How Its Business Model Sweetens Its Financial Statement

Elise Huyen

Introduction

Conventional sales approach A business forecasts the demands and

then schedules the productions, which reverberates throughout the supply chain.

The problems of the conventional method Getting stuck with inventory if sales fall

short of projections

Financial advantages of Dell’s business model

Direct sale approach Building To Order (BTO)

• Production a unit after the order is transmitted to the factory floor

No much forecasting Component suppliers building to order get i

nformation electronically from Dell as customers place orders

Financial advantages of Dell’s business model

The shippers cart products away as soon as they exit the production

process. compresses the amount of time it takes fro

m order to deliver The average computer manufactures

deliver to suppliers within 30 days, and then pays them for 36 days

Receive payments from customers at once

The advantages of Dell’s business model

Achieved a cash-concersation cycle Inventory turnover is high

• company can convert its inventory into cash quickly

Generate a tremendous amount of cash• fund its growth

Dell introduce new technology quickly, and use slower-moving, indirect distribution channels.

Falling component costs quicker than its competitors can

Downside of pushing cost savings

Dell started outsourcing its call center activities led to growing complaints about long wait t

imes for customer service calls and poor postsales support

spent over $100 million to revive customer service, increase the percentage of full-time Dell employees, and reduce part-time and contract workers.

Dell pushes its suppliers hard

Discussion 1

Investigate the financial ratio of inventory turnover. Find current information about Dell and report whether its inventory turnover is still as impressive as the number mentioned in the case. How does Dell’s current inventory turnover ratio compare to that of its competitors?

Inventory Turnover of Dell

2012 2011 2010

Revenue $62,071 $61,494 $52,902

Gross Profit $13,811 $11,396 $9,261

Cost of sold goods

$48,260 $50,098 $43,641

Inventory $1,404 $1,301 $1,051

Inventory turnover

38.57 40.05 34.89

All these numbers are not as impressive as the number mentioned in the case, 107 times per year.

Discussion 1

Inventory turnover comparison

Dell 31.2 (July, 2012)

HP 12.5 (July, 2011)

IBM 19.1 (Sep., 2012)

Discussion 2

Locate Dell’s most recent 10-K and compute what you believe are the three most important financial ratios for Dell. Are the ratios impressive or do they cause you reason for concern?

Discussion 2

Profit margin a measure of profitability of a company, the

profit margin is calculated by dividing the net revenue by the net sales revenue

Profit margin: 23.3%; average 5 years: 20.5% The profit margin of a company is also an

indication of its pricing policy and also the company’s ability to control prices

Discussion 2

Debt equity ratio a measure of a companies proportion of

equity and debts used to finance the companies operations.

Total debt/Equity Ratio: 0.87 Referred to as risk because it is equal to

the debts divided by the shareholders equity

Gross margin a companies amount of contribution

toward its enterprise after payments of it production costs

Discussion 3

If you were the CEO of HP, how would you repond to Dell's direct approach to selling?

Discussion 3

Follow the Porter’s value chain model the primary and supportive activities

Primary Activities Inbound Logistics Operation: removing several layers of

management, outsourcing more production to subcontractors, development and installation of new IT database to improve the supply chain.

Outbound logistics: 3Pl model reducing HP’s fixed costs groups 9-12 core partners

Discussion 3

Supportive Activities Procurement : applying the most

technology including e-auctions, e-quoting, e-invoicing and e-payments

Technology development: HP created a unique service (ANA – Adaptive Network Architecture) to deliver the ability of managing an adaptive enterprise to customers

Discussion 4

What lessons can a young entrepreneurial firm learn from Dell's experiences?

Discussion 4

Drivers of supply chain of Dell Facilities: low facility costs Inventory: low inventory costs Transportation: high transportation

costs Information: high information costs http://www.youtube.com/watch?v=LkL1

7lqMq90

References

Research Hewelett Packard through its vaule chain – Hongni Zhang, International Journal of Business and Management -8 August 2010

Forbes Magazines