Discussion Questions 8-38. Investigate the financial ratio of inventory turnover. Find current information about Dell (www.hoovers. com is a good starting place) and report whether its inventory turnover is still as impressive as the number mentioned in the case. How does Dell's current in- ventory turnover ratio compare to that of some of its competitors such as Apple and Hewlett-Packard? Do the same for Dell's asset turnover ratio. 8-39. Locate Dell's most recent 10-K report and either locate or compute what you believe are the three most important financial ratios for Dell. Are the ratios impressive or do they provide you reason for concern? 8-40. If you were the CEO of Dell Inc., what expectations would you reflect when preparing a pro forma income statement for your company? 8-41. What lessons can a young entrepreneurial firm learn from Dell's experiences? Dell Inc.: How Its Business Model Sweetens Its Financial Statements Web: www.dell.com Facebook: Dell Twitter: @Dell Bruce R. Barringer, Oklahoma State University R. Duane Ireland, Texas A&M University Introduction but also had profound positive effects on Dell's supply There are many reasons that Dell Inc, has, for the most chain and financial activities. For a period of time after part, been successful over the years. Two of the most Dell launched its business model, other PC manufactur- ers, like Hewlett-Packard, had to forecast demand, build compelling reasons are its direct sales model and its ultra-efficient global supply chain. While a start-up can't computers, ship them to retailers, hope they'd sell, and then wait 30 days or more for payment. Dell sidestepped quickly emulate what Dell has done, there are lessons to be learned from Dell's experiences that any start-up all of this via its direct sales model. It received orders, built computers, and then shipped them to the buyers can benefit from. Historically at least, Dell's approach to via UPS or FedEx. There was no "forecasting" of de- business made it the preferred computer brand for many mand because demand was determined in real time, and businesses and consumers. Additionally, the business Dell never got stuck with outdated computers because approach has sweetened Dell's financial statements and it maintained no inventory. Its customers also essentially its ability to make money. financed its operations by paying in advance. Dell maintained this business model from 1988 Dell's Hybrid Sales Approach (Combining Direct until 2007, when it shifted its sales strategy. Rather Sales and Retail Sales) than selling exclusively directly, it decided to transition to a hybrid model, where it would continue to empha- Dell was founded in 1988 touting a direct sales model, size direct sales, but also sell a portion of its product Rather than selling through stores like Sears and Best line through retailers such as Best Buy, Staples, and Buy, Dell sold direct, first over the phone and then via Walmastra The main reason for the chance the Internet. Its business model natomlands 135% 0 Dell's Hybrid Sales Approach (Combining Direct Sales and Retail Sales) Dell was founded in 1988 touting a direct sales model. Rather than selling through stores like Sears and Best Buy, Dell sold direct, first over the phone and then via the Internet. Its business model not only allowed busi- nesses and consumers to "customize their computers, TO Wy paymy mauvarice Dell maintained this business model from 1988 until 2007, when it shifted its sales strategy. Rather than selling exclusively directly, it decided to transition to a hybrid model, where it would continue to empha- size direct sales, but also sell a portion of its product line through retailers such as Best Buy, Staples, and Walmart. The main reason for the change was that Dell was shifting its emphasis from targeting businesses to CHAPTER 8 ASSESSING A NEW VENTURE'S FINANCIAL STRENGTH AND VIABILITY 291 targeting businesses, consumers, and international mar kets. The thinking was that it needed to have its com- puters side-by-side with its competitors in consumer channels if it hoped to become the preferred computer vendor for consumers along with businesses. It was also problematic to sell exclusively directly in some interna- tional markets. Dell doesn't disclose the percentage of its sales that originate through its website or over the phone (its Type here to search BI times a year, compared to 13.9 times a year for Hewlett- Packard and 14.6 times a year for the S&P 500 average. Inventory turnover is determined by the following for- mula (the higher the number the better): Cost of Goods Sold Inventory Turnover Average Inventories A high inventory turnover means that a company is This View Sign Window Help Tools Case-3.2.Dell.pdf Case 8.2.Dell (1) 135 IL problematic to sell exclusively directly in some interna- tional markets. Dell doesn't disclose the percentage of its sales that originate through its website or over the phone (its original direct-sales model) versus the percentage of its sales that come through retail outlets. It's clear, though, that a significant portion of its sales now occur online and over the phone and an increasing percentage of its sales are generated through retail outlets. Cost of Goods Sold Inventory Turnover Average Inventories A high inventory turnover means that a company is converting its inventory into cash quickly. Turning its inventory over quickly allows Dell to generate cash that's used to fund its growth, and to not get caught with out-of-date inventory. An often-told joke in the PC Industry is that unsold inventory is like unsold vegetables-it spoils quickly. So maintaining a favor able inventory turnover ratio is critical Another ratio that's important is the asset turnover ratio. Asset turnover reflects the amount of sales gener- ated for every dollar's worth of assets. It's calculated using the following formula (the higher the number the better): Asset Turnover Sales Assets Dell's Supply Chain and Manufacturing Strategy Dell's hybrid sales model has a significant impact on its supply chain and manufacturing strategy. It can produce computers in a highly efficient manner, be- cause it does not have to forecast demand and keep excess inventory on hand for a large percentage of its sales. In fact, when Dell receives an order, via the Internet or on the phone, its suppliers are alerted in real time and, periodically throughout the day, deliver parts to Dell's assembly facilities where the comput- ers are assembled, configured, and shipped. It also searches on a worldwide basis to find the best com- binations of quality and cost for parts, which results in a complex yet highly efficient supply chain. In fact, in his 2005 book The World Is Flat, Thomas Friedman asked Dell to retrace the supply chain for his lap- top computer, to determine where it was made, how many suppliers were involved, and how it reached his Type here to search O Dell's asset turnover ratio is 1.26, compared to 1.06 for Hewlett-Packard and 0.34 for the S&P 500 average. Asset turnover denotes the amount of sales generated for every dollar's worth of assets. It's a measure of ef- ficiency in regard to a firm's ability to use its assets to generate sales. Along with crunching numbers, savvy manag- ers assess the impact of their financial strategies on their overall coals and levels of customer satisfaction. o D je THE GROWING www parts to Dell's assembly facilities where the comput- ers are assembled, configured, and shipped. It also searches on a worldwide basis to find the best com- binations of quality and cost for parts, which results in a complex yet highly efficient supply chain. In fact, in his 2005 book The World Is Flat, Thomas Friedman asked Dell to retrace the supply chain for his lap- top computer, to determine where it was made, how many suppliers were involved, and how it reached his front door. The total supply chain for Friedman's Dell Inspiron 600m notebook computer, including suppliers of suppliers, involved about 400 companies in North America, Europe, and primarily Asia. The computer was codesigned in Austin, Texas, in Talwan by a team of Dell engineers, and by a team of Taiwanese note book designers (a globally distributed team can work 24 hours a day). Its final assembly was in a Dell fac- tory in Penang, Malaysia. It was flown from Penang, Malaysia, to Nashville, Tennessee, on a China Airlines 747. the only 747 that lands in Nashville, other than when Air Force One is in town. It was delivered to Friedman's home via UPS. To further increase efficiencies and reduce the amount of capital it must maintain, Dell is currently tran sitioning from this model and is relying increasingly on contract manufacturers > U Dell's asset turnover ratio is 1.26, compared to 1.06 for Hewlett-Packard and 0.34 for the S&P 500 average. Asset turnover denotes the amount of sales generated for every dollar's worth of assets. It's a measure of ef- ficiency in regard to a firm's ability to use its assets to generate sales Along with crunching numbers, savvy manag- ors assess the impact of their financial strategies on their overall goals and levels of customer satisfaction, Ultimately, it doesn't matter that a company has attrac tive-looking financial statements if its customers are starting to go elsewhere. Dell's hybrid sales approach and its supply chain and manufacturing strategy shine in this area too. Because it turns its inventory over quickly it offers its customers the latest technologies rather than saddling them with products that likely will soon be out- dated. It can also pass along the advantages of falling component costs quicker than its competitors can The Downside of Pushing Cost Savings Too Far Although the majority of the decisions that Dell has made have both sweetened its financial statements and pleased its customers, Dell is learning the hard way that cost savings can be pushed too far. In the early 1990s, partly in response to the challenges imposed by its rapid growth, Dell started outsourcing the majority of its call center activities to low-wage countries in Asia and Central America This stotevaladies chosof Financial Advantages of Dell's Hybrid Type here to search o DI 199 of Dell engineers, and by a team of Taiwanese note- book designers (a globally distributed team can work 24 hours a day). Its final assembly was in a Dell fac- tory in Penang, Malaysia. It was flown from Penang, Malaysia, to Nashville, Tennessee, on a China Airlines 747, the only 747 that lands in Nashville, other than when Air Force One is in town. It was delivered to Friedman's home via UPS. To further increase efficiencies and reduce the amount of capital it must maintain, Dell is currently tran- sitioning from this model and is relying increasingly on contract manufacturers. @ it offers its customers the latest technologies rather than saddling them with products that likely will soon be out- dated. It can also pass along the advantages of falling component costs quicker than its competitors can The Downside of Pushing Cost Savings Too Far Although the majority of the decisions that Dell has made have both sweetened its financial staternents and pleased its customers, Dell is learning the hard way that cost savings can be pushed too far. In the early 1990s, partly in response to the challenges imposed by its rapid growth, Dell started outsourcing the majority of its call center activities to low-wage countries in Asia and Central America. This strategy led to a chorus of growing complaints about long wait times for customer service calls and poor post-sales support. In response, Dell has spent over $100 million to revive its customer service, including an effort to increase the percentage of full-time Dell employees who staff customer ser vice support lines and reduce its use of part-time and (continued) Financial Advantages of Dell's Hybrid Sales Approach and Its Supply Chain and Manufacturing Strategy There are direct financial benefits to Dell's hybrid sales approach and its approach to supply chain management and manufacturing. One of the biggest advantages is its inventory turnover. Dell turns its inventory over 31,4 Q Search the web 8. Med Adobe Acrobat PDC Home Tools Canel 292 PART 3 T MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM contract workers. The jury is still out on whether Dell has done enough to stem the tide of customer dissatisfac- tion. Another downside is that Dal pushes its suppliers hard. While most suppliers respond positively. It's hard to gauge the long-term impact in supplier relations by Dell's appearing to assume the role of "tasi masterin its relationships with its suppliers It's also unclear how long Dels hybrid sales - proach will maintain an advantage. Although its inven tory tumover number is still strong. It's not as outstand- Ing as it was when Del sold primarily online and over the phone. In 2004 Dell's invertory turnover was 107.1. but it is 31.4 today. Dellalso has a formable competi tor in Apple Apple's inventory tumor is 63. It may be unfair to compare Dell direct to Apple, given that Apple is a more diversified company, but the compani son highlights the fact met Delis no longer trendsetter in inventory management officiency. Another challenge that all computer manufacturers aos cine in personal computer sales Insighty at word Global decline in computer the reality of the day over for promersk De Howard and Apple Discussion Quest 8-38. Investigate the finan Find current informat com is a good startin inventory turnover is mentioned in the case ventory turnover ratio competitors such as A the same for Dell's ass 8-39. Locato Dell's most rece locate or compute wa most important financia Impressive or do they 8-40. If you were the CEO of would you reflect when statement for your com 3-41. Whatessons can you trom Dell's experiences So Del TO- Kort your ending on 1. 2013: Find Tanda Tunoverato Bun Dell Fast ER O Discussion Questions 8-38. Investigate the financial ratio of inventory turnover. Find current information about Dell (www.hoovers. com is a good starting place) and report whether its inventory turnover is still as impressive as the number mentioned in the case. How does Dell's current in- ventory turnover ratio compare to that of some of its competitors such as Apple and Hewlett-Packard? Do the same for Dell's asset turnover ratio. 8-39. Locate Dell's most recent 10-K report and either locate or compute what you believe are the three most important financial ratios for Dell. Are the ratios impressive or do they provide you reason for concern? 8-40. If you were the CEO of Dell Inc., what expectations would you reflect when preparing a pro forma income statement for your company? 8-41. What lessons can a young entrepreneurial firm learn from Dell's experiences? Dell Inc.: How Its Business Model Sweetens Its Financial Statements Web: www.dell.com Facebook: Dell Twitter: @Dell Bruce R. Barringer, Oklahoma State University R. Duane Ireland, Texas A&M University Introduction but also had profound positive effects on Dell's supply There are many reasons that Dell Inc, has, for the most chain and financial activities. For a period of time after part, been successful over the years. Two of the most Dell launched its business model, other PC manufactur- ers, like Hewlett-Packard, had to forecast demand, build compelling reasons are its direct sales model and its ultra-efficient global supply chain. While a start-up can't computers, ship them to retailers, hope they'd sell, and then wait 30 days or more for payment. Dell sidestepped quickly emulate what Dell has done, there are lessons to be learned from Dell's experiences that any start-up all of this via its direct sales model. It received orders, built computers, and then shipped them to the buyers can benefit from. Historically at least, Dell's approach to via UPS or FedEx. There was no "forecasting" of de- business made it the preferred computer brand for many mand because demand was determined in real time, and businesses and consumers. Additionally, the business Dell never got stuck with outdated computers because approach has sweetened Dell's financial statements and it maintained no inventory. Its customers also essentially its ability to make money. financed its operations by paying in advance. Dell maintained this business model from 1988 Dell's Hybrid Sales Approach (Combining Direct until 2007, when it shifted its sales strategy. Rather Sales and Retail Sales) than selling exclusively directly, it decided to transition to a hybrid model, where it would continue to empha- Dell was founded in 1988 touting a direct sales model, size direct sales, but also sell a portion of its product Rather than selling through stores like Sears and Best line through retailers such as Best Buy, Staples, and Buy, Dell sold direct, first over the phone and then via Walmastra The main reason for the chance the Internet. Its business model natomlands 135% 0 Dell's Hybrid Sales Approach (Combining Direct Sales and Retail Sales) Dell was founded in 1988 touting a direct sales model. Rather than selling through stores like Sears and Best Buy, Dell sold direct, first over the phone and then via the Internet. Its business model not only allowed busi- nesses and consumers to "customize their computers, TO Wy paymy mauvarice Dell maintained this business model from 1988 until 2007, when it shifted its sales strategy. Rather than selling exclusively directly, it decided to transition to a hybrid model, where it would continue to empha- size direct sales, but also sell a portion of its product line through retailers such as Best Buy, Staples, and Walmart. The main reason for the change was that Dell was shifting its emphasis from targeting businesses to CHAPTER 8 ASSESSING A NEW VENTURE'S FINANCIAL STRENGTH AND VIABILITY 291 targeting businesses, consumers, and international mar kets. The thinking was that it needed to have its com- puters side-by-side with its competitors in consumer channels if it hoped to become the preferred computer vendor for consumers along with businesses. It was also problematic to sell exclusively directly in some interna- tional markets. Dell doesn't disclose the percentage of its sales that originate through its website or over the phone (its Type here to search BI times a year, compared to 13.9 times a year for Hewlett- Packard and 14.6 times a year for the S&P 500 average. Inventory turnover is determined by the following for- mula (the higher the number the better): Cost of Goods Sold Inventory Turnover Average Inventories A high inventory turnover means that a company is This View Sign Window Help Tools Case-3.2.Dell.pdf Case 8.2.Dell (1) 135 IL problematic to sell exclusively directly in some interna- tional markets. Dell doesn't disclose the percentage of its sales that originate through its website or over the phone (its original direct-sales model) versus the percentage of its sales that come through retail outlets. It's clear, though, that a significant portion of its sales now occur online and over the phone and an increasing percentage of its sales are generated through retail outlets. Cost of Goods Sold Inventory Turnover Average Inventories A high inventory turnover means that a company is converting its inventory into cash quickly. Turning its inventory over quickly allows Dell to generate cash that's used to fund its growth, and to not get caught with out-of-date inventory. An often-told joke in the PC Industry is that unsold inventory is like unsold vegetables-it spoils quickly. So maintaining a favor able inventory turnover ratio is critical Another ratio that's important is the asset turnover ratio. Asset turnover reflects the amount of sales gener- ated for every dollar's worth of assets. It's calculated using the following formula (the higher the number the better): Asset Turnover Sales Assets Dell's Supply Chain and Manufacturing Strategy Dell's hybrid sales model has a significant impact on its supply chain and manufacturing strategy. It can produce computers in a highly efficient manner, be- cause it does not have to forecast demand and keep excess inventory on hand for a large percentage of its sales. In fact, when Dell receives an order, via the Internet or on the phone, its suppliers are alerted in real time and, periodically throughout the day, deliver parts to Dell's assembly facilities where the comput- ers are assembled, configured, and shipped. It also searches on a worldwide basis to find the best com- binations of quality and cost for parts, which results in a complex yet highly efficient supply chain. In fact, in his 2005 book The World Is Flat, Thomas Friedman asked Dell to retrace the supply chain for his lap- top computer, to determine where it was made, how many suppliers were involved, and how it reached his Type here to search O Dell's asset turnover ratio is 1.26, compared to 1.06 for Hewlett-Packard and 0.34 for the S&P 500 average. Asset turnover denotes the amount of sales generated for every dollar's worth of assets. It's a measure of ef- ficiency in regard to a firm's ability to use its assets to generate sales. Along with crunching numbers, savvy manag- ers assess the impact of their financial strategies on their overall coals and levels of customer satisfaction. o D je THE GROWING www parts to Dell's assembly facilities where the comput- ers are assembled, configured, and shipped. It also searches on a worldwide basis to find the best com- binations of quality and cost for parts, which results in a complex yet highly efficient supply chain. In fact, in his 2005 book The World Is Flat, Thomas Friedman asked Dell to retrace the supply chain for his lap- top computer, to determine where it was made, how many suppliers were involved, and how it reached his front door. The total supply chain for Friedman's Dell Inspiron 600m notebook computer, including suppliers of suppliers, involved about 400 companies in North America, Europe, and primarily Asia. The computer was codesigned in Austin, Texas, in Talwan by a team of Dell engineers, and by a team of Taiwanese note book designers (a globally distributed team can work 24 hours a day). Its final assembly was in a Dell fac- tory in Penang, Malaysia. It was flown from Penang, Malaysia, to Nashville, Tennessee, on a China Airlines 747. the only 747 that lands in Nashville, other than when Air Force One is in town. It was delivered to Friedman's home via UPS. To further increase efficiencies and reduce the amount of capital it must maintain, Dell is currently tran sitioning from this model and is relying increasingly on contract manufacturers > U Dell's asset turnover ratio is 1.26, compared to 1.06 for Hewlett-Packard and 0.34 for the S&P 500 average. Asset turnover denotes the amount of sales generated for every dollar's worth of assets. It's a measure of ef- ficiency in regard to a firm's ability to use its assets to generate sales Along with crunching numbers, savvy manag- ors assess the impact of their financial strategies on their overall goals and levels of customer satisfaction, Ultimately, it doesn't matter that a company has attrac tive-looking financial statements if its customers are starting to go elsewhere. Dell's hybrid sales approach and its supply chain and manufacturing strategy shine in this area too. Because it turns its inventory over quickly it offers its customers the latest technologies rather than saddling them with products that likely will soon be out- dated. It can also pass along the advantages of falling component costs quicker than its competitors can The Downside of Pushing Cost Savings Too Far Although the majority of the decisions that Dell has made have both sweetened its financial statements and pleased its customers, Dell is learning the hard way that cost savings can be pushed too far. In the early 1990s, partly in response to the challenges imposed by its rapid growth, Dell started outsourcing the majority of its call center activities to low-wage countries in Asia and Central America This stotevaladies chosof Financial Advantages of Dell's Hybrid Type here to search o DI 199 of Dell engineers, and by a team of Taiwanese note- book designers (a globally distributed team can work 24 hours a day). Its final assembly was in a Dell fac- tory in Penang, Malaysia. It was flown from Penang, Malaysia, to Nashville, Tennessee, on a China Airlines 747, the only 747 that lands in Nashville, other than when Air Force One is in town. It was delivered to Friedman's home via UPS. To further increase efficiencies and reduce the amount of capital it must maintain, Dell is currently tran- sitioning from this model and is relying increasingly on contract manufacturers. @ it offers its customers the latest technologies rather than saddling them with products that likely will soon be out- dated. It can also pass along the advantages of falling component costs quicker than its competitors can The Downside of Pushing Cost Savings Too Far Although the majority of the decisions that Dell has made have both sweetened its financial staternents and pleased its customers, Dell is learning the hard way that cost savings can be pushed too far. In the early 1990s, partly in response to the challenges imposed by its rapid growth, Dell started outsourcing the majority of its call center activities to low-wage countries in Asia and Central America. This strategy led to a chorus of growing complaints about long wait times for customer service calls and poor post-sales support. In response, Dell has spent over $100 million to revive its customer service, including an effort to increase the percentage of full-time Dell employees who staff customer ser vice support lines and reduce its use of part-time and (continued) Financial Advantages of Dell's Hybrid Sales Approach and Its Supply Chain and Manufacturing Strategy There are direct financial benefits to Dell's hybrid sales approach and its approach to supply chain management and manufacturing. One of the biggest advantages is its inventory turnover. Dell turns its inventory over 31,4 Q Search the web 8. Med Adobe Acrobat PDC Home Tools Canel 292 PART 3 T MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM contract workers. The jury is still out on whether Dell has done enough to stem the tide of customer dissatisfac- tion. Another downside is that Dal pushes its suppliers hard. While most suppliers respond positively. It's hard to gauge the long-term impact in supplier relations by Dell's appearing to assume the role of "tasi masterin its relationships with its suppliers It's also unclear how long Dels hybrid sales - proach will maintain an advantage. Although its inven tory tumover number is still strong. It's not as outstand- Ing as it was when Del sold primarily online and over the phone. In 2004 Dell's invertory turnover was 107.1. but it is 31.4 today. Dellalso has a formable competi tor in Apple Apple's inventory tumor is 63. It may be unfair to compare Dell direct to Apple, given that Apple is a more diversified company, but the compani son highlights the fact met Delis no longer trendsetter in inventory management officiency. Another challenge that all computer manufacturers aos cine in personal computer sales Insighty at word Global decline in computer the reality of the day over for promersk De Howard and Apple Discussion Quest 8-38. Investigate the finan Find current informat com is a good startin inventory turnover is mentioned in the case ventory turnover ratio competitors such as A the same for Dell's ass 8-39. Locato Dell's most rece locate or compute wa most important financia Impressive or do they 8-40. If you were the CEO of would you reflect when statement for your com 3-41. Whatessons can you trom Dell's experiences So Del TO- Kort your ending on 1. 2013: Find Tanda Tunoverato Bun Dell Fast ER O