Asset Management Trends at Dell
Declines in asset turnover are often harbingers of less robust cash dynamics down the road.
Dell (DELL) reported 3Q results on the evening of November 29th and the stock subsequently traded 12% lower on Friday. As a b-school professor with interest in operations management, I've long regarded Dell as a benchmark in operational effectiveness. For many years, the company's innovative just-in-time and supply chain management practices translated into jaw dropping asset management outcomes.
Data suggest a change in trend. Since the late 1990s, I've been tracking Dell inventory management metrics on a quarterly basis. Figure 1 shows inventory turnover while Figure 2 indicates days of sales in inventory (DSI). (Note: Because I calculate turnover as trailing twelve month revenues divided by quarter end inventory, DSI is merely the inverse of turnover multiplied by 365. Although these two graphs essentially show the same thing, I share them both because some individuals tend to prefer one metric over the other. I should also note that the data are through 2Q 2007 since Dell has yet to report balance sheet numbers for 3Q.)
The charts indicate slippage in inventory management effectiveness. Since zenith values of about 140 turns and less than 3 DSI in 2003, these measures have regressed to levels last seen seven or eight years ago.
From where I sit, part of this decline relates to Dell's decision a couple years back to abandon their singular devotion to the direct distribution model. Responding to slowing growth and competitive pressures, the company has invaded the more conventional bricks and mortar retail channels inhabited by Hewlett Packard (HPQ) and others. At first, this meant building small kiosk stores (read: more plant, property and equipment) in shopping malls so that customers could touch and feel Dell products before configuring them through dell.com for build-to-order production. More recently, however, Dell has been building computers to forecast (read: inventory) for placement in various retail channels.
Simultaneously making both of these channels work profitably in high volumes is difficult due to policy conflicts. For example, how to price PCs in the direct channel in a manner that doesn't cannibalize retail store sales? Or how to configure operating processes for both build-to-order and build-to-stock production?
Moreover, declines in asset turnover are often harbingers of less robust cash dynamics down the road.
Historically, Dell's business model has generated extremely high returns on invested capital. Less effective asset management is likely to challenge future returns. How much so is certainly debatable, as is the extent to which this situation is already baked into the stock price. But I do suspect that this is part of what's weighing down the stock.
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