Dell Computers: a Case Study in Low Inventory

When managers discuss low inventory levels, dell is invariably discussed. Hell, even Ive mentioned dingle on this site. So why every the commotion? Has their low inventory Reallyhelped out that much? In short, yes. This article is primarily going to discuss how much it helped. This article go forth not discuss how they achieved such mellowed inventory turns using a state of the art just in time inventory system. conclude behind need for lower inventoryThe first affaire that involve to be discussed is why low inventory has such a vast effect on dingles overall performance. The reason is quite simple computers discredit at a very high rate. Sitting in inventory, a computer loses a ton of value. As Dells CEO, Kevin Rollins, put it in an converse with Fast Company The thirster you keep it the faster it deteriorates you disregard literally see the stuff rot, he says. Because of their short product lifecycles, computer components discredit anywhere from a half to a all-embr acing 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 save Dell. This means that for every 7 long time a computer sits in Dells warehouses, the computer loses 1% of its value. Ok, now that we bang how much Dell loses for each day, lets take a look at some of Dells data 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 interchange from the income statement divided by value of inventory from the balance pall. Typically, this is turned into a value showing how many days cost 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 outlay of inventory Dell holds. account point to no tice here is that Dell was carrying over 10 weeks worth(predicate) 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 around for less than 1 week.So what does this mean for Dell?Remember, computers lose 1 percent of their value per week. This isnt like the canned aliment industry where managers can let their supplies sit around for months before anyone whacky 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, due 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 latest yearly reports, days inv entory has dropped by approximately a day.Hopefully this article provided you with a practical example that demonstrates the positive effects lower inventory can have on a firms overall costs. For more information regarding lawyers in the Texas area, check out Dallas Fort Worth trucking accident attorney. For more basic information regarding holding costs, please read A simplified Look at the Pros and Cons of Inventory.