OM Assignment Ȃ HP Inkjet Supply Chain Case AnalysisOperations Management Hewlett-Packard Inkjet Supply Chain Case Analysis Submitted By: Puneet Pahuja Puneet Poddar Rajat Mehta Srinivasa Raghavan R Vikas Jain 1114034 1114035 1114036 1114049 1114057 June 24, 2011 Page | 1 HP faced an ³Inventory/Service-Crisis´ for their DeskJet printer product portfolio. resellers were complaining of shortage of certain printer models. has been assigned the task to determine the possible solutions of the supply chain problem faced by HP in Europe. Presence of fierce competition required the problem to be addresses immediately. This case study analyzes the above problem statement in detail by evaluating various options and alternatives available. Brent Cartier. Despite growing inventory levels at the distribution centres in Europe. The above analysis resulted in a combination of solutions and suggestions that involves reconfiguration of key operational strategies related to supply chain management of HP DeskJet printer. a famous manufacturer of computers and peripherals. In the early 1990s.OM Assignment Ȃ HP Inkjet Supply Chain Case Analysis EXECUTIVE SUMMARY This case study deals with Hewlett-Packard (HP). Manager for Special Projects in the Materials Department of HP Company¶s Vancouver Division. June 24. 2011 Page | 2 . Since. as is evident from the following developments: a) Reduction in Cycle time from 8 -12 weeks to 1 week. HP used to hold 3. the performance of its supply chain was quite alarming in Europe compared to its North American or Asia-Pacific distribution centers. and since HP was operating in a price sensitive market. Following are the causes of the problems faced at HP¶s European DC: i. the supply chain was little complex. 2011 Page | 3 . it can be disastrous to its business. June 24.OM Assignment Ȃ HP Inkjet Supply Chain Case Analysis 1. The performance of its supply chain at the manufacturing stage has seen considerable improvements over past two decades. which in turn adds to inventory carrying cost. Higher Lead time: For the European DC. It was quite common to have product shortages for model demands from some countries. high availability to its customers. while inventory of some other models kept piling up. In order to maintain. The magnitude of demand imbalances was alarming in Europe. Asia Pacific and North America. the consequence of the long lead time was that the DCs ability to respond to fluctuations in the demand for the different versions of the product was limited.5 months of raw material inventory. HP is beset with two main issues in its supply chain: a) To satisfy customer needs in terms of product availability while minimizing inventory at European DC. Higher lead time leads to higher safety stocks. b) How to get agreement among various parties that they had the right level of inventory. Evaluate performance of HP DeskJet printer supply chain? What are the causes of problems faced at European DC? HP was manufacturing the DeskJet printers at its Vancouver Division in USA and these printers were then shipped to its three Distribution Centers in Europe. finished printers were shipped from Vancouver by Ocean. the European DC had to maintain high levels of safety stock. Earlier. But. which was not economical and marred its business performance. b) Converted the factory to ³stockless´ production with ³No´ finished goods inventory. 2 27388.5 103.4 203. Budgeting Problem: Informal procedure of allocating overhead at the DC to different product lines can lead to overestimate/underestimate of product cost.7 Sum Total Optimum Safety Stock = 19187. Estimates used by the company ranged from 12% to 60%.2 15830. Determine optimal safety stock inventory level for European DC.8 SD of Lead time demand 32. Inventory carrying cost calculation: There was no set inventory carrying cost value used for calculating safety stock.e. any decision to increase/decrease Inventory or change the shipping method cannot be arrived at fair level of accuracy.3 8738.0 4208.8 32.0 306. iii.6 2401. 2011 Page | 4 .3 420.1 Mean of Lead time demand 42.5 units 19187. Demand uncertainties could lead to inventory build-up or backorders at the European DC.6 419. developed by the marketing department.1 2301. High service level: The target of 98% for LIFR (Line Item Fill Rate).2 211.3 4530. Mean of Lead time demand = Monthly Mean * 1 (Lead time) SD of Lead time demand = Monthly SD * Sqrt(1) Europe Options A AA AB AQ AU AY Monthly Monthly Mean Std.2 518.5 2204.5 42295.OM Assignment Ȃ HP Inkjet Supply Chain Case Analysis ii. could possibly be on higher side and therefore. Demand Forecasting and Demand Uncertainties: It was a huge problem for the European DC.0 11558.5 103. 2.7 4702.6 1168. Transportation time by sea (Lead time) = 4 weeks (i.1 2301.6 1168.9 5624.0 4208.2 15830.1 Safety Stock 66. Without determining product¶s correct handling cost.Dev 42.) 1 month.4 203.3 420.9 5624. could be reason behind the increasing Inventory levels at European DC.0 306.9 839.5 2204.9 June 24. v.9 Total inventory 108. iv. 0 613.5 2104 153.6 419.9 829280. Shipping by Air In our calculations we have assumed that Vancouver Mfg plant can send the printers to European DC by Air every week.4 3888933. June 24.5 78639.6 840.1 7915.0 4208.8 2398441.0 11558.9 84.8 32.1 Sum 66.6 448572.5 21. Evaluate option of shipping by air to European DC Following two options of shipping DeskJet printers have been evaluated: 1.0 19175. This implies that shipments will be sent to Europe 4 times a month.05 1150.9 19187.0 8416.0 8322.8 52376.6 1168.4 203.3 4530.0 4208.5 263000. Shipping by ship In our calculations we have assumed that HP is transporting the printers by ship once a month.1 2301.4 443970.4 2643.7 Total Cost 2.1 300158.5 2204. 2011 Page | 5 .5 103.4 566280.6 46216.5 989381.1 42.2 15830.7 2465860.15 210.2 211.9 5624.5 103.4 31660.6 1168. Dev Mean of Lead time demand SD of Lead Time Demand Safety Stock (SS) Average Cycle Inventory Inventory Carrying Cost of Cycle Inventory per Month Inventory Carrying Cost of Safety Stock per Month Total Inventory Carrying Cost per Month Freight Cost per Month Total Cost per Month A AA AB AQ AU AY 42.2 15830.3 143812.0 306.8 1444819.9 45658.8 11051.1 79479.8 26262.9 26483.8 32.2 4602.5 2204.8 3842716.6 2401. and therefore the lead time mean demand and standard deviations for 1 week have been calculated accordingly. Europe Options Monthly Mean Monthly Std.0 306.3 420.9 5624.1 2301.3 2434200.9 837696.4 203.9 10966.9 46272.OM Assignment Ȃ HP Inkjet Supply Chain Case Analysis 3.3 420. 3 1102.6 247345.3 584. 2011 Page | 6 .888.9 6565.3 209.9 1594952.2 3451.0 460.952 33.5 18495.9 9593.6 Sum Total Cost/Month ± Ship: $3.3 Total Cost where.6 2265. June 24.5 2204.5 5779.9 1199220.763 287.1 105.1 3957.0 4793.5 630.981 per month in inventory carrying costs when HP transports DeskJet printers by air instead of sending printers by ship every month.0 969754.1 65750.8 4161.6 105.3 1200.8 32.2875 52.3 23745.5 575.7 63.2 15830.933 Total Cost/Month ± Air: $1. it is not operationally viable to send the shipment every week then HP should chose a shipment interval that is of minimum possible duration in order to reduce the lead time.8 33384.0 189483.293.3 35953.7 16.1 10. Assumption: Our assumption is that HP is shipping its printers only once a month.1 2301.7 1560289.4 722409.35 660.0 4208.3 993500.0 306.2 283140.8 355202.3 32754.3 1052.625 526 38.5 18035.6 150079.0 2812.2 4885.2 102.5 6312. we are assuming that it would be operationally alright to send the printers by plane every week and economies of scale (in terms of shipment size) would remain the same.8 5.525 1978.OM Assignment Ȃ HP Inkjet Supply Chain Case Analysis Europe Options Monthly Mean Monthly Std.3 420. In case.4 26188.4 203.9 5624.9 186032. Total Cost/Month = Inventory Cost/Month + Freight Cost/Month Conclusion: HP can save an amount of $ 2.0 76.5 103.9 4822.3 51.594.5 13241. Also.3 348890. Dev Mean of Lead time demand SD of Lead Time Demand Safety Stock (SS) Average Cycle Inventory Inventory Carrying cost of Cycle Inventory per Month Inventory Carrying Cost of Safety Stock per Month Total Inventory Carrying Cost per Month Freight Cost per Month Total Cost per Month A AA AB AQ AU AY 42.6 1168. b) If by any chance the demand deviations go beyond the service level (98%) for any of the products.293. need to send printer units equal to the lead time mean demand. the demands will change and the current demand data available right now will become obsolete. c) Also. would serve following purposes: a) First. 2011 Page | 7 . HP can save an amount of $ 2. June 24. . then such fluctuations can be addressed by plane within 1 week. as compared to 4 weeks of ship. Thus the production plant does not have to anymore worry about the deviations in the demand from DC. Sending the printers every week. Systems and processes should be in place to gather demand data for different regions and should be shared across teams in the supply chain on the real time basis. As we observed from calculations in Question no 3. Also. the lead time mean demand (1 week) and standard deviation would reduce. which is an emerging market. thereby reducing the safety stock levels at the European DC and therefore reducing the inventory carrying cost. we can fairly assume that with the passing time. every week. this data consistently collected over a period of time would be useful to prevent the shortage gaming (which may be occurring now at the resellers) by supplying the resellers only on the basis of past demand data. particularly in the South east Asian region.981 per month in inventory carrying costs when HP transports DeskJet printers by plane instead of sending by ship every month. the manufacturing site of HP in Vancouver. Any deviations in demand from mean will be handled by the safety stock maintained at the DCs. This will ensure real time update of the safety stocks levels at the distribution centers and the proper shipment levels. B) Setup Information Gathering systems: Since Eastern Europe is an emerging market.OM Assignment Ȃ HP Inkjet Supply Chain Case Analysis 4. by plane. If you were Brent Cartier what would you do? A) HP should send its DeskJet printers to European DC by plane. since products such as personal computers and monitors require extra processing.5 26188.3 168.0 120501.1 At LIFR 98% Inv Safety Carrying Stock Cost of SS 33.0 5975. HP should formalize the method of assessing product¶s cost to facilitate effective decision making.4 209.2 4640.3 722409. at high service levels. Europe Options A AA AB AQ AU AY Sum At LIFR 90% Inv Safety Carrying Stock Cost of SS 20.7 746960. D) Formalize the process to determine product handling cost at DCs: Under HP¶s current system.7 3341.9 13241.8 1199220.8 93480. following table lists the safety stock levels and their inventory carrying costs for different levels of LIFR.3 580036.0 3599.0 At LIFR 95% Inv Safety Carrying Stock Cost of SS 26.3 4161.0 962878.1 85. And therefore it would be reasonable to say that percentage of effort required to handle DeskJet printers could be less than estimated. any decision to increase/decrease Inventory or change the shipping method cannot be arrived at fair level of accuracy.2 7703. it is possible that the Marketing Department is inflating target LIFR to 98%. June 24.7 2592. the estimated cost of a product may not be correct.1 283140.2 2265.2 21027.9 From the table we see that.9 964.7 449968.1 10632.5 16312. as we increase the service level (from 90% to 98%).9 176360. In absence of any formal process. in-order to maximize their incentive. the marginal utility of increasing the service level decreases rapidly because the Safety Stock level increases and so is their cost. Without determining product¶s correct handling cost.4 5779.0 66. 2011 Page | 8 .6 1818.0 747.9 9593. the salaries at DC's were charged back to the product line using ³percentage of effort´ method. Therefore we recommend that the Target LIFR rate should be revisited and chosen only after cost benefit analysis of different service levels.6 150079.OM Assignment Ȃ HP Inkjet Supply Chain Case Analysis C) Revisit target Line Item Fill Rate (LIFR) of 98%: Since the major performance measure for a typical DC is LIFR.7 227339. Hence.6 1200.0 130. For weekly shipping by plane.0 8248.5 105.0 1410. This would require hiring staff which are trained in material resource planning and BOM explosion systems and component procurement.000 = 666.6 (Total Inventory CC/Avg. thereby reducing the frustration of the DCs. b) The localization procedure for the printers. it was difficult to accommodate them in the standard process as they disrupt the material flow which is designed only for distribution purposes and not for integration purposes. This can serve two purposes: a) Modifying the standard distribution process at the DCs to match the Assembling process which is actually going on in a non-standard manner.6 Profit = $75.06 E) Establish Assembly operations at European DC: Alternatively. June 24. This could help the DCs to project just one single demand of basic printer from the manufacturing site and localization is done at the DCs to meet requirements of customers from different countries. done at the manufacturing site in Vancouver can also be shifted to DCs thereby leaving them with manufacturing just raw printers. F) Collect more data for deciding a manufacturing plant in Europe: We are aware that the manufacturing plant in Vancouver is a well streamlined manufacturing process.OM Assignment Ȃ HP Inkjet Supply Chain Case Analysis Average Selling Price = $400 Million/600.67 Average Cost Price (European DC) for shipping per month = 500 + 91. to meet the language and power supply requirements of the local countries. Therefore we recommend establishing an assembly process for all the DCs. We know that the products such as personal computers and monitors go through integration at DCs. Inventory) = 591. b) Lower lead time would address any demand fluctuations and reduce inventory carrying costs. Following are the advantages and disadvantages of opening up another manufacturing plant at Europe: Advantages: a) Inventory and service problems in Europe will be handled by such a plant. 2011 Page | 9 . We know that the Eastern Europe and South-East Asia are emerging markets. b) We can fairly assume that fairly huge capital expenditure would be required for starting a new plant. This would possibly also free up manufacturing capacity at Vancouver to serve the South-East Asian Markets. particularly in Eastern Europe as this region is attracting lot of investments due to its low operational costs. 2011 Page | 10 .OM Assignment Ȃ HP Inkjet Supply Chain Case Analysis Disadvantages: a) This would leave excess capacity at the Vancouver plant. More data should be collected to arrive at this decision. opening up a plant in Europe could make sense. With increasing demand from these regions. June 24.