OM Assignment – HP Inkjet Supply Chain Case Analysis

Operations Management

Hewlett-Packard Inkjet Supply Chain

Case Analysis

Submitted By:

Puneet Pahuja 1114034

Puneet Poddar 1114035
Rajat Mehta 1114036
Srinivasa Raghavan R 1114049
Vikas Jain 1114057

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 OM Assignment – HP Inkjet Supply Chain Case Analysis

EXECUTIVE SUMMARY

This case study deals with Hewlett-Packard (HP), a famous manufacturer of computers and
peripherals. In the early 1990s, HP faced an “Inventory/Service-Crisis” for their DeskJet printer
product portfolio. Despite growing inventory levels at the distribution centres in Europe, resellers
were complaining of shortage of certain printer models. Presence of fierce competition required
the problem to be addresses immediately.

Brent Cartier, Manager for Special Projects in the Materials Department of HP Company’s
Vancouver Division, has been assigned the task to determine the possible solutions of the
supply chain problem faced by HP in Europe.

This case study analyzes the above problem statement in detail by evaluating various options
and alternatives available. 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.

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 OM Assignment – HP Inkjet Supply Chain Case Analysis

1. 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, Asia Pacific and North
America.

The performance of its supply chain at the manufacturing stage has seen considerable
improvements over past two decades, as is evident from the following developments:
a) Reduction in Cycle time from 8 -12 weeks to 1 week.
b) Converted the factory to “stockless” production with “No” finished goods inventory.
Earlier, HP used to hold 3.5 months of raw material inventory.

But, the performance of its supply chain was quite alarming in Europe compared to its North
American or Asia-Pacific distribution centers. The magnitude of demand imbalances was
alarming in Europe. It was quite common to have product shortages for model demands
from some countries, while inventory of some other models kept piling up. In order to
maintain, high availability to its customers, the European DC had to maintain high levels of
safety stock, which was not economical and marred its business performance.

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.
b) How to get agreement among various parties that they had the right level of inventory.

Following are the causes of the problems faced at HP’s European DC:

i. Higher Lead time: For the European DC, the supply chain was little complex. Since,
finished printers were shipped from Vancouver by Ocean; 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. Higher lead time leads to higher safety
stocks, which in turn adds to inventory carrying cost, and since HP was operating in a
price sensitive market, it can be disastrous to its business.

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 OM Assignment – HP Inkjet Supply Chain Case Analysis
ii. Demand Forecasting and Demand Uncertainties: It was a huge problem for the
European DC. Demand uncertainties could lead to inventory build-up or backorders at
the European DC.

iii. Budgeting Problem: Informal procedure of allocating overhead at the DC to different

product lines can lead to overestimate/underestimate of product cost. Without
determining product’s correct handling cost, any decision to increase/decrease Inventory
or change the shipping method cannot be arrived at fair level of accuracy.

iv. Inventory carrying cost calculation: There was no set inventory carrying cost value
used for calculating safety stock. Estimates used by the company ranged from 12% to
60%.

v. High service level: The target of 98% for LIFR (Line Item Fill Rate), developed by the
marketing department, could possibly be on higher side and therefore, could be reason
behind the increasing Inventory levels at European DC.

2. Determine optimal safety stock inventory level for European DC.

Transportation time by sea (Lead time) = 4 weeks (i.e.) 1 month.

Mean of Lead time demand = Monthly Mean * 1 (Lead time)
SD of Lead time demand = Monthly SD * Sqrt(1)

Mean of SD of Lead
Europe Monthly Monthly Safety Total
Lead time time
Options Mean Std.Dev Stock inventory
demand demand
A 42.3 32.4 42.3 32.4 66.6 108.9
AA 420.2 203.9 420.2 203.9 419.0 839.2
AB 15830.1 5624.6 15830.1 5624.6 11558.6 27388.7
AQ 2301.0 1168.5 2301.0 1168.5 2401.3 4702.3
AU 4208.0 2204.5 4208.0 2204.5 4530.2 8738.2
AY 306.8 103.1 306.8 103.1 211.9 518.7
Sum 19187.5 42295.9

Total Optimum Safety Stock = 19187.5 units

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 OM Assignment – HP Inkjet Supply Chain Case Analysis

3. Evaluate option of shipping by air to European DC

Following two options of shipping DeskJet printers have been evaluated:

1. Shipping by ship
In our calculations we have assumed that HP is transporting the printers by ship once a month.

Inventory
Inventory Total
Mean of SD of Carrying
Safety Average Carrying Inventory Freight
Europe Monthly Monthly Lead Lead Cost of Total Cost
Stock Cycle Cost of Carrying Cost per
Options Mean Std. Dev time Time Cycle per Month
(SS) Inventory Safety Stock Cost per Month
demand Demand Inventory
per Month Month
per Month
A 42.3 32.4 42.3 32.4 66.6 21.15 2643.8 8322.8 10966.5 84.6 11051.1
AA 420.2 203.9 420.2 203.9 419.0 210.1 26262.5 52376.8 78639.3 840.4 79479.7
AB 15830.1 5624.6 15830.1 5624.6 11558.6 7915.05 989381.3 1444819.1 2434200.4 31660.2 2465860.6
AQ 2301.0 1168.5 2301.0 1168.5 2401.3 1150.5 143812.5 300158.4 443970.9 4602.0 448572.9
AU 4208.0 2204.5 4208.0 2204.5 4530.2 2104 263000.0 566280.9 829280.9 8416.0 837696.9
AY 306.8 103.1 306.8 103.1 211.9 153.4 19175.0 26483.8 45658.8 613.6 46272.4
Sum 19187.5 2398441.9 3842716.9 46216.8
Total Cost 3888933.7

2. Shipping by Air
In our calculations we have assumed that Vancouver Mfg plant can send the printers to European DC by Air every
week. This implies that shipments will be sent to Europe 4 times a month, and therefore the lead time mean demand
and standard deviations for 1 week have been calculated accordingly.

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 OM Assignment – HP Inkjet Supply Chain Case Analysis

Inventory
Inventory Total
Mean SD of Carrying
Safety Average Carrying Inventory Freight
Europe Monthly Monthly of Lead Lead cost of Total Cost
Stock Cycle Cost of Carrying Cost per
Options Mean Std. Dev time Time Cycle per Month
(SS) Inventory Safety Stock Cost per Month
demand Demand Inventory
per Month Month
per Month
A 42.3 32.4 10.6 16.2 33.3 5.2875 660.9 4161.4 4822.3 63.5 4885.8
AA 420.2 203.9 105.1 102.0 209.5 52.525 6565.6 26188.4 32754.0 630.3 33384.3
AB 15830.1 5624.6 3957.5 2812.3 5779.3 1978.763 247345.3 722409.6 969754.9 23745.2 993500.0
AQ 2301.0 1168.5 575.3 584.3 1200.6 287.625 35953.1 150079.2 186032.3 3451.5 189483.8
AU 4208.0 2204.5 1052.0 1102.3 2265.1 526 65750.0 283140.5 348890.5 6312.0 355202.5
AY 306.8 103.1 76.7 51.6 105.9 38.35 4793.8 13241.9 18035.7 460.2 18495.9
Sum 9593.8 1199220.9 1560289.7
Total Cost 1594952.3
Total Cost/Month – Ship: $3,888,933
Total Cost/Month – Air: $1,594,952
where, Total Cost/Month = Inventory Cost/Month + Freight Cost/Month

Conclusion: HP can save an amount of $ 2,293,981 per month in inventory carrying costs when HP transports DeskJet printers by air
instead of sending printers by ship every month.

Assumption: Our assumption is that HP is shipping its printers only once a month. Also, 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. In case, 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.

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 OM Assignment – HP Inkjet Supply Chain Case Analysis

4. If you were Brent Cartier what would you do?

A) HP should send its DeskJet printers to European DC by plane, every week. As we

observed from calculations in Question no 3, HP can save an amount of $ 2,293,981 per month
in inventory carrying costs when HP transports DeskJet printers by plane instead of sending by
ship every month.

Sending the printers every week, by plane, would serve following purposes:

a) First, the lead time mean demand (1 week) and standard deviation would reduce, thereby
reducing the safety stock levels at the European DC and therefore reducing the inventory
carrying cost.
b) If by any chance the demand deviations go beyond the service level (98%) for any of the
products, then such fluctuations can be addressed by plane within 1 week, as compared to
4 weeks of ship.
c) Also, the manufacturing site of HP in Vancouver, need to send printer units equal to the
lead time mean demand. Thus the production plant does not have to anymore worry about
the deviations in the demand from DC. Any deviations in demand from mean will be
handled by the safety stock maintained at the DCs.

B) Setup Information Gathering systems: Since Eastern Europe is an emerging market, we

can fairly assume that with the passing time, the demands will change and the current demand
data available right now will become obsolete, particularly in the South east Asian region, which
is an emerging market.

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. This will ensure real
time update of the safety stocks levels at the distribution centers and the proper shipment
levels.

Also, 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.

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 OM Assignment – 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, it is possible that the Marketing Department is inflating target LIFR to 98%,
in-order to maximize their incentive.

For weekly shipping by plane, following table lists the safety stock levels and their inventory
carrying costs for different levels of LIFR.

At LIFR 90% At LIFR 95% At LIFR 98%

Inv Inv Inv
Europe Safety Safety Safety
Carrying Carrying Carrying
Options Stock Stock Stock
Cost of SS Cost of SS Cost of SS
A 20.7 2592.0 26.7 3341.3 33.3 4161.4
AA 130.5 16312.0 168.2 21027.2 209.5 26188.4
AB 3599.7 449968.0 4640.3 580036.9 5779.3 722409.6
AQ 747.8 93480.0 964.0 120501.6 1200.6 150079.2
AU 1410.9 176360.0 1818.7 227339.1 2265.1 283140.5
AY 66.0 8248.0 85.1 10632.2 105.9 13241.9
Sum 5975.7 746960.0 7703.0 962878.1 9593.8 1199220.9

From the table we see that, at high service levels, as we increase the service level (from 90% to
98%), the marginal utility of increasing the service level decreases rapidly because the Safety
Stock level increases and so is their cost.

Therefore we recommend that the Target LIFR rate should be revisited and chosen only after
cost benefit analysis of different service levels.

D) Formalize the process to determine product handling cost at DCs: Under HP’s current
system, the salaries at DC's were charged back to the product line using “percentage of
effort” method. In absence of any formal process, the estimated cost of a product may not be
correct, since products such as personal computers and monitors require extra processing. And
therefore it would be reasonable to say that percentage of effort required to handle DeskJet
printers could be less than estimated. Without determining product’s correct handling cost, any
decision to increase/decrease Inventory or change the shipping method cannot be arrived at fair
level of accuracy. Hence, HP should formalize the method of assessing product’s cost to
facilitate effective decision making.

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 OM Assignment – HP Inkjet Supply Chain Case Analysis

Average Selling Price = $400 Million/600,000 = 666.67

Average Cost Price (European DC) for shipping per month = 500 + 91.6 (Total Inventory
CC/Avg. Inventory) = 591.6
Profit = $75.06

E) Establish Assembly operations at European DC: Alternatively, We know that the products
such as personal computers and monitors go through integration at DCs, 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.

Therefore we recommend establishing an assembly process for all the DCs. This would require
hiring staff which are trained in material resource planning and BOM explosion systems and
component procurement. 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, thereby reducing the frustration of the
DCs.

b) The localization procedure for the printers, to meet the language and power supply
requirements of the local countries, done at the manufacturing site in Vancouver can also
be shifted to DCs thereby leaving them with manufacturing just raw printers. 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.

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. 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.
b) Lower lead time would address any demand fluctuations and reduce inventory carrying costs.

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 OM Assignment – HP Inkjet Supply Chain Case Analysis
Disadvantages:
a) This would leave excess capacity at the Vancouver plant.
b) We can fairly assume that fairly huge capital expenditure would be required for starting a new
plant.

More data should be collected to arrive at this decision. We know that the Eastern Europe
and South-East Asia are emerging markets. With increasing demand from these regions,
opening up a plant in Europe could make sense, particularly in Eastern Europe as this region is
attracting lot of investments due to its low operational costs.
This would possibly also free up manufacturing capacity at Vancouver to serve the South-East
Asian Markets.

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