Dell Working Capital

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Explain how Dell’s working capital policy is a competitive for the company. -- Dell reduces its working capital using its build-to-order manufacturing process. Dell focused on building computers according to sales forecast. Using build-to-order, Dell was benefited several ways: -- Significantly reduced its inventory on hand (in components, work in process and finished goods), accounts payable thus reducing its working capital (refer exhibit 1). -- High inventory turn over and low inventory days led to low cash conversion cycle. -- By reducing those costs, Dell had additional funds not necessarily to run the day-to-day business but for other purposes such as investment. Those funds could also be used to speed purchasing new technology from supplier, such as the Pentium chip. Whereas Dell’s competitors built several lines of stock computers in advance of any customer being identified, let alone committing to buy. As they built up obsolescing inventory, labor costs, and accounts payable costs, in anticipation of customers that may or may not actually ever present to the company to make a purchase, Dell’s competitors tied up significant funds in working capital. Therefore Dell’s competitors were prevented from using that cash for other purposes. Also as technology improved, these firms were slow incorporating the new technology into their products due both to a lack of cash and an inventory of out-of-date products that could not be effectively sold along-side the Dell’s faster, newer models. How did Dell fund its 52% growth in 1996? -- To figure out how did Dell fund its 52% growth in 1996, we need analyse Dell’s performance in both the years. To meet the increase in demand, Dell would have to increase its operating assets from their 1995 level of $1100 million. At the close of 1995, its operating asset to sales ratio was 32%. With an increase in sales in

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