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TitleAnalysis of DELL
TagsWorking Capital Dell Inventory Profit (Accounting) Gross Margin
File Size368.0 KB
Total Pages12
Document Text Contents
Page 1

AFS, Assignment # 1 Page 1

Question #1

How Dell’s working capital policy is a Competitive Advantage?


Dell’s Working Capital Policies

Dell manufactures, sells, and services personal computers. The company markets directly to

its customers and builds computers after receiving a customer order. This build-to-order

model enables Dell to have much smaller investments in working capital than its competitors.

It also enables Dell to enjoy more fully the benefits of reductions in component prices and to

introduce new products more rapidly. Dell has grown quickly and has been able to finance

that growth internally by its efficient use of working capital and its profitability.

Competitive Advantage

To find out Dell’s working capital advantage, we 1
calculate days sales of inventory,

payable days and receivables days to find their cash conversion cycle.

Days sales of inventory =365*(429+293)/(2*4229) =31.16

Payable days =365*(466+403)/(2*4229) =37.50

Receivables days =365*(726+538)/(2*5296) =43.56

Cash conversion cycle =31.16+43.56-37.50 =37.22

1. The cash conversion cycle measures how long a firm takes to convert resource inputs

into cash flows. The shorter CCC, the less time capital is tied up in the business

process. It means that due to Dell’s WC Policy, it generated cash from maintaining

Low Cash Conversion Cycle.

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AFS, Assignment # 1 Page 2

2. Dell WC Policy rolling out PCs with new Operating Systems Technology, much

faster than its competitors.

3. Dell WC Policy helps it to pass on saving on customers, when the component cost has

been reduced

4. Due to customer build to strategy, it has low finished goods which results in low

caring cost

5. Low inventory with low fixed assets gives dell a higher Return on Capital Employed.

Dell’s low inventory has other substantial advantages. Because the industry’s short

product life cycles can cause component prices to drop by 30% a year as new

technology is introduced, Dell’s low component inventory reduces obsolescence risk

and lowers inventory cost.

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AFS, Assignment # 1 Page 11

efficiency rates, Dell would have needed over $500 million additional current assets to

generate 47% in incremental sales in 1997.

Equal to its asset efficiency gains, Dell substantially lengthened its Days Payables

Outstanding (DPO). The manager of Dell’s asset management department conceded that in

1996 Dell was paying vendors prior to negotiated terms because of a lack of attentiveness

between supply receipt and payment dates. In quarter 4 of 1997 Dell paid its suppliers, on

average, in 54 days – an increase of 64% , or 21 days, from a year earlier. Accounts payables

increased nearly $500 million in 1997, providing Dell with an additional source of growth

funding. Exhibit TN-8 shows that accounts receivables were $357 million more than the


Exhibit TN-9 shows that the improvements in Dell’s working capital resulted in a negative

conversion cycle.

Margin Performance.

For 1997, Dell’s return on sales rose to 6.6%, up from 5.1% a year ealier. Though average

revenue per unit fell by 6%, gross margin increased because of reductions in component

prices and a sales mix shift to higher margin products such as servers and notebooks. For

1997, gross margin was 21.5% versus 20.2% in 1996. Operating margin also improved as

operating expense as a percent of sales fell 12.3% from 13.1% a year earlier. Net profits

totaled $518 million, of which $120 million was the result of improved margins over 1996.

This additional income provided internal financing for Dell’s growth.

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AFS, Assignment # 1 Page 12

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