9-201-029
REV: DECEMBER 15, 2003
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Professor Richard Ruback and Research Associate Aldo Sesia prepared this case. HBS cases are developed solely as the basis for class discussion.
Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
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RICHARD RUBACK
Dell’s Working Capital
Dell Computer Corporation had reported impressive growth for fiscal year 1996 with its sales up
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 had
financed its recent growth internally, management needed a plan for financing the future growth.
Company 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 compatible personal
computers, upgraded them, then sold the upgraded PCs directly to businesses by mail order.
Subsequently, Dell began to market and sell its own brand personal computer, taking orders over a
toll free telephone line, and shipping directly to customers.
Selling directly to customers was Dell’s core strategy. Sales were primarily generated through
advertising in computer trade magazines and, eventually, in a catalog. Dell combined this low cost
sales/distribution model with a production cycle that began after the company received a customer’s
order. 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-free
telephone and on-site technical support in an effort to differentiate itself in customer service.
Dell’s Inventory Management
Dell built computer systems after the company received the customer’s order. In contrast, the
industry leaders built to forecast and maintained sizeable finished goods inventory in their stock or at
their channel partners. Dell’s build-to-order manufacturing process yielded low finished goods
inventory balances. By the mid-1990s Dell’s work-in-process (WIP) and finished goods inventory as a
percent of total inventory ranged from 10% to 20%. This contrasted sharply with the industry
leaders, such as Compaq, Apple and IBM, whose WIP and finished goods inventory typically ranged
from 50% to 70% of total inventory, not including inventory held by their resellers.
This document is authorized for use only in Prof. Samveg Patel’s Corporate Finance / PGDM at Management Development Institute – Gurgaon from Jan 2023 to Apr 2023.
201-029 Dell’s Working Capital
Dell maintained an inventory of components. The cost of individual components, such as
processor chips, comprised about 80% of the cost of a PC. As new technology replaced old, the prices
of components fell by an average of 30% a year.1 Dell ordered components based on sales forecasts.
Components were sourced from about 80 suppliers in the mid-1990s – down from a high of 200 or
more. Dell issued “releases” for a certain amount of product from a supplier’s inventory on a regular
basis, depending upon the forecast.2 Suppliers, many of whom had warehouses close to Dell’s
Austin Texas and Ireland plants, delivered parts to Dell, often on a daily basis.
As Michael Dell explained, “other companies had to maintain high levels of inventory to stock
reseller and retail channels. Because we built only what our customers wanted when they wanted it,
we didn’t have a lot of inventory taking up space and soaking up capital.”3 As such, Dell’s supply of
inventory was significantly lower than its competitors, providing a competitive advantage.
Table A Days Supply of Inventory (DSI)a
1993b 1994b 1995b
Dell Computer 55 33 32
Apple Computer 52 85 54
Compaq Computer 72 60 73
IBM 64 57 48
Source: Dell Computer Corporation Fiscal 1993-1995 Annual Reports; case writer estimates from Apple Computer, Compaq
