Describe how Dell pioneered the management of net working capital

Dell Computer Corporation (DELL) has long been recognized for its innovative approach to managing its working capital. Describe how Dell pioneered the management of net working capital to free up resources in the firm.

Dell is not the largest personal computer company, but it is the fastest growing. Dell’s year-over-year unit sales rose 67 percent in the second quarter of 1997, while the No. 1 PC company, the Compaq Computer Corporation, rose 25 percent, according to Dataquest, a market research firm based in San Jose, Calif. And Dell’s return on invested capital reached 167 percent in the second quarter, nearly 10 times the industry average. At about $100 a share at the end of September, Dell’s stock price quadrupled since the beginning of the year, after adjusting for splits. While almost all of its competitors still build, standard machines based on often faulty market forecasts, and stuff the channel with inventory, Dell makes each machine to order, and maintains only 12 days of inventory. Its major customers include Ford, Boeing and Texaco, as well as Federal, state and local governments. At Dell’s new factory in Round Rock, Tex., near Austin, a personal computer can be assembled, tested and packed, complete with installed software, in just eight hours from the time an order is received.

To understand how boldly Dell’s model flew in the face of conventional wisdom, one must look back to 1981, when the International Business Machines Corporation sanctified the personal computer industry with the introduction of the original I.B.M. PC. While industry pioneers like Apple Computer Inc. had used distributors and dealers because they needed the leverage to gain nationwide sales, I.B.M., with the most sophisticated field sales organization in the world, chose to sell the PC through the channel because that was the way things were done. Compaq’s early success was often attributed to its superior treatment of the channel. And the PC industry’s largest trade show is still Comdex, which originally stood for Computer Dealers Exposition.