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Dell's Product Policy - Essay Example

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Dell's Product Policy

This translates to their system having low cash conversion cycle hence cash is generated steadily. However, the system has its limitations. The low inventory held means shortage is a possibility in cases where manufacturers delay in supplying the PC chips, like in 1996. The very high dependence on on-time component supply by manufacturers poses a major threat to steady supply. In addition, changes in product means an overhaul in processes which is an expensive venture. This means that working capital can be funded through the management of inventory and cash flow cuts (Ruback & Sesia 2003). Working capital is the measure of efficiency and liquidity in a company. To obtain the computation, one needs to subtract current liabilities from the firm’s current assets. Inventory process For comparison, we assume that the cost of goods sold by the competitors remains constant. We observe that the carrying costs only depend on the DSI (Ruback & Sesia 2003). For 1995, the cost of sales =$2737, equivalent to a daily COS of 2737/365= $7.5% We make a comparison with the highest observed DSI of the competitor, Compaq, 73. Hence the inventory Compaq holds over dell is (73-32)*75=$307.5 m This means that for Compaq to acquire new goods, it has to sell its old inventory. Since new technology is 30% cheaper, Compaq incurs and an opportunity loss, given by 0.3*307.5=$92.25m Cash funding This provides a simple way for the company to grow its assets in the short term without borrowing long term. Assume we want to grow the cash by 52% for 1996 internally. The total assets denoted TA for 1995 is computed as follows: TA (1995) =1594-484=1110. As a fraction of sales, 1110/3475=0.3194 or 31.94%. Assuming that they want to hold this for 1996, the required increase in the total assets without long term investment is given by 0.3194*0.52*3475=579.37m. This should be done without the increasing account payables (as this is an external means). This means that the cumulative liabilities should be computed excluding these payables, i.e. for CL (cumulative liabilities) for 1995=1594-403 and for 1996=2184-466. The change in current assets not factoring in accounts payable is the difference in the two values, yielding a value $491m. Assuming the company adopts the same strategy of maintaining the profit generated, the net profit to sales ratio should remain constant. This value computed as 149/3475=0.0429 or 4.29%. We can determine the cash flow from net profit for 1996 by holding the sales value constant, computed as shown, .0429*1.52*3475=$226.89m, surpassing the debt level as the total cash inflow which is the sum of the net profit and the increase in liabilities against the cash outflow required for 1996 Fund growth for 1997 The increase in total assets, TA for 1996, 2148-591=1557 as ratio of sales, 1557/5296=0.294 or 29.4 %.Assuming a growth of 50% is desired, the increase in 1997 is given by 0.294*0.5*5296=778.51m. For cumulative liabilities, CA as a ratio of the sales value is given as (2148-466)/5296=0.316 or 31.6%. Hence the cash flow from the change in the current assets in 1997 is given by 2523-(2148-466) =841m. The net profit as a ratio of sales in1996 =272/5296 = 0.0514 or 5.14%. Hence the cash flow from operating profit for 1997 is given as 0.0514*1.5*5296=408.32m.This means that Dell Corporation has the ability to fund itself in 1997 internally without external injection of capital. (Ruback & Sesia 2003) Aventis ...Show more

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Name: Name of institution: Tutor: Dell’s Product Policy The main advantages of Dell’s inventory is it ensures low finished products, low carrying costs, as it strengthens its custom build-to-order strategy. The strategy makes marketing for defective products much easier, something that is not rare in technological products…
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