Dell Case Answers

Dell Case Answers

1. Dell built the computer systems after the company received the order. Dell focused on adopting a just in time inventory system that allowed them to keep their work in process and finished goods inventory between a 10-20% range. Their competitors had work in process and finished goods inventory between 50 to 70%. Dell’s supply of inventory was much lower than its competitors, which gave them a competitive advantage. Dell only had parts or raw materials in their inventory. Advantages of just in time inventory include faster turnaround of the products which reduces the risk of products being damaged, more cost efficient allowing a steady cash flow, and less space needed for inventory. Disadvantages include not having the product ready on time, and lack of control of time because Dell is depending on its suppliers.

When technology was changing, Dell was able to jump on it fast. Dell was the first manufacturer to convert its entire major product line to the Pentium technology. Dell was able to offer faster systems at the same price its rivals were. Since Dell used just in time inventory, Dell was able to update any flawed chips and offer the new Windows 95 system the day it was launched.

1. Dell’s sustainable growth rate in 1995-1996 was:

(Sales/Assets)*(Assets/E)*(Net Income/Sales)*(100%)

(3,475/1,594)*(1,594/652)*(149/3475)*100%

2.1801*2.44478*.0429*.1

22.89%

The actual growth rate is 1996:

Ending Sales-Beginning Sales

           Beginning Sales

(5,296-3,475)/3,475=52.40%

Since the actual growth rate exceeded the sustainable growth rate which means that Dell was growing beyond what was sustainable which raised a red flag if they could keep in business for a long period of time.

1. We were not given definite rules for completing the pro forma statement. We increased everything as a percent of sales which was not supposed to be. Preferred stock, common stock, long term debt, and notes payable do not increase with sales.
2. Dell’s sustainable growth rate in 1996 was:

(Sales/Assets)*(Assets/E0)*(Net Income/Sales)*(100%-Didn’t pay dividends)

(5,296/2,148)*(2,148/973)*(272/5,296)*(.100)

2.4655*2.2076*.0514*1

27.97%

1. Look at Excel Spreadsheet
2. Dell would need to have a lot more inventory on hand because Compaq kept their inventory on hand for 41 days longer in 1995.

Extra Inventory:

73-32=41 Days