Dells-Working-Capital-(HBS-case)-[Finance]

DONOTCOPYHarvardBusinessSchool9-201-029August16,2000ProfessorRichardS.RubackandResearchAssociateAldoSesiapreparedthiscasefrompublishedsourcesasthebasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrativesituation.Copyright©2000bythePresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.1Dell'sWorkingCapitalDellComputerCorporationhadreportedimpressivegrowthforfiscalyear1996withitssalesup52%overtheprioryear.Industryanalystsanticipatedthepersonalcomputermarkettogrow20%annuallyoverthenextthreeyears,andMichaelDellexpectedthathiscompany,withitsbuild-to-ordermanufacturingsystem,wouldcontinueitsdouble-digitgrowth.AlthoughDellComputerhadfinanceditsrecentgrowthinternally,managementneededaplanforfinancingthefuturegrowth.CompanyBackgroundDellComputerCorporationwasfoundedin1984bythennineteen-year-oldMichaelDell.Thecompanydesigned,manufactured,soldandservicedhighperformancepersonalcomputers(PCs)compatiblewithindustrystandards.Initially,thecompanypurchasedIBMcompatiblepersonalcomputers,upgradedthem,thensoldtheupgradedPCsdirectlytobusinessesbymailorder.Subsequently,Dellbegantomarketandsellitsownbrandpersonalcomputer,takingordersoveratollfreetelephoneline,andshippingdirectlytocustomers.SellingdirectlytocustomerswasDell’scorestrategy.Saleswereprimarilygeneratedthroughadvertisingincomputertrademagazinesand,eventually,inacatalog.Dellcombinedthislowcostsales/distributionmodelwithaproductioncyclethatbeganafterthecompanyreceivedacustomer’sorder.Thisbuild-to-ordermodelenabledDelltodeliveracustomizedorderwithinafewdays,somethingitscompetitorscouldnotdo.Dellwasalsothefirstintheindustrytoprovidetoll-freetelephoneandon-sitetechnicalsupportinanefforttodifferentiateitselfincustomerservice.Dell’sInventoryManagementDellbuiltcomputersystemsafterthecompanyreceivedthecustomer’sorder.Incontrast,theindustryleadersbuilttoforecastandmaintainedsizeablefinishedgoodsinventoryintheirstockorattheirchannelpartners.Dell’sbuild-to-ordermanufacturingprocessyieldedlowfinishedgoodsinventorybalances.Bythemid-1990sDell’swork-in-process(WIP)andfinishedgoodsinventoryasapercentoftotalinventoryrangedfrom10%to20%.Thiscontrastedsharplywiththeindustryleaders,suchasCompaq,AppleandIBM,whoseWIPandfinishedgoodsinventorytypicallyrangedfrom50%to70%oftotalinventory,notincludinginventoryheldbytheirresellers.DONOTCOPY201-029Dell'sWorkingCapital2Dellmaintainedaninventoryofcomponents.Thecostofindividualcomponents,suchasprocessorchips,comprisedabout80%ofthecostofaPC.Asnewtechnologyreplacedold,thepricesofcomponentsfellbyanaverageof30%ayear.1Dellorderedcomponentsbasedonsalesforecasts.Componentsweresourcedfromabout80suppliersinthemid-1990s–downfromahighof200ormore.Dellissued“releases”foracertainamountofproductfromasupplier’sinventoryonaregularbasis,dependingupontheforecast.2Suppliers,manyofwhomhadwarehousesclosetoDell’sAustinTexasandIrelandplants,deliveredpartstoDell,oftenonadailybasis.AsMichaelDellexplained,“othercompanieshadtomaintainhighlevelsofinventorytostockresellerandretailchannels.Becausewebuiltonlywhatourcustomerswantedwhentheywantedit,wedidn’thavealotofinventorytakingupspaceandsoakingupcapital.”3Assuch,Dell’ssupplyofinventorywassignificantlylowerthanitscompetitors,providingacompetitiveadvantage.TableADaysSupplyofInventory(DSI)a1993b1994b1995bDellComputer553332AppleComputer528554CompaqComputer726073IBM645748Source:DellComputerCorporationFiscal1993-1995AnnualReports;casewriterestimatesfromAppleComputer,CompaqComputer,andIBMFiscal1992-1994AnnualReportsaDSI=(NetEndingInventory)/(QuarterlyCOGS/90Days)bDell’sfiscalcalendarendsinJanuary;Apple’sinSeptember;CompaqandIBM’sinDecember.TheDSIfor1995representsDell’sDSIforthequarterendedon1/29/95,Apple’son9/30/94,andCompaq’sandIBM’son12/31/94.September1990-August1993In1990,Dellhadonly1%oftheU.S.PCmarketshare.4MichaelDellanticipatedthatthefragmentedPCindustrywasreadyforaconsolidationandthatDellwastoosmalltosurviveaconsolidation.AtthetimeMichaelDellexplained,“Irealizedwehadtodecidewhetherweshouldstaythesizewewere–andfacetheconsequences–orgoforbigtimegrowth…Obviously,wewentforgrowth–inonebigleap.”5OnSeptember10,1990,inanattempttocapturesalesfromsmallbusinessesandfirsttimeconsumers,Dellannounceditwasbreakingfromitsdirect-onlybusinessmodelandwouldbegintosellitsPCs6throughCompUSA(formerlySoftWarehouseSuperstores).Overthenexttwoandahalfyears,Dellexpandedthisindirectdistributionchannelbyaddingothermassmarketretailers(i.e.,1Anon,“SellingPCslikeBananas,”TheEconomist;London,October5,1996,p.63.2ClareGoldsberry,“ComputerMakersMayOvercomeJITTroubles,”PlasticsNews,August15,1994,p.20.3MichaelDellwithCatherineFredman,“DirectfromDell,StrategiesThatRevolutioniz