Inventory analysis Dell Inc. and Hewlett-Packard Company (HP) compete with each

Question

Inventory analysis

Dell Inc. and Hewlett-Packard Company (HP) compete with each other in the personal computer market. Dell's primary strategy is to assemble computers to customer orders, rather than for inventory. Thus, for ex., Dell will build and deliver a computer within four days of a customer entering an order on a Web pg. Hewlett-Packard, on the other hand, builds some computers prior to receiviing an order, then sells from this inventory once an order is received. Below is selected financial information for both companies from a recent year's financial statements (in millions):

                                                                                                                                Dell Inc.                                      Hewlett-Packard Co.

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Sales                                                                                                                     $61,494                                           $126,035

Cost of goods sold                                                                                                  50,098                                               96,089

Inventory, beginning of period                                                                                  1,051                                                 6,128

Inventory, end of period                                                                                           1,301                                                 6,466

a. Determine for both companies (1) the inventory turnover and (2) the number of days' sales in inventory. Round to one decimal place.

b. Interpret the inventory ratios by considering Dell's and Hewlett-Packard's operating strategies.

Please show your work

                                                                                                                                                                                                         

Explanation / Answer

a.

b. As suggested by the values computed, the efficiency level with which Dell manages its inventory is much higher as compared to that of Hewlett Packard. Not only has Dell been able to convert evey dollar invested in inventory into much higher revenues, it is also conversely been able to extract much higher revenues from a relatively meagre investment or capital employed in inventories. As a result, the cost of capital in dollar terms for Dell should be substantially lower as compared to Hewlett Packard. Also, Dell avoids the dangers associated with holding high levels of inventories, such as obsolescence and high warehousing cost.

Hewlett Packard Dell Beginning inventory 6,128 1,051 Ending inventory 6,466 1,301 Average inventory 6,297 1,176 Cost of goods sold 50,098 96,089 Inventory turnover: COGS/average inventory 7.955 times 81.708 times Number of days sales in inventory: 365 / inventory turnover 45.88 days 4.47 days

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