Chuz,
Sorry, but I have to disagree with one thing you said:
However, the time held in inventory is so short that I don't think any loss is meaningful.
Inventory does not lose value in reality at a steady rate, of course. Instead, losses frequently occur in discrete jumps. When they do occur, the boxmaker who is caught holding minimal inventory suffers the least indigestion and lives to see another day. Last week, for example, Intel announced it would reduce the prices of pentium IIs by 20%. Now, how many P-IIs does Dell have in inventory? I don't know, but let's assume a P-II currently costs $400 and comprises 1/4 of the total component cost of a PC. This suggests Dell is holding $254MM*.25= $63.5MM worth of P-IIs, which suggests an inventory loss of $12.7MM. If Dell had already attained inventory turns from 8 to 4 days, its loss would only have been one half that amount. By doubling the number of inventory turns, the $12.7MM loss would be spread over twice as many PCs, assuming the same volume of inventory. Or, at the same production rate, only half as much inventory must be carried, so that Dell would have been caught with only $32MM instead of $63.5MM P-IIs on hand. Either way its inventory loss per production rate is reduced by one half.
If Dell doubles its inventory turns, the lion's share of the benefits will be reduced losses from obsolescence, not cost of capital savings -- although both are important, IMHO.
Geoff |
