Hewlett Packard Company Deskjet Printer Supply Chain (A) Group 8: Chengjiao Gan, Kenneth Chua, Weishu Mo,

Yuchen Cheng

Q1) What is the problem that is causing Brent to lose sleep? What is causing it? The problem is that in order to ensure a high availability of DeskJets, HP has to maintain and even enforce a high inventory in distribution centers, especially in Europe. But, in face with this problem, different parties in the company cannot get an agreement on what should the right level of inventory be. There are several reasons why the inventory has been raised so high in these years. First, as the printer industry is highly competitive, the manufacturers have relatively less control of the value chain compared to their customers (resellers). Their customers want to carry as little inventory as possible so as to reduce risk and holding cost. Thus manufacturers like HP will have to bear the burden of high inventory in order to maintain a high level of availability to resellers as well as to the end users. Second, there are many uncertainties that can affect the supply chain, including the delivery of incoming materials problems (late shipments, wrong parts, etc.), internal process problems (process yields and machine downtimes), and demand fluctuations. The first two sources of uncertainties result in delays in manufacturing lead time to replenish the stocks in the distribution centers. Demand uncertainties can lead to inventory buildup in distribution centers and backorders which will severely impact the availability of the printer. Finally, the lead time of DeskJet from forecasting, to production, and finally to selling them in the market is too long. The lead time is about 5-6 weeks, comprising factory cycle time of about a week, transportation time from Vancouver to the US distribution center in San Jose for about a day, and long shipping time to Europe and Asia for about 4-5 weeks. Long lead time will amplify the impact of demand uncertainty in the remote target markets, slow down the companys reaction to the changing market, and increase risks such as obsolescence. As for the difficulty to reach a consensus among different divisions to set an inventory goal, the main reason is that every party plays a different role in the company and has different immediate objectives in the whole business, thereby tending to protect their own interest. Production organization thinks distribution organization should do better in tracking and storing warehouses of inventory; distribution organization dislikes huge inventory and wants to charge for extra warehouse space. The marketing organization loves high inventory as it will reduce stock-out and lift total sales, in which marketings performance is measured against. In all, the key issue is how to maintain product availability while reducing inventory.
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Q2) There are a number of solutions proposed by various parties. What are they? What do you think of each? 1) Sales and marketing division advocates more inventories. It is because inventory costs do not enter into the P&L statements, but lost sales hurt their revenues. They are not concerned with the carrying cost, but rather the potential lost sales, which could hurt their divisions performance. 2) Traffic Department supervisor suggests the use of air shipment to transport the printers to Europe instead of shipping them over sea. We think it may be a good solution, because the current time it takes to ship from US to Europe is about 4-5 weeks, making up the bulk of the total lead time. The use of air shipment will definitely reduce the total lead time, improve the reaction to uncertainties and benefit the whole supply chain system. However, HP should also consider the high cost of air shipment, management cost and cost of switching shipment mode. 3) A student from Stanford University proposes to invest more into demand forecasting. The team strongly believes that demand forecast is an important part of a robust supply chain system. Since HP is facing a demand imbalance, which is caused by an inaccuracy of forecast, they should invest more resources into a superior forecast system. In fact, demand forecast can be significantly improved by simply having people go to Europe and get first-hand market information. However, we need to note that forecasting will never be correct as there will always be unexpected changes in the market. Instead, HP could consider modifying its supply chain system to be more demand-driven, like Zara, instead of forecasting driven. However, a demand-driven model requires shorter lead time, which is not easy to achieve either. 4) An internal taskforce has started to develop a safety stock methodology. We think this is a good way to improve the situation based on the current situation. The current safety stock may be too high, causing a high inventory. A good safety stock methodology may solve the problem to some extent. But as mentioned in the case, small changes may seem not useful, but big changes may not be accepted by management team. 5) Production organization simply proposes that distribution organization should do better in tracking store warehouses of inventory, because they cannot make the right product in a right amount. 6) Distribution organization hates the big inventory and want to charge a cost of extra warehouse space The above two suggestions are both from their own standpoints. It is a systemic
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problem that can only be solved at the systems level.

Q3) What would you recommend? What analysis can you use to support your recommendation?

Maintaining a high level of availability to customers while keeping inventory low was the main issue if we saw the problem as a whole. As introduced in the case, Vancouver prided itself as an almost stockless factory. Its manufacturing and distribution process was once very successful. However, when dealing with high-volume product like DeskJet, it got harder to replenish the DCs just in time to maintain the target inventory. We think that the concerns should come from two resources. One should be setting the right target inventory levels, and the other one should be ensuring that the DCs were replenished just in time. Seeking a Consensus The first difficulty of setting a proper inventory level was the difference of views between HPs resellers and the region organizers. As resellers wanted to carry as little inventory as possible, yet maintaining a high level of availability to end-users (consumers) was critical to them, the organizers wants 98% product availability which had been developed by marketing. To solve the problem, HP attempted to seek a consensus amongst the various divisions on the inventory level. As mentioned in Q1, the root cause of the inability to do so is because every department is measured against a different performance metric, which is not directly tied to the firms objective of maximizing profits. To ensure that every department has the firms best interest in mind, the senior management will have to step in to align every departments goal to the firms objective. By doing so, this will go a long way in helping to forge a consensus, and slowly but surely, lower the inventory level. For instance, the marketing department will not request for unreasonably high product availability unless it clearly outweighs the costs of high inventory carrying cost. Dealing with Demand Uncertainty Another difficulty of setting the right inventory level was the uncertainty of demand. The three major sources of uncertainty that could affect a supply chain are: (i) delivery of incoming material (ii) internal processes (iii) demand The manufacturing group in Vancouver has already helped to significantly reduce the
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uncertainties caused by delivery variability of incoming materials and on improving process yields and on reducing downtimes at the plant. Nevertheless, meeting varying consumer demand continues to remain as HPs biggest stumbling block, compounded by both long shipping times to DCs outside of North America and safety stock levels determined by judgmental rule-of-thumb. To this, the team proposes that HP implement a science-based safety stock system which would be responsive to demand uncertainties and replenishment lead times. Varying consumer demand could be forecasted by techniques, such as triple exponential smoothing model. This technique not only takes into account of trend, but also seasonality, which is manifested by the demand data shown in Exhibit 4. Here, we assume that the given data is the average monthly demand over a number of years. The exhibit shows that a significant number of instances where there were huge changes in demand in the space of two months. For example, for the Asian-Pacific Option A, demand dramatically tanked from 1002 in Mar to 6 Apr. Second, the team proposes the adoption of the base stock (T, S) policy in place of rule-of-thumb ordering. We believe that the proposed policy is appropriate as demand is probabilistic and that replenishment will take place on a regular basis. Outsourcing Other than setting the right level of inventory, it would always be helpful if the manufacturer can act according to the change of demand in a shorter period of time. There were also plenty of causes that HP didnt manage to do so. A significant one was the long shipment and custom clearing time, especially for Europe and Asia Pacific market. Instead of starting a sister plant in Europe, as mentioned in the case, our team proposes that HP consider outsourcing selected manufacturing processes. It would be an efficient method to solve the long shipment time problem. Besides, comparing to the huge capital expenditure of starting a new plant, outsourcing can be achieved faster with lower initial investment. Instead of worrying about whether the volume in Europe was large enough to justify such a site, the company could build outsourcing contracts with one or several plants with desirable manufacturing scales. It would also be alluring if the demand of the outsourcing product fell dramatically in the future, HP could still cut losses by ending contracts with the external manufacturers rather than suffering the great loss of shutting down a plant. Furthermore, when cheap manufacturers from China and other low-cost countries rose, the flexible characteristic of outsourcing contracts would enable the company quickly make use of it and save a lot of cost. The cost savings can be translated to lower product prices and raise HPs competitiveness.
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Localization The DeskJet printer fit well into the standard process that the DCs had envisioned. However, other products, such as personal computers and monitors, which integration was required, did not fit in so well. Since DCs were not capable of integrating those products, they would have to keep high level of the same model with additions of different destination country. The concerns about introducing the integration process in DCs are lacks of MRP and BOM explosion systems, and lack of adequate trained people. However, we think that the company should carefully estimate the effect of long lead time and high inventory level of these products. If, at some DCs, these products significantly limited the storing space thus increased the storage cost, the integration process should be introduced. Necessary money and training should be provided to ensure that this does not become a drag on productivity. Division of large DCs In regions like Europe and Asia Pacific, where demand data varied a lot between countries, the company could also consider breaking down some of the big regions into several small areas so that the demand forecast could be done separately to increase the preciseness. The correlation between these areas could be taken into consideration. The company could also consider setting up some smaller warehouse in those areas to react to the change of demand more quickly. Q4) What challenges might HP face in implementing your recommendation? Seeking a Consensus One key challenge that HP faces in implementing the recommendation is that the management has to carefully craft incentives to ensure that every department is aligned to the firms objective of maximizing profit. Senior figures in the departments have to be imbued with firms objective so that cross-departmental conflicts can be resolved with the interests of the firm in mind. While we have proposed that the distribution organization undergo training and build in processes to support manufacturing functions, HP could still face resistance from the organization as it could see itself taking on the work of others, in this case production department, that has been pushed to them. Dealing with Demand Uncertainty While we believe that the science-based safety stock system is a vast improvement over the existing rule-of-thumb ordering, implementation of the new system is not
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without challenges. A rule-of-thumb policy appeals to one because it is easily understood, even to the man on the street. Conversely, a science-based policy may, at least in the beginning, appear incomprehensible and foreign. To replace the rule-of-thumb policy that has been in place for the longest time with the science-based policy, it will take a while to get the buy-in of not only the management, but also the rank-and-file who will be implementing it. Furthermore, the demand forecasting comes with caveats. The longer the forecast horizon, the worse the forecast gets. As such, forecasts should be made at an aggregate level in order to obtain good projections. Additionally, correlations are also always not considered in the projections.

Outsourcing As mentioned before, outsourcing in Europe or Asia Pacific is a good method to solve the long shipment time problem. However, more uncertainty could fall on the manufacturing process as it is no longer under HPs direct control. To prevent it from exacerbating the already long lead time, the company should co-operation with outsourcing companies with good credit and build stable relationship with them to insure the productivity. There could also be some quality control issues since some customers would worry about the quality difference between the original company and the outsource factory. Moreover, even if the company was just outsourcing part of the manufacturing process, there may be some intellectual property and business secret concerns. Transportation and storage of critical parts should also be carefully arranged.

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