29-09-2003 00:33									#151
	Avatar Enlargement: We've got the solution

Yes, that's a good point. They might be unloading the delivery time to their suppliers. On a net basis, the economy is no better off. On the customer side, they do offload the delivery time, by charging the credit cards upon shipment (or even earlier).

As to the fact that there's other working capital besides inventory, you also have a very good point.

	29-09-2003 00:44									#152
	Help yourself to an AD-FREE life

quote: Originally posted by DanS Now another part of this question. In macroeconomic terms, I think the equation is something like money supply x velocity = economic output. If the Dells of the world increase their inventory ratios, then that increases the economy's velocity.

money supply x money velocity = nominal output

The economy has no turnover velocity from the GDP view as it measures only final uses. On the following questions, I've simply lost you... if you include transactions along the supply line, that may have some impact, but I can't relate it to your points...

	29-09-2003 00:44									#153
	Support Apolyton, buy Civilization: The Boardgame

I was trying to disaggregate all the different issues and hadn't touched the macro point. The other thing is that maybe they can count it as sold as soon as they recieve payment? Which is in advance. Still would mean that they only need to have 3 days worth of parts on hand. Anyhow, I would be pretty suspicious of the accounting on this number. Devil in the details and all.

	29-09-2003 00:52									#154
	Support Apolyton, buy Alpha Centauri

They have about 9 billion of current assets, nicely matched with current liabilities. Revenue is 39 Billion. I wonder if some of their inventory (or what we would consider inventory) is tied up in "cash equivalents". I guess I could see them being efficient enough to operate the factory with 3 days parts supply. And they build to order a lot, so there aren't many finished goods. Still would not surprise me to find some supplier warehouses next to their JIT plants and some strict penalties for non-delivery, which they must pay for implicitly in price.

Last edited by TCO on 29-09-2003 at 01:02

	29-09-2003 01:01									#155
	Support Apolyton, buy Civilization 2

quote: if you include transactions along the supply line, that may have some impact, but I can't relate it to your points...

Maybe my points aren't so clear. I guess I make the assumption that decreasing the time to turn over inventory will end up in the turn over of final uses in more or less a 1:1 fashion. M1 velocity is about 8.5 per annum, roughly in line with the little less than 10 inventory turnover per annum for the S&P 500. Perhaps this assumption is daft.

	29-09-2003 01:10									#156
	Got spare money?

I looked at the 10K for Dell. It is about a day of WIP. A day of finished goods. And 2 days of raw materials.

	29-09-2003 01:11									#157
	Inflate your Upload Space

quote: I guess I could see them being efficient enough to operate the factory with 3 days parts supply. And they build to order a lot, so there aren't many finished goods. Still would not surprise me to find some supplier warehouses next to their JIT plants and some strict penalties for non-delivery, which they must pay for implicitly in price.

Yes, I was curious about that as well. Dell's gross margins are no better than the industry standard, for instance. Also, I was curious about how the increasing scale of Dell's operations would drive the profitability of the chain and who would lock in that profit--Dell or its suppliers.

	29-09-2003 01:13									#158
	Support Apolyton buy from Amazon

To the extent that they reduce inventory and don't just dump it on suppliers, they are benefitting the overall economy. Basically making goods cheaper by being more efficient. There are some ineffeciencies from there delivery method and sales method (end up with less bulk transfers), but overall, they sure look pretty cool.

	29-09-2003 01:21									#159
	Support Apolyton, buy Galactic Civilizations

quote: Originally posted by DanS Yes, I was curious about that as well. Dell's gross margins are no better than the industry standard, for instance. [QUOTE] Well, if they are the same. While having less inventory, that sounds pretty good. [quote] Also, I was curious about how the increasing scale of Dell's operations would drive the profitability of the chain and who would lock in that profit--Dell or its suppliers.

You lost me here.

1. "The chain" includes competitors. Could you restate your idea? But assuming that there is competition in among suppliers, I expect Dell to capture the earnings for changes that they make. If certain suppliers change to adapt to JIT better, than they will capture some value. If all competitors ape what Dell does and if the market remains competetive, I expect the value to accrue to consumers.

2. They haven't really radically changed scale over the last few years. I would expect economy of scale changes to be much more interesting earlier in their existence. Economy of scale tends to peter out. I mean they are at the stage where they just add a call center or add a factory. But each facotry or call center will be at scale. There may be some E of S in advertising or the like. But I doubt that this is the significant story in the supply chain. Probably learning and continued innovation/pushing the envelope is the more significant factor here.

	29-09-2003 01:31									#160
	Avatar Enlargement: We've got the solution

Re #1, the chain does include competitors, but I was interested in the fact that while Dell has a pretty large scale, its gross margins were no more favorable than its competitors, who probably don't have Dell's scale. Is this because there are few economies of scale of which Dell can take advantage? Does the price that Dell pays to its suppliers include the implied cost of holding inventory to such a degree that on a net basis, the whole chain is no better off? That's what I mean.

Re #2, Dell's sales have doubled over the last 5 years. I guess that could be due to a larger product line.

	29-09-2003 01:41									#161
	Put an end to popups!

quote: There are some ineffeciencies from there delivery method and sales method (end up with less bulk transfers), but overall, they sure look pretty cool.

Yes, that's what I was thinking. In the face of higher sales and a wider product line, they have cut by half the time it takes to turn around their inventory. That's pretty cool and good basic business from a thirtysomething tycoon, if it's real. It seems like this would help them roll over their competitors in pretty short order, but I don't have a good idea about what the relative impact of this would be. If we assume that the inventory ratio is real and not just some supplier agreement sleight of hand, then how can we measure the relative impact?

	29-09-2003 20:10									#162
	Avatar Enlargement: We've got the solution

The Dell business model is based on the reduction of inventory to an absolute minimum, not only for the resulting decrease of the need of working capital, but primarily to suppress the risk of obsolescence of the parts and of the end products. This risk is one of the main dangers of the desk top and portable computers industry. Dell has perfectly solved the problem with no risk at all on the finished products (the one day inventory relates to computers ordered (and generally paid), and a very small risk on parts with a two days inventory.

This impressive performance is made possible by:
- The acceptance by the customers to wait about 10 days before their decision and the availability of the computer, whereas they can go to the computer shop and bring back a computer immediately. These 10 days are the value given by the customer to the Dell quality.
- The Dell quality (production, delivery and after sale maintenance) which remains at a very high level over time and has gained the customer trust.

Therefore it is tempting to say that the Dell business model is perfect. It is but only because Dell has till now perfectly mastered the selling by mail. Selling by mail has two drawbacks : the right of return granted to the customer (which can be devastating if the customers is disappointed with the product); the marketing only through mail and press advertising is not a simple thing.

The Dell performance cannot be compared to classical marketers, particularly with those who are not manufacturers; it can only be compared to manufacturers selling all their production by mail.

Dell has the reputation to provide, at equivalent prices, products incorporating parts more up-to-date than their competitors, thanks to their way to handle inventory. This could explain that their gross margin is not better than their competitors: this advantage is given for free (at least partly) to the end user.

Reasoning about velocity cannot be made with accuracy, and we can wonder if any breakthrough were made whether corrective steps would not be made on the money supply side for fear of inflation. But in any case, it cannot be recommended to all the Dells of the world to shift to the Dell business model; at this point, Dell is a master piece. Would you recommend to all artists to paint like Michelangelo?

I am afraid that your vision of productivity is not complete; both aspects of productivity are always to be considered, and for any contemplated change on one of them the management has to look on the other to check that it will not deteriorate. For instance, the improvement in the capital use resulting from the disappearance of the end products inventory has also a positive effect on the labour productivity (no warehouse employees, no paper work between the plant and the warehouse, no inventory taking, etc). But the same move made with a customer base accustomed to have products available on the shelf, it could badly damaged the productivity of the sales employees. Additionally, improvements in the labour productivity are often a consequence of capital expenditures. The art of management is to properly balance the two sides.

The information age is not supposed to equip the factories with inventory control systems which do not work: lol: Often this system must be finely tune for a long time, but the end result is worth the effort.

	30-09-2003 04:46									#163
	Suffering from ads?

Dan, re 1: If they have the same margins and less working capital, their ROIC will be better. All else equal (and we don't know that to be the case) if they have similar margins and lower inventory, it implies that they really do reduce inventory, not just transfer holding costs to the supplier (else they would have to pay a higher costs for parts).

Re 2: I think the Economy of scale between 20 Bil and 40 Bil is not so significant. Like I said, they just add another call center or another factory (which is at scale). The difference between a large factory or small one or large or small call center is more likely what is significant. And that is something one can acheive at 20 Bil or 40 Bil or 5 bil. Economy of scale does not scale linearly with scale.

P.s. I liked Davout's post.

	30-09-2003 04:47									#164
	Lose 30 kilos (of popups)

Note that Carly Fiorina would hate me for making this argument re number 2.

	30-09-2003 11:11									#165
	Get a bigger avatar today!

--"Economy of scale does not scale linearly with scale."

Sig material.

	03-10-2003 23:42									#166
	Support Apolyton, pre-order Civilization IV

I also liked davout's post.

quote: Reasoning about velocity cannot be made with accuracy, and we can wonder if any breakthrough were made whether corrective steps would not be made on the money supply side for fear of inflation. But in any case, it cannot be recommended to all the Dells of the world to shift to the Dell business model; at this point, Dell is a master piece. Would you recommend to all artists to paint like Michelangelo?

Well, they're businesses, not artists. The lowest cost model will win out in the end, as long as the customers are willing to go for it. Maybe nobody wants to buy on the spur of the moment, but has not heretofore been given a favorable price/time tradeoff.

Re monetary policy, I too wonder about the corrective actions taken on the money supply. Does money velocity vary all that much over time? And how does the money velocity of the US compare to other countries? Do those countries with higher money velocity tend to have more productive capital?

quote: Dell has the reputation to provide, at equivalent prices, products incorporating parts more up-to-date than their competitors, thanks to their way to handle inventory. This could explain that their gross margin is not better than their competitors: this advantage is given for free (at least partly) to the end user.

That's a good explanation re gross margins.

quote: For instance, the improvement in the capital use resulting from the disappearance of the end products inventory has also a positive effect on the labour productivity (no warehouse employees, no paper work between the plant and the warehouse, no inventory taking, etc). But the same move made with a customer base accustomed to have products available on the shelf, it could badly damaged the productivity of the sales employees. Additionally, improvements in the labour productivity are often a consequence of capital expenditures. The art of management is to properly balance the two sides.

Good points, all. I wonder how we could quantify what portion of the gain is impacting capital productivity and what portion labor productivity. Have any ideas?

quote: Re 2: I think the Economy of scale between 20 Bil and 40 Bil is not so significant. Like I said, they just add another call center or another factory (which is at scale). The difference between a large factory or small one or large or small call center is more likely what is significant. And that is something one can acheive at 20 Bil or 40 Bil or 5 bil. Economy of scale does not scale linearly with scale.

TCO: Of course, you're right. A $20 billion company should not have economies of scale that are much less than a company with $40 billion in scale. I'm thinking more along the lines of marginal parts that Dell has. As they grow, they should be able to take advantage of more scale on these parts. I'm thinking that this is how they have been able to increase their inventory turnover from amazing to insane--they have had to hold fewer marginal parts in order to gain favorable scale for the parts.

	03-10-2003 23:55									#167
	Browse Apolyton AD-FREE

Here's an article about Intel's CEO saying that the US needs to do more to keep its tech edge. Basically, he advocates subsidizing R&D to a greater degree than we do already.

http://money.cnn.com/2003/10/03/tec...rrett/index.htm

Some of his arguments are solid. Why we are subsidizing/protecting agriculture, steel, and lumber is a question that should be asked repeatedly. Some of these are pretty large subsidies. Of course, R&D is subsidized too. Also, his argument about education is good.

But when he starts thinking about substantial additional government subsidies for R&D, I start asking why the government should distort capital allocation decisions to a greater degree than it already does. After all, apparently industry has made the decision that R&D is only worthwhile at a particular amount.

One thing to note is that private R&D is taking an increasingly large portion of overall R&D, and overall R&D as a percentage of the economy has been rising long-term, at least here in the US.

Last edited by DanS on 04-10-2003 at 00:10

	04-10-2003 00:56									#168
	Tired of ads?

quote: I looked at the 10K for Dell. It is about a day of WIP. A day of finished goods. And 2 days of raw materials.

OK, so this means that it takes 2 days to organize the raw materials, 1 day to assemble the product, and 1 day to ship out?

If you compare to the 10-K from 5 years ago, which stage bore the brunt of the halving of the inventory ratio?

	06-10-2003 20:59									#169
	Avatar Enlargement: We've got the solution

In order to make the bump not so gratuitous, I'll ask a question with regard to net debt and gross debt.

For most countries, the difference between gross debt and net debt is not that great. For instance, the difference is about 10 percentage points in the US. Same with the Euro area. However, in both Japan and Canada, the difference is rather large: 90 percentage points and 40 percentage points, respectively. To what is owed this huge difference?

	06-10-2003 22:31									#170
	Support Apolyton buy from Amazon

quote: Originally posted by DanS In order to make the bump not so gratuitous, I'll ask a question with regard to net debt and gross debt. For most countries, the difference between gross debt and net debt is not that great. For instance, the difference is about 10 percentage points in the US. Same with the Euro area. However, in both Japan and Canada, the difference is rather large: 90 percentage points and 40 percentage points, respectively. To what is owed this huge difference?

Barriers?

	06-10-2003 22:49									#171
	Increase Your PM Length

What's the definition of both? Net debt in corporate finance is your interest bearing debt minus your cash and marketable securities.

	06-10-2003 23:46									#172
	Got spare money?

As I understand it, that's what it is for nations too. But does the government of Japan really have cash and marketable securities to the tune of $3 trillion? Is the "marketable securities" really just an IOU to the pensions system?

Last edited by DanS on 07-10-2003 at 00:04

	07-10-2003 00:33									#173
	Support Apolyton or Terrorists Win

quote: Originally posted by DanS I also liked davout's post. Well, they're businesses, not artists. The lowest cost model will win out in the end, as long as the customers are willing to go for it. Maybe nobody wants to buy on the spur of the moment, but has not heretofore been given a favorable price/time tradeoff. Re monetary policy, I too wonder about the corrective actions taken on the money supply. Does money velocity vary all that much over time? And how does the money velocity of the US compare to other countries? Do those countries with higher money velocity tend to have more productive capital? That's a good explanation re gross margins. Good points, all. I wonder how we could quantify what portion of the gain is impacting capital productivity and what portion labor productivity. Have any ideas? TCO: Of course, you're right. A $20 billion company should not have economies of scale that are much less than a company with $40 billion in scale. I'm thinking more along the lines of marginal parts that Dell has. As they grow, they should be able to take advantage of more scale on these parts. I'm thinking that this is how they have been able to increase their inventory turnover from amazing to insane--they have had to hold fewer marginal parts in order to gain favorable scale for the parts.

This doesn't make much sense. IT doesn't give with the earlier comment about different factories, at scale. It only makes sense if there production is centralized. And still would be minimal as it would only affect a small portion of the parts. Look at the average invetnory. It has been 3-4 days for several years. That is the interesting story. Not how it changed last year.

	07-10-2003 00:35									#174
	Support Apolyton, buy Civilization: The Boardgame

I have kidicious on ignore. Please don't respond to his posts or include him in the discussion.

(Note to Ming. Ignore any whining. This is econoweenie land and I am allowed to violate site rules inside here. It's like an easement.)

	07-10-2003 00:52									#175
	Got spare money?

quote: I am afraid that your vision of productivity is not complete; both aspects of productivity are always to be considered, and for any contemplated change on one of them the management has to look on the other to check that it will not deteriorate. For instance, the improvement in the capital use resulting from the disappearance of the end products inventory has also a positive effect on the labour productivity (no warehouse employees, no paper work between the plant and the warehouse, no inventory taking, etc). But the same move made with a customer base accustomed to have products available on the shelf, it could badly damaged the productivity of the sales employees. Additionally, improvements in the labour productivity are often a consequence of capital expenditures. The art of management is to properly balance the two sides.

I know this has been quoted several times, but I really like it. It's why we have FIFO and the likes. Through-put and meeting demand while limiting overhead and inventory... Simple?

quote: I wonder how we could quantify what portion of the gain is impacting capital productivity and what portion labor productivity

Quantify? That would be easy, but wouldn't you consider capital productivity and intrinsic value? The only way to quantify it would be through capital savings, which could be optimized or just awful without yeilding a value... Productivity is easy to quantify, but measuring that to an intrinsic value is next to impossible, and that is where buisness minds come into play... to guess.

Question on comparing companies debt: are those debts measured on an even scale? What I mean is these companies from different nations have different governments in which to deal with. Some of them can't sink their debt through depreciation of assets such as land and equipment, since in some of these places the company doesn't own the land or the buildings... Also, when looking at Japan they do a lot of buisness with places like China (or at least have more companies that do) who doesn't float their currency, which could result in losses unless they hedge the yen against it, possibly resulting in debt. So, what I mean are all these international factors calculated into these debt ratios so that these comparisons can be made on even ground?

	07-10-2003 01:29									#176
	Support Apolyton, buy Call to Power 2

quote: Look at the average invetnory. It has been 3-4 days for several years. That is the interesting story. Not how it changed last year.

It has been 3-4 days for only the last 2 years. 4 years ago it was 7 days, not 3-4 days.

	07-10-2003 06:37									#177
	Support Apolyton

eh...ok. Now how much cash did that generate? Is it really the important story?

	07-10-2003 09:14									#178
	Support Apolyton, buy Call to Power 2

That's what I've been trying to figure out!

Clearly, the Dell managers are controlling for that variable and brag about their progress on that variable. And they are rolling over their competitors. Is it that this variable is just incidental to them rolling over their competitors, or is it the main ingredient of the special sauce?

Further, Dell bragged about it in the context of IT and the internet, in that he thought the added virtual storefront wasn't where the benefit lay primarily (and I'm sure they benefit from dell.com). Rather, that it was remaking the internal processes of the company. I read that to mean that Dell thought that he had a big advantage on cost structure. But how much advantage does moving from a 7 day inventory to a 3.5 day inventory give them, and where does that show up in the numbers?

Last edited by DanS on 07-10-2003 at 09:20

	07-10-2003 09:20									#179
	Support Apolyton, buy GURPS/ Alpha Centauri

It gives them 3 days cash in the year that it happens. And it gives them the carrying cost of that cash year over year.

I think the revenue growth is the more significant story.

	07-10-2003 09:21									#180
	Support Apolyton, buy Galactic Civilizations: Deluxe Edition

Perhaps I haven't framed these questions well at all.