OM Assignment HP Inkjet Supply Chain Case Analysis

Operations 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

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 Companys 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.

June 24, 2011

Page | 2

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 HPs 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.

June 24, 2011

Page | 3

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 products 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)

Europe Options A AA AB AQ AU AY

Monthly Monthly Mean Std.Dev 42.3 420.2 15830.1 2301.0 4208.0 306.8 32.4 203.9 5624.6 1168.5 2204.5 103.1

Mean of Lead time demand 42.3 420.2 15830.1 2301.0 4208.0 306.8

SD of Lead time demand 32.4 203.9 5624.6 1168.5 2204.5 103.1

Safety Stock 66.6 419.0 11558.6 2401.3 4530.2 211.9

Total inventory 108.9 839.2 27388.7 4702.3 8738.2 518.7

Sum
Total Optimum Safety Stock = 19187.5 units

19187.5

42295.9

June 24, 2011

Page | 4

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.

Europe Options

Monthly Mean

Monthly Std. 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

42.3 420.2 15830.1 2301.0 4208.0 306.8

32.4 203.9 5624.6 1168.5 2204.5 103.1

42.3 420.2 15830.1 2301.0 4208.0 306.8

32.4 203.9 5624.6 1168.5 2204.5 103.1

Sum

66.6 419.0 11558.6 2401.3 4530.2 211.9 19187.5

21.15 210.1 7915.05 1150.5 2104 153.4

2643.8 26262.5 989381.3 143812.5 263000.0 19175.0

8322.8 52376.8 1444819.1 300158.4 566280.9 26483.8 2398441.9

10966.5 78639.3 2434200.4 443970.9 829280.9 45658.8 3842716.9

84.6 840.4 31660.2 4602.0 8416.0 613.6 46216.8

11051.1 79479.7 2465860.6 448572.9 837696.9 46272.4 3888933.7

Total Cost
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.

June 24, 2011

Page | 5

OM Assignment HP Inkjet Supply Chain Case Analysis

Europe Options

Monthly Mean

Monthly Std. 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

42.3 420.2 15830.1 2301.0 4208.0 306.8

32.4 203.9 5624.6 1168.5 2204.5 103.1

10.6 105.1 3957.5 575.3 1052.0 76.7

16.2 102.0 2812.3 584.3 1102.3 51.6

Sum
Total Cost/Month Ship: $3,888,933 Total Cost/Month Air: $1,594,952

33.3 209.5 5779.3 1200.6 2265.1 105.9 9593.8

5.2875 52.525 1978.763 287.625 526 38.35

660.9 6565.6 247345.3 35953.1 65750.0 4793.8

4161.4 26188.4 722409.6 150079.2 283140.5 13241.9 1199220.9

4822.3 32754.0 969754.9 186032.3 348890.5 18035.7 1560289.7

63.5 630.3 23745.2 3451.5 6312.0 460.2

4885.8 33384.3 993500.0 189483.8 355202.5 18495.9 1594952.3

Total Cost

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.

June 24, 2011

Page | 6

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.

June 24, 2011

Page | 7

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.

Europe Options A AA AB AQ AU AY Sum

At LIFR 90% Inv Safety Carrying Stock Cost of SS 20.7 2592.0 130.5 16312.0 3599.7 449968.0 747.8 93480.0 1410.9 176360.0 66.0 8248.0 5975.7 746960.0

At LIFR 95% Inv Safety Carrying Stock Cost of SS 26.7 3341.3 168.2 21027.2 4640.3 580036.9 964.0 120501.6 1818.7 227339.1 85.1 10632.2 7703.0 962878.1

At LIFR 98% Inv Safety Carrying Stock Cost of SS 33.3 4161.4 209.5 26188.4 5779.3 722409.6 1200.6 150079.2 2265.1 283140.5 105.9 13241.9 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 HPs 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 products 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 products cost to facilitate effective decision making.

June 24, 2011

Page | 8

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.

June 24, 2011

Page | 9

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.

June 24, 2011

Page | 10