DELL'S DIRECT HIT
The key to the PC maker’s business model? A finance staff that watches inventory like a hawk.
By Sethuraman Dinakar

Minutes before starting to write this story, my Dell Inspiron 3200 stopped working. It took eight minutes to find Dell’s toll-free number and another six minutes to get hold of a Dell representative. Once the problem was explained, the Dell employee calmly talked me through a step-by-step process aimed at diagnosing the source of the trouble. It took a few more minutes to conclude that the hard drive had crashed. Within three business days, Dell had restored the laptop to health.

While another computer retailer might have fixed a broken laptop just as quickly, it probably would have cost them a lot more to do it. For the most part, computer retailers in Asia still stagger under the traditional costs of selling a high-tech item in this part of the world. Those costs include maintaining an army of distributors and managing thousands of square feet of retail store space and dozens of walk-in service centers. By contrast, Dell Computers, the largest direct-sale merchant of home computers in the US, does all its business over the telephone and Internet. That high-tech approach to selling high-tech items has proved so successful that the company has set its corporate sights on Asia’s far-flung markets.

But so far, booting up the direct-sales model in Asia has not been a snap for Dell. The biggest problem: local customers still seem a bit uneasy about using a telephone to buy a PC. Given the quality of phone service in many parts of the region, this reluctance is understandable. In addition, most Dell PC buyers in the US and Europe use credit cards to pay for their purchases. But the percentage of customers who own credit cards in developing markets in Asia is still relatively small.

Nevertheless, the Round Rock, Texas-based computer maker has plowed ahead. In 1995, the company opened a 238,000 square-foot Asia Pacific manufacturing base in Penang, Malaysia. Last November, Dell cut the ribbon on its first factory in China, in Xiamen. Many of the PCs rolling out of those factories will go to corporate customers – a huge part of Dell’s business in the US and Europe. Indeed, Dell has already won sizeable contracts from a number of Asian subsidiaries of the company’s multinational customers. In addition, Dell’s Web site now supports 16 country-specific sites for the region, in five different languages.

Those efforts are finally starting to pay off. In 1996, the computer maker ranked 15th in sales of computers in Asia (ex Japan). Last year, Dell shot up to seventh on the list, according to International Data Corporation (IDC). With direct sales operations now in 12 Asian countries and distributors in 38 locations in Asia, regional revenues topped US$1 billion, a nearly 50 percent jump from the year before. Units shipped increased 47 percent.

Company managers will not talk about whether Dell is actually turning a profit in Asia. But analysts say that the PC maker is certainly not missing out on the rewards of its increased sales. Says Janardhan Menon, analyst at Dresdner Kleinwort Benson in Singapore: “By side-stepping the retail channel, Dell’s margins are higher than its competitors.”

Ruthless People

To maintain those high margins, the computer maker relies heavily on its world-class finance de-partment. Mark Stevens, vice-president and con-troller, Dell Asia-Pacific, says keeping inventory at paper-thin levels is crucial to Dell’s success. Stevens, a former business development director with Motorola in China, watches the company’s inventory like a hawk. He looks at weekly updates of how many days of stock Dell carries, broken down by product component. Working closely with suppliers, he ensures that orders for unpopular products are slashed. If inventories start to climb, he recommends that Dell launch promotions to steer customers towards products it wants to unload. This attention to detail pays off, too. Dell’s inventory levels are currently about six days – 60 inventory turns a year – as compared to 12 to 30 turns a year for its competitors. This tight control of stock means Dell can control its expenditures that much more.

It also means that the company can respond swiftly to advances in technology, which seem to occur about every Tuesday in the computer industry. When Intel unveiled its new Pentium III processor in February, for example, Dell immediately started selling a Pentium III-based desktop computer. To help move older Pentium II models, the company bundled those boxes with larger 17-inch monitors and DVD players. “The nature of Dell’s model gives it an edge over others in inventory management,” says Dane Anderson, director of computer systems research for IDC in Singapore. This ruthless obsession with inventory helps generate lots of cash. In fact, Dell has perfected what it calls a negative cash conversion cycle. While not a unique concept, Dell claims it is the first computer retailer to take advantage of this aggressive cash management approach. In essence, a negative cash conversion cycle means that Dell gets paid before it pays its suppliers. On the accounts payable side, Dell gets the same terms that any big customer receives from suppliers – about 30-60 days. On the receivables side, however, Dell collects its bills in about half that time. To determine the cash conversion cycle, Stevens adds Dell’s receivables, i.e. days sales outstanding and days sales in inventory, then subtracts days of payables. Last quarter, Dell’s accounts receivables stood at 36 days but its payables ran up to 54 days while its days inventory came in at six. This worked out to a negative cash conversion cycle of 12 days.

No Secrets

This metric, according to Stevens, is the linchpin for the company’s entire inventory management. “How fast costs come down depends on inventory,” he says. “It offers us half of our cost advantages over our competitors.” Stevens says he then passes most of the cost reductions on to customers, to keep the whole cycle moving. Thomas Meredith, Dell’s CFO, confirms Stevens’ view. In a recent interview in CFO, the US-based sister publication of CFO Asia, Meredith said, “The balance between profitable growth and liquidity management is all about velocity.” Stevens won’t comment on how much cash the system generates in Asia, but according to company statements, Dell’s worldwide operations generated US$752 million in cash in the quarter ending in January, increasing the company’s cash and marketable securities to a whopping US$3.2 billion.

They put the money to good use, too. Cash generated by the Dell model goes to buy Dell stock. Since launching a stock repurchase program in February 1996, the computer maker has acquired 375 million of its own shares. Investors aren’t complaining, that’s for sure. When the company first started the buyback program, shares of Dell were trading at US$1.50. As of press time, the Dell share price was near US$42 – a remarkable rise.

Still, Dell will be hard pressed to duplicate that sort of performance over the next three years. In the US, Compaq has begun selling its PC product lines over the Internet, tying up with e-commerce vendors. Gateway, Dell’s direct sales arch-rival in the US, has also opened up shop in Asia. Unlike Dell, however, both Gateway and Compaq have their own dealer network, which could cause problems for the two vendors. Retail dealers get a little testy when they see their line of computers being sold over the Internet for less. But as e-commerce becomes popular, more companies will be tempted to peddle their wares online – ala the Dell model. “Direct sales can complement the existing distribution network,” says IDC’s Anderson. Another worry: Dell has succeeded so far largely on the strength of its sales to corporate customers. This has made sales and payment collection relatively simple to monitor and manage. Selling and collecting bills from the vast army of consumers in Asia won’t be nearly so easy. Further, analysts are skeptical about Dell’s prospects in China, a country with a low phone penetration rate and strong local brands.

Sethuraman Dinakar is CFO Asia’s Singapore bureau chief.