Dell Working Capital Essay

1856 WordsNov 10, 20148 Pages
Solution for Dell's Working Capital Dell’s working capital policy Pros: - Low finished goods, low carrying cost, reinforces it custom build-to-order strategy. - in case of defective products, it is much quicker time to market. - rolling out pcs with new os, technology much faster than its competitors. - helps it to pass on saving on customers, when the component cost is reducing. - generates cash from maintaining low cash conversion cycle/ - more sales can be stimulated on credit basis - low inventory with low fixed assets gives dell a higher return on capital employed. Cons: - It has led to the component shortages in 1996 - larger dependence on the on-time high quality supplies from manufacturers - when products changes, process should start afresh by thrashing out existing ones Assuming that the COGS per day remains same for the competitors of dell: The carrying costs solely depends on the days sales of inventory ( dsi) - during 1995: cost of sales = $2737 mn - cost of sales per day= COS/365 = 2737/365 = $7.5 mn - DSI ( dell) = 32, DSI ( compaq) = 73 - so, inventory holding of compaq over dell is in excess of = ( 73-32)*7.5=$307.5 mn Because compaq has to sell off its old inventory before purchasing new goods: - loss of benefits from purchase of low cost, ( 30% lower) new technology inventory - compaq’s opportunity loss = 0.3**307.5=$92.25 mn Dell’s cash funding to achieve 52% growth in 1996 through internal means: Its total assets except short tern investments should grow in proportion - let’s define the assets mentioned above as TAESTI - TAESTI1995 = 1594 - 484 = $ 1110 mn, as percentage of sales in 1995 = 1110/3475 = 31.94% - to determine TAESTI1996’s contribution, TAESTI ratio to sales in should remain intact. - required increase of TAESTI to meet 1996 growth = 0.3194*0.522*3475 = $ 579.37 mn It should be met without the support

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