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Dell S Working Capital Case Analysis G05 PDF
Dell S Working Capital Case Analysis G05 PDF
Pros:
Low finished goods, low carrying cost, reinforces it custom build-to-order strategy
In case of defective products, it is much quicker time to market
Rolling out PCs with new OS, technology much faster than its competitors
Helps it to pass on savings on customers, when the component cost is reducing
Generates cash from maintaining Low Cash Conversion Cycle
More sales can be stimulated on credit basis
Low inventory with low fixed assets gives Dell a higher Return on Capital Employed
Cons:
It has led to the component shortages in 1996
Larger dependence on the on-time high quality supplies from manufacturers
When product changes, process should start afresh by thrashing out existing ones
2. Assuming that the COGS per day remains same for the competitors of Dell:
The carrying costs solely depends on the Days Sales of Inventory (DSI)
During 1995: Cost of Sales = $2737 mn
Cost of Sales per day = COS/365 = 2737/365 = $7.5 mn
DSI(Dell) = 32; DSI(Compaq) = 73
So, Inventory holding of Compaq over Dell is in excess of= (73-32)*7.5 = $307.5 mn
Because Compaq has to sell off its old inventory before purchasing new goods:
Loss of benefits from purchase of low cost, (30% lower) new technology inventory
Compaq’s opportunity loss = 0.3*307.5 = $92.25 mn
3. Dell’s cash funding to achieve 52% growth in 1996 through internal means:
Its Total Assets except short term investments should grow in proportion
Let’s define the assets mentioned above as TAESTI
TAESTI1995=1594-484=$1110 mn; as percentage of sales in 1995=1110/3475=31.94%
To determine TAESTI1996‘s contribution, TAESTI ratio to sales in should remain intact
Required increase of TAESTI to meet 1996 growth=0.3194*0.522*3475=$579.37 mn
As cash inflow (491+226.89= $717.89 mn) is more than required cash outflow of $579.37
mn, it can be inferred that Dell got enough money to fund the growth in 1996 internally.
As cash inflow (841+408.32= $1249.32 mn) is more than required cash outflow of $778.51
mn, it can be inferred that the growth in 1997 can be funded internally.
5. Increased requirement of cash to buy-back the equity worth $500 mn, along with re-
payment of long-term debt of $113 mn, along with maintaining 50% growth:
The overall cash requirement will be increased now by: 500+113+778.51 = $1391.51 mn
It will be met partly by Short Term Investments = $591 mn
By improving profit margin from 5.14% to 6.6%, increased contribution = $524.3 mn
So, the remaining cash flow to be met = 1391.51-591-524.3 = $276.21 mn
By improving the Cash Conversion Cycle, cash inflow will improve and meets needs:
DSI=31 days, reducing it by 3 days saves carrying cost:3*1.5*4229/365=$52.15 mn
DSO=42 days, reducing it by 6 days reduces receivable: 6*1.5*5296/365=$130.6 mn
DPO=33days, increasing it by 6days improves payables:6*1.5*4229/365=$104.2 mn
So, the increased cash inflow out of operational improvements will be:
52.15+130.6+104.2=$286.95 mn; as Dell already faced problem with component shortages
in 1996, it will not look into reducing its DSI by a large margin.