Dell Computers: a Case Study in Low Inventory

When managers discuss small-scale inventory levels, dingle is invariably discussed. Hell, even Ive mentioned Dell on this site. So why all the commotion? Has their low inventory Reallyhelped out that much? In short, yes. This member is primarily going to discuss how much it helped. This article will not discuss how they achieved such high school inventory turns using a state of the art scarcely in time inventory system. think behind need for lower inventoryThe first thing that needs to be discussed is why low inventory has such a great effect on Dells overall performance. The reason is quite undecomposable computers depreciate at a very high rate. Sitting in inventory, a computer loses a ton of value. As Dells CEO, Kevin Rollins, put it in an interview with Fast Company The longer you keep it the alacritous it deteriorates you can literally see the stuff rot, he says. Because of their short product lifecycles, computer components depreciate anyw here(predicate) from a half to a salutary point a week.Cutting inventory is not just a nice thing to do. Its a financial imperative. Were going to assume that the depreciation is a full point per week (1%/week) and use that to determine how much money high inventory turns can exempt Dell. This means that for every 7 days a computer sits in Dells warehouses, the computer loses 1% of its value. Ok, outright that we know how much Dell loses for each day, lets take a look at some of Dells entropy over the past 10 years that I pulled from www. hemanufacturer. com What I got from this was the inventory turns.An inventory turn, as this website successfully describes it, is cost of goods sold from the income statement divided by value of inventory from the balance sheet. Typically, this is dark into a value showing how many days worth of inventory a firm has by dividing inventory turnover by 365. I divided the inventory turnover by 52 in order to show how many weeks worth of inventory Dell holds.Key point to not ice here is that Dell was carrying over 10 weeks worth of inventory in 1993. By 2001, Dell was carrying less than 1 weeks worth of inventory. This essentially means that inventory used to sit virtually for 11 weeks and now it sits rough for less than 1 week.So what does this mean for Dell?Remember, computers lose 1 percent of their value per week. This isnt same(p) the canned food industry where managers can let their supplies sit around for months before anyone bats an eye. Computers arent canned goods, and as Kevin Rollins of Dell put it, computers rot. The longer a computer sits around, the less it is worth.That said, delinquent to depreciation alone, in 1993 Dell was losing roughly 10% per computer just by allowing computers to sit around before they were sold. In 2001, Dell was losing less than a percent. Based on holding costs alone, Dell reduced costs by nearly 9%.Since 2001, Dell has continueed to lower inventory. Looking at their in vogue(p) annual reports, days invent ory has dropped by approximately a day.Hopefully this article provided you with a practical event that demonstrates the positive effects lower inventory can have on a firms overall costs. For more than information regarding lawyers in the Texas area, check out Dallas Fort Worth trucking accident attorney. For more underlying information regarding holding costs, please read A Simplified Look at the Pros and Cons of Inventory.