Dell´s Working Capital – Richard Ruback

1- Briefly explain DELL´s strategy. Do you consider this strategy reasonable? 2- What is your assessment of DELL´s performance? Please refer to the financial statements and calculate the financial ratios used in class to strengthen your analysis. 3- Calculate DELL´s Free Cash Flows. What is your assessment of the quality of these cash flows?

-------------------------------------------------

1- Dell, one of the best worldwide computer producer and one of the most successful organizations in the world, attribut the success to quality products and strategic management. Dell manufactures, sells, and delivers personal computers directly to the customers by a build-to-order model, which enables Dell to have much smaller investments in working capital than its competitors and 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.
Dell’s management principles as well as its supply chain (including inventory) is founded in “Build-to-Order” philosophy, and this philosophy is lies of exchanging inventory for information, because information is easier to store, to move, to discard and less expensive than inventory.
Graphic 1 shows Dell´s working capital advantage over competitors by the DSI (days sales of inventory). In 1994 and 1995, Dell’s DSI was about half the level of its competitors.

Graphic 1

This strategy seens very reasonable in this sector because, dispate the conservation of capital, Dell’s low inventory has other substantial advantages, once 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