Dell working capital case
Dell’s build to order system created a very different balance sheet. We want to assess their competitive advantage in working capital at the time of the case, evaluate how they funded growth at the time (1996) and evaluate potential ways to fund projected sales growth of 50% in 1997 through use of internal funds.
1. Calculate their working capital advantage. To do this, calculate days sales of inventory, payable days and receivables days to find their cash conversion cycle.
The advantage of working capital:
1. It helps the business concern in maintaining the goodwill
2. It can arrange loans from banks and others on easy and favorable terms
3. It enables a concern to face business crisis in emergencies such as depression
4. It creates an environment of security, confidence and over all of efficiency in a business
5. It helps in maintaining solvency of the business
| DSI | DSO | DPO | CCC |
1993 | 46.5 | 52.75 | 51.25 | 48 |
1994 | 40.5 | 53.5 | 46.5 | 47.5 |
1995 | 33.5 | 49.75 | 44.75 | 38.5 |
1996 | 34.5 | 47 | 40.25 | 41.25 |
DSI=(DSIQ1+DSIQ2+DSIQ3+DSIQ4)/4
DSO=(DSOQ1+DSOQ2+DSOQ3+DSOQ4)/4
DPO=(DPOQ1+DPOQ2+DPOQ3+DPOQ4)/4
CCC=(CCCQ1+CCCQ2+CCCQ3+CCCQ4)/4=DSI+DSO-DPO
2. Compare Dell’s CCC to that of Compaq – including focus on the inventory days.
In January 1996, which equaled to that at the end of the 1995, Dell’s days sales of inventory was 32 days while Compaq’s days sales of inventory was 73 days. Because 32 days was less than 73 days, if we keep two companies’ DSO and DPO equal, we can conclude that the Dell manage the inventory more efficient.
In fact, Because of the build-to-order strategy, Dell can keep a smaller level of inventory compared to other companies. By the way, the strategy can help Dell to reduce the amount of inventory on hand, which can reduce the risk of the inventory, such as the risk of inventory out of date, because in 1900’s, the development of technology...