BADM 566 Supply Chain Management- write-up 3 Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick

Timmons, Jiraphong Tisavipat 1. HP is in an inventory crisis. What should it do? Qualitatively evaluate the options in case A. There are two significant, main issues in this case. First, we are inquiring into the best way to satisfy customer needs in terms of product availability, whilst minimizing inventory. The second refers to what exactly minimizing inventory means; is driving towards zero the proper focus for level of inventory? These issues arise because of H-Ps incredible success in the Inkjet Printers space. Their huge sales growth with the revolutionary Deskjet brought great revenue; And with that, the archetypal dual supply chain problem of decreasing availabilities amidst increasing inventories. There are several significant recommendations that we have, broken down according to A-E, listed below: A. Building a new European factory: We do not recommend building a new factory in Europe, because it is not entirely clear whether or not European volumes are large enough for the area to justify its own site. To be sure, the average demand in Europe is ~23,000 units/month, which is only 44% of total demand that Vancouver covers itself already. Besides, a new factory would add new overhead costs. So, even though the inventory and service crisis is most acute in Europe, and a new factory would go some ways in that regard, ultimately, there are more efficacious ways of solving the current problems. We think that the solution here lies with localization. Right now, the power supply module fitting and such is done as an aspect of FAT. The proposal out there now is to localize that piece of assembly within each Distribution Center. This could decrease the safety stock level and increase the capability to react to demand fluctuations. However, the DCs materials management systems have neither MRP nor BOM systems integrated within them. In order words, their systems are set up for distribution only, and what is more, their people are not adequately trained in the components assembly and the like. So, it seems sensible to recommend an amalgam of the two situations. Rather than localize at the factory, or at the DC, the localization could be done at a different facility just near the DC. That way, distribution can remain separate from manufacturing, while also taking aim at the problems the current setup engenders. B. Utilize air shipments for Europe: Right now, the cycle time through the all-important PCAT and FAT manufacturing stages is only one week. The transit time from Vancouver to San Jose (the US DC) is only a day. However, the transit time to the European and Asian DCs is 4-5 weeks! The kind of inflexibility this creates can easily create problems with imbalance. One way to reduce this is through the use of air shipments, but this option is expensive, but not prohibitively so. To illustrate that cost, please see the table below, where we assume that air freight adds 10% to the printers unit cost. This option would decrease HPs net income, certainly. But the bulk of the cost comes from the US. With the transit time to the US DC not an issue, the air option to Europe and Asia looks like it might prove to be a relatively inexpensive way to help mitigate the cost of the imbalance going on now. Opening up the air freight option for emergency and supplementary shipments looks like a good tool to give to managers. Based on Exhibit 4: Total Name St dev. mean Europe 23,109 6,244 Asia 1,932 750 North US 26,612 7,384 Approximation Revenue/ Cost 60% month 1,359,329 815,598 113,629 68,178 1,565,400 939,240 Air option Income/ month 543,732 45,452 626,160 Cost 70% 951,531 79,541 1,095,780 Income Income difference 407,799 135,933 34,089 11,363 469,620 156,540

Table notes: Price approximately equal $ 58.8 per unit (from the case 1990 year : Revenue $10 billion / sale 17 million units)

BADM 566 Supply Chain Management- write-up 3 Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Jiraphong Tisavipat Total 51,652 14,379 3,038,359 1,823,01 1,215,344 2,126,851 911,508 303,836 C. Do better forecasting: Our recommendation here links very closely with the recommendations in A and E. Management, in response to pressures from the service level/availability crowd, decided to operate the DCs in a make-to-stock fashion. As we learned in class, MTS is a great methodology for decreasing production and transport costs. And, there will always be a push system somewhere in the supply chain because you cant grow trees in response to a furniture order. But, though operating the push segment of your supply chain at the DC level might be good for some costs, it exacerbates the supply/demand mismatch cost. Putting the localization step intermediary to manufacturing can be a big help here, too. Localizing at the DC means customer orders could be designed to pull the system. That is to say, the localization change initiative should incorporate more Made-to-Order characteristics. Thus, the mismatch could be more effectively mitigated. We also recommend that HP establish an infrastructure (for example a web-based interface to enter the sales or demand) to gather real time data from the distributors and retailers. As a group member heard in a recent lecture by a IT VP from Wal-Mart, being able to accurately understand real-time inventory levels, worldwide, is extremely difficult, but very important. D. Reducing customer service by lowering fill rate: This option hits right at the heart of a primary objective, which is to decrease the cost of holding inventories. For instance, if you see the table below, decreasing the fill rate to the 90% will allow H-P to hold 6,306 less units per year in Europe, and nearly 15,000 units system wide. There are certainly cost savings to be gained from less storage, but more important are the benefits associated with having less working capital tied up in inventory. However, the printer market is extraordinarily competitive and becoming commoditized. This means that price is evermore the primary purchasing determinant. This increases the costs associated with, and thus the risk of stockouts. So maintaining the current safety stock philosophy that is already in place is our strong recommendation. H-P cannot afford to lose business based on service differentiating factors, because of the nature of the competition currently in place in printers. Exhibit 4 from the case Name Total mean 23,109 1,932 26,612 51,652 St dev L(Z) 0.0740 1 0.0514 9 0.0720 7 0.0718 4 Fill rate (amount of satisfaction) 0.98 Z (table B) 1.06 1.24 1.07 1.08 0.90 Z (table B) 0.05 0.33 0.08 0.09 Difference i 23,421 2,179 27,203 52,946 -6,306 -683 -7,310 -14,235

i 29,727 2,862 34,513 67,181

Europe Asia North US Total

6,244 750 7,384 14,379

L(Z) 0.370 0 0.257 4 0.360 3 0.359 2

E. Keep more inventories. Maintaining our fill rate and our level of service is very important, but there are better ways to do that than by simply keeping more inventories. The Europeans had not at the time been introduced to the Japanese supply chain miracle that is Kanban, and so it is easy for them to advocate for maintaining service levels by adding to holding inventories. However, Mr. Arkadia, having

Table notes: Price approximately equal $ 58.8 per unit (from the case 1990 year : Revenue $10 billion / sale 17 million units)

BADM 566 Supply Chain Management- write-up 3 Advancement Team 5: Yu Ting Tseng, Evren Ycel, Aslanbek Amrin, Nick Timmons, Jiraphong Tisavipat been at the frontlines of bringing Kanban to Vancouver, was correct that H-P needed to Meet customer needs with less inventory. Adding to inventories now will only make the existing imbalance worse. Crowded DCs will only become moreso, especially in Europe. And large amounts of capital will be unnecessarily tied up. The argument to keep more inventories is really not very strong at all, and we strongly recommend against doing so.

Table notes: Price approximately equal $ 58.8 per unit (from the case 1990 year : Revenue $10 billion / sale 17 million units)