Case Study: Dell’s Working Capital
Essay by Janney Dong • November 14, 2015 • Case Study • 1,078 Words (5 Pages) • 4,577 Views
Case Study: Dell’s Working Capital
Introduction: Dell designs, manufactures, sells, and services personal computers. The company markets directly to its customers and builds computers after receiving a customer order in a short time. This build-to-order model enables Dell to have significantly lower supply of inventory than its competitors. It also enables Dell to make less costly to introduce new products more quickly. Dell has grown rapidly and has been able to finance that growth by its efficient use of working capital and its profitability.
The SWOT Analysis of Dell:
Strengths:
- Brand name. Dell has a very strong brand reputation for quality products.
- Product customization. Dell allows its customers to customize their laptops.
- Environmental record. Competency in mergers and acquisitions.
- Direct selling business model.
Weaknesses:
- Commodity (computer hardware) product.
- Poor customer services
- Low investments in R&D
- Weak patents portfolio
- Too few retail locations
- Low differentiation
Opportunities:
- Expand services and enterprise solutions businesses
- Obtain more patents through acquisitions
- Strengthen their presence in emerging markets
- Tablet market growth
Threats:
- Growing demand for smartphones and tablets
- Profit margin decline on hardware products
- Slowing growth rate of the laptops market
- Intense competition
The Analysis of the statements:
1996 | 1995 | 1994 | 1996 | 1995 | 1994 | ||
Current Assets | 1957.00 | 1470.00 | 1048.00 | Net Income | 272.00 | 149.00 | -36.00 |
Current Liabilities | 939.00 | 752.00 | 538.00 | Shareholder's Equity | 973.00 | 652.00 | 471.00 |
Net Working Capital | 1018.00 | 718.00 | 510.00 | ROIC/ROE | 0.28 | 0.23 | -0.08 |
Current Ratio | 2.08 | 1.95 | 1.95 | Sales | 5296.00 | 3475.00 | 2873.00 |
Quick Ratio | 1.46 | 1.24 | 1.00 | Cost of Sales | 4229.00 | 2737.00 | 2440.00 |
Inventory | 429.00 | 293.00 | 220.00 | ||||
Inventory Turnover | 9.86 | 9.34 | 11.09 |
Advantage and Disadvantage of Dell’s policy (Compare with Compaq): |
1993 | 1994 | 1995 | |
Dell Computer | 55 | 33 | 32 |
Compaq Computer | 72 | 60 | 73 |
(DSI)
The advantage of Dell’s working capital policy can be explained using the DSI data for Dell and its competitors. In 1994 and 1995, Dell’s DSI was almost the half of Compaq. For 1995, Dell have inventory to supply the sales of 32 days contrast to Compaq, which have 73 days to maintain the sales. After calculated the increase in inventory Dell would need if it operated at Compaq’s DSI level[1], the result is below:
The cost of sale of Dell in 1995: $2737
Additional inventory at Compaq’s DSI = (Dell’s COS) (Compaq’s DSI – Dell’s DSI)/360 days = [($2,737) (73-32)]/360 = $312 million. The $312 million represents 59.2% of Dell’s cash and short-term investments and 47.85% of stockholder equity in 1995, also 114.7% of its 1996 income in 1996.
Dell’s main strategy is: 1. selling straight to consumer and starts an order-to-built manufacturing cycle. 2. a personalized purchased in a short time. 3. small inventory balance means lower cost to remove to new technology and no excess stock.[2] Dell shows comparative advantages in pricing and its low cost gained through supply chain. The high inventory return and low inventory days resulted in low cash conversion cycle. Dell doesn’t take the risks for the obsolete goods and achieve the lowest inventory levels in the industry.
However, the disadvantage of Dell is it has lack of the component in 1996 and it shows large dependence on the on-time high quality supplies from manufacturers[3]. In recent years, Dell's performance is not that outstanding as before. Since we have moved into the mobile age, holding the best supply chain strategy won't help too much if the core technology is falling behind[4].
How did Dell fund its 52% growth in 1996?
In 1996, Dell reported revenue was up 52% over the prior year compared with an industry increase of 31%, from the Exhibits 4 and 5; we created a sheet for fiscal 1996 to stating it:
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