ISBN: 0-03-028931-9

Chapter 16 Managing Current Assets

Dell Revolutionizes Working Capital Management

In Chapter 3 we noted Dell Computer Corporation's phenomenal performance over the past decade, when its stock increased a staggering 72,000 percent. Dramatic improvements in computer technology and growth in the Internet help explain Dell's superb results. However, not all computer companies have prospered, and Dell is clearly "the best of the bunch." How has Dell bested its competitors? Perhaps the number one reason is its working capital management, which is the focus of this chapter.
The key to Dell's success is its ability to build and deliver customized computers very quickly. Traditionally, manufacturers of custom-design products had two choices. They could keep a large supply of inventory on hand to meet customer needs, or they could make their customers wait for weeks while the customized product was being built. Dell uses information technology to revolutionize working capital management. First, it uses information technology to better coordinate with its suppliers. If a supplier wants to do business with Dell, it must be able to provide the necessary components quickly and cheaply. Suppliers that adapt and meet Dell's demands are rewarded with increased business, and those that don't lose their Dell business.
Second, Dell uses information technology to collect data that enables it to better customize products for its customers. For example, a recent Fortune article described how Dell has been able to capture most of the Ford Motor Company's PC business:

Look at what the company does for one big customer, Ford Motor. Dell creates a bunch of different configurations designed for Ford employees in different departments. When Dell receives an order via the Ford Intranet, it knows immediately what type of worker is ordering and what kind of computer he or she needs. The company assembles the proper hardware and even installs the right software, some of which consists of Ford-specific code that's stored at Dell. Since Dell's logistics software is so sophisticated, it can do the customization quickly and inexpensively.

Sound working capital management is necessary if a company wants to compete in the information age, and the lessons taught by Dell extend to other industries. Indeed, Michael Dell, founder and CEO of Dell Computer, recently discussed in an interview with The Wall Street Journal how traditional manufacturers, such as the automobile companies, can use the experience of Dell to improve their operations. The article included Michael Dell's five points on how to build a better car:

1. Use the Internet to lower the costs of linking manufacturers with their suppliers and dealers.
2. Turn over to an outside specialist any operation that isn't central to the business.
3. Accelerate the pace of change, and get employees conditioned to accept change.
4. Experiment with Internet businesses. Set up trials to see what happens when customers can access information more easily, and in ways they never could before.
5. Think about what could be done with the capital that would be freed up by shedding excessive inventory and other redundant assets.

DISCUSSION QUESTIONS

1. Do you see any potential pitfalls to Dell's aggressive working capital management program?
2. How do you view working capital management in relation to the overall corporate plan? Do you think working capital decisions are as important as capital structure or investment decisions?

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