Sunday, 19 October 2008

Michael Dell's Operating Cash Cycle

I started reviewing for the exam, and I passed Module 4 again. It concerns Financing Growth.
Churchill & Mullins mention in their article “How fast can your company afford to grow?” about components of an operating cash cycle. They offer along the way a small schematic on this OCC should look like:



I would like to talk about Michael Dell, a great entrepreneur that revolutionized the computer. The result of his strategy would turn the above diagram around.

The customer first sends the criteria for the desired computer, after which he/she has to pay in order to allow green light for the PC to enter in the manufacturing process.
Thus from the company’s point of view, the “Goods Sold” come first in line, followed by inventory ordering. We considered in the diagram bellow that the inventory will be received faster than the money from the customer gets in the Account Receivable
This method probably does not reduce the operating cash cycle, but definitely increases the effectivnes of holding the inventory, since only required components are purchased. Days of Account Payable remains unchanged, but the “Duration Cash is Tied Up” is smaller. It is not marked in the diagram, but the “Duration Cash is Tied Up” would be in-between “Inventory Received” and “Payment Received”
We considered this case in which Inventory received comes in front of Payment Received, but if it would be the other way around, then the durations of the cash being tied up would probably be 0.
Also the “Days of Holding the inventory” (components that need to be assembled) is also reduced if not totally taken out of the equation in we consider that the assembly starts as soon as the components arrive.

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