales 3475
Op. Asset as % of sales 31.94%
   
1996
Sales 5296
Operating Assets (Op. Asset %age in 1995 * Sales) 1692
   
   
Extra Operating Asset Required in 1996 582

   
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199 Di
  1995 6 ff
214 55
Liabilities 1594 8 4
Accounts
Payable 403 466 63
   
   
   
  1995    
  Net Profit 149  
347
  Sales 5  
4.3
  Net Profit as %age of sale %  
   
  1996    
529
  Sales 6  
  Projected Operational Profit 227  
   
  Available Fund 718  
   
       

Company required 582mill $ and had available 717 mills $. So, it could manage with internal
finance.

Comparison
Total Assets 1995.00 1996.00
Sales 3475.00 5296.00
Asset 1594.00 2148.00
Current Liabilities 752.00 939.00
Asset Turnover Ratio 2.18 2.47
Current Liabilities as a %age of sales 21.64% 17.73%

 Current Liability has decreased from 21 to 17%

 Asset Turnover Ratio has improved from 2.18 to 2.47

1997 – Working Capital Assessment

Requirement
   

1996
Total Assets 2148
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Short Term Investments 591

Operating Assets ( Total Asset - Short Term Assets) 1557

Sales 5296
29.40
Op. Asset as % of sales %

Net Profit 272.00

Net Profit as %age of Sales 5.14%

   
1997

Forecasted Sales ( 50% higher) 7944

Operating Assets (Op. Asset %age in 1995 * Sales) 2336

   
Extra Operating Asset Required in 1997 779

   
Financing
   
  1996
Liabilities 2148
Accounts Payable 466
Liabilities except Account Payables as % of sales 31.8%
   
1997  
Forecasted Liabilities 2523
Liabilities except accounts payable increase from 1996 to 1997 841
   
1996  
Sales 7944
Projected Operational Profit 408
   
Available Fund 1249
   

Company required 779mill $ and had available 1249 mills $. So, it could manage with
internal finance.

Data

Calculation - Dell's
Working Capital.xlsx
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Conclusion

1996

Company required 582mill $ and had available 717 mills $. So, it could manage with internal
finance.

1997

Company required 779mill $ and had available 1249 mills $. So, it could manage with
internal finance.