Dell's money machine

David Berlind at ZDNet Tech Update talks about Dell's business model, so-called "Day Sales in Inventory" (DSI) and explains how the direct model keeps the cost incredibly low (+ the effects of that on its potential entry into handheld business)

"How can I recommend something that makes vaporware look like a shipping product? It's simple. Not counting printers, Dell has a very straight-forward model for doing business: It takes the same, relatively standard off-the-shelf parts (Intel processors, Microsoft operating systems, memory, displays, etc.) that its competition is using, integrates those parts into something that works well, puts that something in a cardboard box, and sells the same system everyone else sells--but for a lot less money.

Although Dell officials might not like the characterization, Dell can do this because Dell isn't a computer company. It's a bank (Apparently, Sun's Scott McNealy agrees, but in a very uncomplimentary way.) By the time Dell collects payment from its customers for the computers it has already shipped to them, Dell still has a few days to pay for the parts that went into those computers and, on top of that, is probably getting a discount that's typical for accelerated payment--a discount that can be passed onto the customer. Dell's direct model and mean, lean manufacturing and inventory control processes are what make this possible. In fact, companies that sell direct to their customers actually have a benchmark for this process called DSI (Day Sales in Inventory).

DSI refers to the number of days that elapse between the time a company receives its raw materials and the time those raw materials are shipped as part of a finished product. The lower a company's average DSI, the more cash it can generate off the float and any discounts, and the more money it can take off the price of its systems. Because Dell sells primarily through a direct channel, where its build-to-order products go straight from the assembly line's last conveyer belt to the customer, the company can keep its DSI very low. According to a Dell spokesperson, as of the second quarter, Dell's average DSI is now down to an astonishing four days. If Dell's average DSI is four, and assuming its terms for payment are a stingy 1/15 Net 30 (1 percent discount if paid within 15 days of invoice, no discount if paid within 30 days of invoice), Dell would still have anywhere from 11 to 26 days to collect interest on the money that it must eventually send to suppliers like Intel. Compare that to companies that operate in channels where they must keep finished product handy for weeks or months at time. By the time those companies sell their computers, they've already paid for the parts and the cost of holding that inventory is eating away at their bottom line. Now you know why everyone would rather be in the direct business." - more