XIBMS – Inventory Management at Dell Computers

XIBMS – Inventory Management at Dell Computers

Background

Dell traces its origins to 1984; when Michael Dell created PCs Limited while a student at the University of Texas at Austin. The dorm-room headquartered company sold IBM PC-compatible computers built from stock components.

Michael Dell started trading in the belief that by selling personal computer system directly to customers, PCs Limited could better understand customers’ needs and provide the most effective computing solutions to meet those needs. Michael Dell dropped out of school in order to focus full-time on his fledgling business, after getting about $300,000 in expansion-capital from his family.

In 1985, the company produced the first computer of its own design – the “Turbo PC”, sold for US$795. PCs Limited advertised its systems in national computer magazines for sale directly to consumers and custom assembled each ordered unit according to a selection of options. The company grossed more than $73 million in its first year of trading.

The company changed its name to “Dell Computer Corporation” in 1988 and began expanding globally – first in Ireland. In June 1988, Dell’s market capitalization grew by $30 million to $80 million from its June 22 initial public offering of 3.5 million shares at $8.50 a share. In 1992, Fortune magazine included Dell Computer Corporation in its list of the world’s 500 largest companies, making Michael Dell the youngest CEO of a Fortune 500 company ever.

When managers discuss low inventory levels, Dell is invariably discussed. So why all the commotion? Has their low inventory REALLY helped out that much? In short, yes.

                       

 Reasoning Behind Need For Lower Inventory

The first thing that needs to be discussed is why low inventory has such a great effect on Dell’s overall performance. The reason is quite simple: computers depreciate at a very high rate. Sitting in inventory, a computer loses a ton of value.

As Dell’s CEO, Kevin Rollins, put it in an interview with Fast Company: “The longer you keep it the faster it deteriorates – you can literally see the stuff rot,” he says. “Because of their short product lifecycles, computer components depreciate anywhere from a half to a full point a week. Cutting inventory is not just a nice thing to do. It’s a financial imperative.”

We’re going to assume that the depreciation is a full point per week (1% per week) and use that to determine how much money high inventory turns can save Dell.

This means that for every 7 days a computer sits in Dell’s warehouses, the computer loses 1% of its value. Ok, now that we know how much Dell loses for each day, let’s take a look at some of Dell’s data over the past 10 years that I pulled from www.themanufacturer.com

What I got from this was the inventory turns. An inventory turn, as this website successfully describes it, is “cost of goods sold from the income statement divided by value of inventory from the balance sheet”. Typically, this is turned into a value showing how many days worth of inventory a firm has by dividing inventory turnover by 365. I divided the inventory turnover by 52 in order to show how many weeks worth of inventory Dell holds.

Here are the results :

     Table 5.1     Dell’s Inventory Turnover Data

Year	Inventory Turnover	Week’s Inventory
1992 1993 1994 1995 1996 1997 1998 1999 2000	4.79 5.16 9.4 9.8 24.2 41.7 52.40 52.40 51.4	10.856 10.078 5.532 5.306 2.149 1.247 0.992 0.992 1.012

Key point to notice here is that Dell was carrying over 10 weeks worth of inventory in 1993. By 2001, Dell was carrying less than 1 week’s worth of inventory. This essentially means that inventory used to sit around for 11 weeks and now it sits around for less than1 week.

So what does this mean for Dell?

Remember, computers lose 1 percent of their value per week. This isn’t like the canned food industry where managers can let their supplies sit around for months before anyone bats an eye. Computers aren’t canned goods, and as Kevin Rollins of Dell put it, computers “rot”. The longer a computer sits around, the less it is worth.

 That said, due to depreciation alone, in 1993 Dell was losing roughly 10% per computer just by allowing computers to sit around before they were sold. In 2001, Dell was losing less than a percent. Base on holding costs alone, Dell reduced costs by nearly 9%.

Since 2011, Dell has continued to lower inventory. Looking at their latest annual reports, day’s inventory has dropped by approximately a day.

Case Questions:

1. What are the reasons of maintaining small level  of inventory by Dell Computers?
2. What other ways of inventory management can be suggested to Dell Computers? 

XIBMS – Inventory Management at Dell Computers

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