Brief Outline This case is regarding Dell computers financial status in the period from 1991 to 1995. In this analysis we intend to highlight the various issues related to working capital experienced by the company. What makes this case interesting is the turnaround of Dell’s financial structure which in turn led to its recovery from seemingly major liquidity issues. To give a brief outline, this study enlightens one on how a fast growing company can get into trouble due to mismanagement of cash flows, organization of value chain and also the measures taken by the management to recover from the same.
The data used for the purpose of this analysis was primarily the financial records pertaining to the relevant years which were obtained from online databases. The Build up The primary business model of Dell was build-to-order. This meant that they basically built the computer systems after receiving the purchase order. This yielded very little finished goods inventory. Table 1 shows the days supply of inventory of Dell in comparison to Apple, Compaq and IBM.
However, they did maintain an inventory of computer components and accessories. This inventory was based on sales forecasts. Like Toyota’ practice of integrating suppliers in one complex, Dell followed a similar strategy of remaining geographically close to their suppliers and the parts were thus delivered on a daily basis to their plants. The Problem In the year of 1990, Dell had a market share of 1%. This propelled them to concentrate their efforts on their various selling and marketing strategies.
These strategies proved to be highly effective as the next year, 1991 saw a growth of 63% versus that of the industry. Table B shows worldwide sales growth between 1991 and 1995. An important fact to record is that Dell, due to its extensive changes in marketing and expansion strategies, recorded an increase in sales by 268% compared to market levels of around 5%. In 1993, the Annual report revealed that Dell had $32 Million in cash and cash equivalents.
Although seemed to be a large amount, there was a concern regarding the discrepancy between sustainable growth rates and current existing growth rate. Here, it should be noted that Dell Computer had relied on internal funding for its growth efforts, but it was evident that there was a necessity for external sources of financing. Statements from one of Dells executives deserve mention as it astutely describes their problem – “It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas. ” Dell’s Response and ultimate recovery
As with any prudent company, Dell quickly realized their weakness and threats in terms of financial structures and their monitoring. Growth ceased to be the only criteria, areas like liquidity and profitability were given due importance. Measures were undertaken in each of the internal departments to ensure greater accountability and inventory control. Highly specialized managers were hired to guide the company through its transformatory stage. The two main components, in terms of financial monitoring, were Return on Invested Capital (ROIC)