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
information 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 from 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 times
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=LkL17lqMq90
References
Research Hewelett Packard through its vaule
chain – Hongni Zhang, International Journal
of Business and Management -8 August 2010
Forbes Magazines