Dell Working Capital

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1. What are the costs and benefits of Dell’s just in time manufacturing system? • Costs i. Likely sacrifices efficiencies from economies of scale and assembly lines ii. Consequently, only suited to a direct-sale model. As such, may be more costly to market to customers iii. Relatively more vulnerable to supply chain disruptions • Benefits i. Lowers working capital needs, makes it easier to self-finance ii. Leads to beneficial cash conversion cycle iii. Decreases risk of obsolete inventory iv. Marketing benefits from custom-made computers 2. Suppose that you are now in the planning stage for fiscal 1996 and that you estimate that in fiscal 1996 sales will grow 52%. (This is the actual growth rate.) If Dell’s operation in fiscal 1996 were to repeat the fiscal 1995 operation what would be the external financing needs? Compare your forecast to the actual performance in fiscal 1996? • $390M • My asset forecast is $90M higher • My net income is 15% lower ($41M) 3. Assume that Dell will grow 50% in fiscal 1997. How would you recommend that Dell finance this growth? Will it be possible for Dell to finance the growth without accessing external funds? How much would working capital need to be reduced and/or profit margin increased? What steps do you recommend the company take? Base your forecasts on the 1996 performance. • Finance it through debt; it has so little and is a big company by this point. But don’t take too much, still achieve a DPO reduction so that the debt is minimal • No, it will not be possible. • Would need to reduce working capital by $260M • Would need to increase gross margins by 328bps • If growth is so important, then a price raise would likely slow that. The DPO change needed to self-finance is likely too aggressive. I would try to get half through DPO improvements and the other half through debt. This roughly doubles their debt. (But

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