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Hewlett-Packard Company DeskJet Printer Supply Chain (A) Case Solution
The following write-up focuses on the supply chain crisis currently being faced by Hewlett-Packard, particularly in European region by exploring various options available to its Manager for Special Projects, Brent Carter. The available options include switching to air freight from ocean freight, using a delayed differentiation method while manufacturing, opening up a manufacturing facility in Europe, and last improving the safety stock calculation method. All these options are explored based on their impact on meeting top management’s expectation of reducing inventory levels while maintaining a 98% item fill rate.
Following questions are answered in this case study solution:
What are the industry characteristics, the product characteristics and the supply chain characteristics?
What has caused the so-called “Inventory / Service Crisis”?
List the important “drivers” of safety stock.
What are the pros and cons of the following proposals mentioned in the A case: a European factory, better forecasting, more inventory.
What is delayed differentiation and how can HP use this concept to address the problems described in the case above? How can the advantages of delayed differentiation be quantified?
How would you evaluate the various alternatives available to Brent Cartier to address the inventory and service problem? For your analysis assume that the DCs follow a periodic review policy and place weekly replenishment orders, and the target item fill rates are 98%.
a. Assess quantitatively the air freight option relative to current operations. Just consider the products for the European market. Do not forget to consider pipeline inventory (since HP owns the pipeline inventory from Vancouver to Europe).
b. HP wants to minimize inventory while still achieving at least a 98% fill rate.
Hewlett Packard Company DeskJet Printer Supply Chain A Case Analysis
1. What are the industry characteristics, the product characteristics and the supply chain characteristics?
i. Industry Characteristics
The printer industry, across the globe, is highly competitive. There were various brands in each region that dominated the market. For example, HP was the market leader in the United States, Canon in Japan; whereas, Epson and Siemens were major players in European region. Because of the high competition, the product loyalty was considerably low. Customer preferences were driven by cost, reliability, quality, and availability of stock.
ii. Product Characteristics
The DeskJet printer, introduced in 1988, is one of the HP’s most successful products of all time. The printer had the capability of printing near letter quality resolution prints on a standard paper, which was a major factor of its success in the market. In addition to this, HP also used localization technique to make its product popular in the European region by incorporating appropriate power supply model and accurate manual in local language of that country.
iii. Supply Chain Characteristics
The supply chain network for any HP product included suppliers, manufacturing sites, distribution centers, dealers, resellers, and customers. HP had a sophisticated supply chain network with manufacturing site in Vancouver and distribution centers in US, Europe, and Asia. Products were shipped via ocean to three distribution centers; therefore, the transportation time was 4 – 5 weeks for Europe and Asia and one day for US. HP keeps a target inventory level of each product in the distribution center based on the forecasted sales plus safety stock so as to meet all customer demands.
2. What has caused the so-called “Inventory / Service Crisis”?
HP was using a rule of thumb for determining safety stock level and target item fill rate was kept at 98% because of the marketing department’s preference. This made the top management at HP realized that their supply chain network was filled with unproductive assets. In some regions, particularly Europe, the distribution center was not able to meet demands of customers for popular products; whereas, there were piles of other products. The company was facing a tough time in maintaining the right balance of inventory, and the safety stock level was not high enough in many cases. Supply chain partners in Europe, especially sales people, were demanding increased shipments of product, which was not a feasible option for the head office because high level of inventory was increasing the inventory management cost and shrinking the manufacturer’s margin. The company was in a dilemma of how to manage the inventory levels so as not bear high inventory cost, but on the same time meet all customers’ demands.
3. List the important “drivers” of safety stock.
HP calculated its safety stock based on a rule of thumb rather than a valid scientific approach, which resulted in shortage of particular products at the distribution center. The safety stock was determined based on the forecasted sales of that region plus additional stock in case of some delays. Ideally, the safety stock should have been calculated based on demand uncertainties and replenishment lead times i.e. total time required for in-house production plus the transportation time. So for HP there were various drivers for safety stock, which are as following:
Production time– time required to manufacture a product in factory.
Transportation time – time required to ship a product from a company’s manufacturing site to the regional distribution center.
Inventory carrying cost– the annual cost of maintaining a desired inventory level.
Target item fill rate – availability of a particular product line in local distribution center. Currently set at 98% based on the marketing department’s preference.
Stock-out cost – the cost of losing a customer/revenue because of unavailability of the product.
4. What are the pros and cons of the following proposals mentioned in the A case: a European factory, better forecasting, more inventory.
i. Benefits of Opening a Factory in the European Region
First of all, it would resolve all issues of lead times as the company would be in a better position to deal with all demand uncertainties. Secondly, besides a different power voltage system, there were multiple languages in Europe and each required a different product manual. A factory in Europe would be in a better position to incorporate such demands and the distribution center of the Europe would be allowed to operate on its strength i.e. work as a warehouse rather than a facility to support the assembly process. Third, a factory in Europe would also be able to fulfill varying demands of Asia Pacific region as the transportation time from Europe to Asia would be considerably less as compared to Vancouver to Asia. Furthermore, a European site would also allow the company to deal with future demands of the region and become an important player in the industry by competing head to head with European manufacturers.
ii. Downsides of a Factory in the European Region
Though, there are many long term potential benefits of opening a manufacturing site in the European region, but it should be kept in mind that the company will have to make a huge investment in building such a facility. In addition to this, there is also a doubt on the future demand i.e. will the volumes be high enough to justify a site.
5. What is delayed differentiation and how can HP use this concept to address the problems described in the case above? How can the advantages of delayed differentiation be quantified?
i. Delayed Differentiation
It is basically a supply chain management concept where the company produces family or generic products at the start of the manufacturing process and then differentiates those products into a specific end product.
ii. Application at Hewlett-Packard
From the case study, it is apparent that HP is having a hard time in meeting demands of certain products, particularly in European region because of high uncertainty in demand. In addition to this, the safety stock method currently being used at HP has resulted in high inventory levels of unpopular products, which has significantly decreased the profit margin. Considering this issue, delayed differentiation method can be used in this regard as if HP fails to improve its demand forecast mechanism, it will still be able to meet the final demand of customers.
If HP uses an aggregate demand information method, then it can quantify the advantages of delayed differentiation to a great extent. It is easier to forecast a demand of a particular region rather than of a country similarly it is also possible to determine the demand of a particular product family rather than of a specific end product.
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