Monday, September 16, 2013

Dell's compensation from advantages to risks

Joe Ye

It’s amazing to see Dell again in our course. My last blog was about Dell’s inventory management, which basically control their inventory at very low level, having an astonishing inventory turnover of 107 times per year – about 10 times of its major competitors HP and IBM.

From the article ‘living-dell-time’, I had some extensions of knowledge on Dell’s extreme strategy, also called lean manufacturing. Dell’s management of cash is even more incredible. Through its direct sales channel to end consumers, it collects revenue immediately when the order is placed online – even before the product is assembled. This process model means a constant 0 in account receivable, combined only prepaid revenues in Dell’s accounting book. On the other side, Dell pays its suppliers 36 days later than the materials’ arrival. Then we can find the unbelievable payable period in Dell – negative 36 days.

What’s the benefit of negative payable period? First it promises a strong and steady cash flow, which keeps Dell away from the risk of out of cash at emergency moment. Second Dell has almost no need to raise fund for its daily operation, also keeping itself away from the vulnerable capital market.

These 2 tremendous advantages are no less important than Dell’s 0 inventory strategy as secrets of its great success. Because they compensate Dell’s big risk at inventory side – 0 inventories is very risky in case of external shocks on supplies. Dell realize this compensation by invest enormous money into its information network – back to what story the article ‘Living in Dell Time’ is telling us. It was the information network Dell invested a big fortune to build that detect the dockworkers’ strike 6 months ahead of time, giving Dell enough time to get ready for it. Besides the time Dell earned, it was also able to charter 18 747s from UPS, Northwest Airlines, China Airlines, and other carriers. A 747 holds the equivalent of 10 tractor-trailers -- enough parts to manufacture 10,000 PCs in a very short time[i], so that Dell would be able to keep manufacturing and meet the demand when the strike finally occurred.

We know business with 0 inventories like is extremely fragile in such sudden outside shock, and this is how Dell uses its advantages of negative payment period, as a result of its lean manufacturing strategy, to compensate the risk brought by its inventory strategy itself. By living on information rather than inventory, Dell continues its success as a miraculous business model being studied in hundreds of business schools.

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