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Dell's Working Capital (HBS case) [Finance]

Harvard Business School9-201-029August 16, 2000DDell's Working Capital

Dell Computer Corporation had reported impressive growth for fiscal year 1996 with its salesup 52% over the prior year. Industry analysts anticipated the personal computer market to grow 20%annually over the next three years, and Michael Dell expected that his company, with its build-to-order manufacturing system, would continue its double-digit growth. Although Dell Computer hadfinanced its recent growth internally, management needed a plan for financing the future growth.OCompany Background

Dell Computer Corporation was founded in 1984 by then nineteen-year-old Michael Dell.The company designed, manufactured, sold and serviced high performance personal computers(PCs) compatible with industry standards. Initially, the company purchased IBM compatiblepersonal computers, upgraded them, then sold the upgraded PCs directly to businesses by mailorder. Subsequently, Dell began to market and sell its own brand personal computer, taking ordersover a toll free telephone line, and shipping directly to customers.

Selling directly to customers was Dell’s core strategy. Sales were primarily generated throughadvertising in computer trade magazines and, eventually, in a catalog. Dell combined this low costsales/distribution model with a production cycle that began after the company received a customer’sorder. This build-to-order model enabled Dell to deliver a customized order within a few days,something its competitors could not do. Dell was also the first in the industry to provide toll-freetelephone and on-site technical support in an effort to differentiate itself in customer service.Dell’s Inventory Managementindustry leaders built to forecast and maintained sizeable finished goods inventory in their stock or attheir channel partners. Dell’s build-to-order manufacturing process yielded low finished goodsinventory balances. By the mid-1990s Dell’s work-in-process (WIP) and finished goods inventory as apercent of total inventory ranged from 10% to 20%. This contrasted sharply with the industryleaders, such as Compaq, Apple and IBM, whose WIP and finished goods inventory typically rangedfrom 50% to 70% of total inventory, not including inventory held by their resellers.

Professor Richard S. Ruback and Research Associate Aldo Sesia prepared this case from published sources as the basis forclass discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 2000 by the President and Fellows of Harvard College. To order copies or request permission toreproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go tohttp://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system,used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,recording, or otherwise—without the permission of Harvard Business School.1 NOT COP

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