Dells Working Capital Management Maximizing Sustainable Growth

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Dells Working Capital ManagementMaximizing
Sustainable Growth
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Dells Early Days

• Dell began as a small PC company in the mid-1980s
• Dell began by buying IBM-compatibles, upgrading
  them, and selling them directly
• Then Dell began making its own PCs
• Build-to-order
• After receipt of the order
• Low finished-goods inventory

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Dell Expanded, Then Was Harmed

• In 1990, Dell began to sell through CompUSA and
  then others
• Dells market share leaped to the top 5 after a
  268 increase in sales
• 2Q93, Dell reported a loss of 76MM
• Excess inventory and bad notebooks
• In 1994, Dell left the retail market
• The shift included a change in focus from growth
  to growth, liquidity and profitability

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1995 Shift to ROC and CFC

• Suppliers reduced, inventory better managed
• Dell upgraded to seasoned managers
• Not rare for former entrepreneurial firms
• Major shifts occurred
• Re-emphasis on direct contact w/ customers
• Focus on Intel processor-based PCs
• Began to be able to forecast demand and thus
  better deal with inventory needs
• Flawed Pentium no problem
• Windows Updates no problem

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Exhibit 2 Key WC Ratios
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Exhibits 4 and 5 Improvement

• After a tough year in 1994
• 1995 and 1996 showed high growth, increased
  profitability
• And Exhibit 2 Much lower WC requirements
• Examine 1995 1996 Balance Sheets
• Equity grew by 321MM, but liabilities grew by
  less
• What does that say about sustainable growth?

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Sustainable Growth

• Here are the sustainable growth figures

• But notice the asset called Short-Term
  Investments.
• Consider ignoring that one

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Sustainable Growth Fixed
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1997 Forecasts Source of Funds?

• The case author suggests a 1996 forecast based on
  fixed liabilities versus proportional liabilities
  (see result)
• He suggests doing the same for 1997
• Also including or excluding share repurchases
  (500MM) and payoff of long-term debt
• See results of the alternatives
• Consider if added funding is needed

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How WC Could Help

• Suppose these improvements were made
• Inventory days reduced by 17
• A/R days reduced by 15
• A/P Days increased b y 20
• How much cash would that generate?

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What Actually Occurred in 1997

• Profits were way up
• COGS was reduced
• Operating Expense was reduced
• A/R fell about 12
• Inventory Days fell about 40
• A/P Days rose sharply, more than 60
• Shares were repurchased, LTD paid off
• Put options (warrants) were issued

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Dell The Key Points

• Dell addressed its working capital management
  extremely well
• Its business strategies of direct sales and of
  supplier relations were crucial
• It created a sustainable growth capacity that
  resolves many problems raised by the earlier
  cases we studied