than for inventory. Thus, for example, Dell will build and deliver a computer within four days of a customer entering an order on a Web page. Hewlett-Packard, on the other hand, builds some computers prior to receiving 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
Company
Sales $61,494 $126,033
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.
Answer:
a. (1) Inventory Turnover = Cost of Goods Sold
Average Inventory
Dell:
HP:
$50,098
($1,051 + $1,301) ÷ 2
$96,089
($6,128 + $6,466) ÷ 2
= 42.6
= 15.3
(2) Number of Days’ Sales in Inventory = Average Inventory
Average Daily Cost of Goods Sold
Dell:
HP:
($1,051 + $1,301) ÷ 2
$137.3*
($6,128 + $6,466) ÷ 2
$263.3**
= 8.6 days
23.9 days
* $137.3 = $50,098 ÷ 365 days
** $263.3 = $96,089 ÷ 365 days
b. Dell has a much higher inventory turnover ratio than does HP (42.6 vs. 15.3). Likewise, Dell has a much smaller number of days’ sales in inventory (8.6 days vs. 23.9 days). These significant differences are a result of Dell’s make-to-order strategy. Dell has successfully developed a manufacturing process that is able to fill a customer order quickly. As a result, Dell does not pre-build as many computers to inventory. HP, in contrast, pre-builds computers, printers, and other equipment to be sold by retail stores and other retail channels. In this industry, there is great obsolescence risk in holding computers in inventory. New technology can make an inventory of computers difficult to sell; therefore, inventory is costly and risky. Dell’s operating strategy is considered revolutionary and is now being adopted by many both in and out of the computer industry.