Chuz, If Dell reduces its inventory holding period from 8 to 4 days, I would expect two major benefits:
1. Dell would benefit from a lower cost of capital, as you have already explained;
2. Dell would benefit from savings due to reduced inventory obsolescence. According to a rule of thumb I've seen, pc components decline in value on average at the rate of about 1% per week. This means a component held for one year would be expected to lose ~ 41% of its value. If a PC manufacturer holds a component for one yr., its total inventory cost is the cost of capital plus obsolescence cost. Given that Dell's cost of capital is the current yield on Treasury bonds plus a few points, say 10%, this would suggest an annualized total inventory cost of ~51%.
If Dell reduces its inventory period from 8 to 4 days, we should expect total inventory costs to fall by 50%. Correct? Unfortunately, I don't have Dell's annual report and don't know what their average inventory stock is, in dollars. Let's assume it's $1bil. This would mean Dell's current annual inventory cost is $510m. Therefore, if Dell doubles it's inventory turnover, costs should fall by one half, which would mean savings of $255m on an annual basis. Of course, this is all purely hypothetical because I don't have the real numbers.
Geoff |
