OPERATIONS MANAGEMENT

CASE ANALYSIS:
HP DeskJet Printer Supply Chain.
Submission Date: 13th October, 2015

Submitted by Group 11
FATHIMA SAFNA MI
KUNAL KUMAR KEJRIWAL
PORIKA ANUDEEP NAIK
PRIYANSHI AGRAWAL
SAURABH DAS
CHANDAN KUMAR

1511243
1511257
1511266
1511269
1511281
1511238

Background of the Case

William Hewlett and David Packard founded Hewlett Packard (HP) in 1939. HP introduced DeskJet printer
in 1988 and in very short span of time it became one of the highly successful products of HP family. DeskJet
printer sales grew steadily and in 1990 it reached a level of 600,000 units of value $400 million. HP used
its Vancouver division for manufacturing of DeskJet printers. After that the printers were shipped to
distribution centers in US, Europe and Far East. HP was not able to properly forecast the real demand of
each version and it created piling up of some versions and stock out of some versions. HPs Europe
distribution center wanted to increase the inventory level even further so as to maintain product
availability satisfactorily.
Mr. Brent can use any of the three ways to solve the problem of mismatch of inventory across continents
and product categories.

Demand forecasting system improvement:

The solution for this will be based on some assumed variables and its accuracy will be very low
especially in industries like computer hardware and peripherals. Another important factor is the use
of sea freight for cross continent transportations that caused a lead time of 8-12 weeks. Forecasting
will prove to be a better tool in industries having stable product category and less lead time.

Lead time reduction

University professors have optimized the manufacturing set to be a stockless facility. Hence, we should
explore opportunities to reduce the freight time. The company currently uses sea as a mode of
transportation. Alternatively we can take aerial route. We have discussed below a qualitative analysis
for selection of a better option.

Optimization of safety stock inventory level

We need to develop agreement among various parties that they are carrying proper inventory level.

1. Develop an inventory model for managing the Desk Jet printers in Europe assuming
that the Vancouver plant continues to produce the six models sold in Europe.
As given in the case

Parameters
Lead time(In Weeks)
Review Period(In Weeks)

By Sea
5
1

By Air
1
1

Per unit Transportation cost(In Dollar)

10

30

Product Cost per unit(In Dollar)

400

400

% Inventory carrying cost

Service level

98%

12% to 60%
98%

Assumptions:
(a) The protection interval demand (Lead time+ review period demand) follows a normal
distribution. Thus the z-value at 98% service level is 2.054.
(b) Inventory carrying cost is 25% of the product cost(Opportunity cost)
(c) Currently Pipeline inventory model has been followed by DC.
(d) Max. cargo is equal irrespective of air freight or sea.
Improper inventory management has been observed from the case which lead to overflow and
underflow occurrences. Periodic review systems inventory model can tackle this issue.
For sea route, we have calculated Mean & standard deviation of 6 week demand(5 week lead time+1
week review period) and calculated service level of 98% i.e 2.054* (LT+R). For air route, we have calculated
Mean & standard deviation of 2 week demand(1 week lead time+1 week review period) and calculated
service level of 98% i.e 2.054* (LT+R)
Maximum orderable quantity = (LT+R) + z* (LT+R)
Average Total inventory = Max. Orderable quantity/2+Safety stock= Q/2+SS
Parameters
Inventory holding Cost(In Thousand Dollar)

By Sea
4984.5

By Air
545.6

Fright cost(In Thousand Dollar)

2487.4

1364.0

Difference(In Thousand Dollar)

2497.1

-818.4

Cost Benefit by choosing Air(In Thousand Dollar)

1678.7

It has inferred from analysis that there is capex saving of approx. 1678.7 thousand dollar if we will use
air freight instead of Sea mainly because of low inventory holding cost. Detailed calculation has given in
annexure 1.
We suggest to consider Air transport in their inventory model with better forecasting of stock.

By sea

Europe
Options
A
AA
AB
AQ
AU
AY
Total
Demand

By Air
Inventory
Inventory
Average
holding
Average
holding
Safety Max.orderable
Safety Max.orderable
Total
Cost(In
Total
Cost(In
Stock
quantity
Stock
quantity
inventory Thousand
inventory Thousand
Dollar)
Dollar)
78
137
147
15
45
65
78
8
493
1075
1030
103
284
478
524
52
13593
35511
31348
3135
7848
15154
15425
1542
2824
6010
5829
583
1630
2692
2977
298
5328
11154
10905
1090
3076
5018
5585
559
249
674
586
59
144
285
287
29
22564

54561

49845

4984

13028

23693

24874

2487

2. Compare your results in question 1 to the current policy of carrying one months
average inventory at the DC.
In the current policy, safety stock is a months worth of inventory as per the question. Hence based on
this the cyclical inventory will be half of months inventory. Now, since lead time by sea is 5 weeks. So,
pipeline time should be weekly data*5.
Reordering point (ROP) =
Carrying cost per unit (Cc) =
Carrying cost (CC) =

4* (weekly average demand)

0.25*400=100 dollar
ROP* Cc
Current process

Europe Options
A
AA
AB
AQ
AU
AY
Total Demand
Total inventory holding
cost(In thousand dollar)

New process in part 1

Safety
Stock

Cyclic
Inventory

Pipeline
Inventory

Total
Stock

Safety
Stock

Cyclic

Pipeline
Inventory

Total
Stock

42
420
15830
2301
4208
307
23109

21.15
210.1
7915.05
1150.6
2104
153.4
11554

49
485
18266
2655
4855
354
26664

112
1115
42011
6107
11167
814
61327

78
493
13593
2824
5328
249
22564

5
48
1827
266
486
35
2666

49
485
18266
2655
4855
354
26664

132
1026
33685
5745
10669
639
51895

6133

5189

Based on this our cost saving will be approx. 943 thousand dollar but cost in question 1 model will be
higher if we will consider review period as 4 weeks than EOP model developed in this question.

3. What are the different alternatives available to Brent that can improve the service
level? How would you tackle the inventory/service crisis?
According to our analysis Mr. Brent can have three alternative solutions:

a) Use of Air Transport in place of sea transport

The air freight charge is 2.5 times more than the sea freight charge, but the savings we will get
due to substantial reduction in lead time (from 5 weeks to 1 week) will nullify the effect of high
air freight.

The air freight option will also improve the forecasting capabilities of the company. Due to the
decrease of lead time, it will be quite easy to track the dynamic demand. Due to the effect of
aforesaid points we will be able to manage the inventory better across the value chain.

Air option will provide faster response time in case of fluctuation in supply & demand or delays/
shortages caused by damage of good in transit.

b) Cost analysis for different service level

LIFR value can be changed to 95% of 90% which will reduce the safety stock that HP is maintaining due
to demand fluctuation. The cost for different service level has given in appendix B.

c) Localization Approach
In localization approach we will assemble the appropriate power card and terminator module as per
the country. We will also put manuals in the appropriate language. We propose that at the distribution
center, we put a limited assembling workflow and create a part manufacturing type setup. We can
assemble power modules, power cards and manuals at the DC and then distribute it for retailing. This
will decrease the non-optimum inventorys profitability across varieties along with providing the
customers an optimized product.

For detailed calculation with formulae, Kindly refer attached excel sheet.

HP Deskjet
calculation.xlsx

Appendix 1: Inventory & cost calculation for transportation through air & Sea

Inventory Analysis-By Sea

Europe
Options

Avg.
Monthly
demand(d
)

Monthly
std.
deviatio
n

Ave.
Weekly
Deman
d (d)

Weekly
std.
deviatio
n

Mean of
Protectio
n Interval
Demand(
6 Weeks)

Std. Dev.
of
Protectio
n Interval
Demand

Servic
e
Level

Safety
Stock

Max.order
able
quantity

Average
Total
inventor
y

Inventor
y holding
Cost(In
Thousan
d Dollar)

Fright
cost(In
Thousan
d Dollar)

Week
s of
safety
stock

42

32

10

16

59

38

2.05

78

137

147

15

8.0

AA

420

204

97

98

582

240

2.05

493

1075

1030

103

11

5.1

AB

15830

5625

3653

2702

21919

6618

2.05

13593

35511

31348

3135

355

3.7

AQ

2301

1169

531

561

3186

1375

2.05

2824

6010

5829

583

60

5.3

AU

4208

2205

971

1059

5826

2594

2.05

5328

11154

10905

1090

112

5.5

AY

307

103

71

50

425

121

2.05

249

674

586

59

3.5

Total
Deman
d

23109

22564

54561

49845

4984

546

4.2

5333

31997

Inventory Analysis-By Air

Europe
Options

Avg.
Monthly
demand(d)

Monthly
std.
deviation

Ave.
Weekly
Demand
(d)

Weekly
std.
deviation

Mean of
Protection
Interval
Demand(6
Weeks)

Std. Dev.
of
Protection
Interval
Demand

Service
Level

Safety
Stock

Max.orderable
quantity

Average
Total
inventory

Inventory
holding
Cost(In
Thousand
Dollar)

Fright
cost(In
Thousand
Dollar)

Weeks
of
safety
stock

42

32

10

16

20

22

2.05

45

65

78

4.6

AA

420

204

97

98

194

139

2.05

284

478

524

52

12

2.9

AB

15830

5625

3653

2702

7306

3821

2.05

7848

15154

15425

1542

379

2.1

AQ

2301

1169

531

561

1062

794

2.05

1630

2692

2977

298

67

3.1

AU

4208

2205

971

1059

1942

1498

2.05

3076

5018

5585

559

125

3.2

AY

307

103

71

50

142

70

2.05

144

285

287

29

2.0

Total
Demand

23109

6244

5333

13028

23693

24874

2487

592

2.4

10666

Appendix 2: Carrying cost calculation at different service levels.

Safety Stock for Sea

98% service level

Service Level

SS

SS carrying
cost

A
AA
AB
AQ
AU
AY
Total

78
493
13593
2824
5328
249
22564

7830
49275
1359263
282384
532772
24916
2256441

95% service level

SS

SS carrying
cost

63
395
10886
2262
4267
200
18072

6271
39465
1088638
226162
426699
19955
1807190

90% service level

85% service level

SS

SS carrying
cost

SS

SS carrying
cost

49
307
8482
1762
3325
155
14080

4886
30748
848188
176210
332453
15547
1408032

40
249
6860
1425
2689
126
11387

3951
24867
685958
142507
268866
12574
1138723

Safety Stock for Air

98% service level

95% service level

90% service level

85% service level

Service Level

SS

SS carrying
cost

SS

SS carrying
cost

SS

SS carrying
cost

SS

SS carrying
cost

A
AA
AB
AQ
AU
AY
Total

45
284
7848
1630
3076
144
13028

4521
28449
784771
163035
307596
14385
1302757

36
228
6285
1306
2464
115
10434

3621
22785
628525
130575
246355
11521
1043382

28
178
4897
1017
1919
90
8129

2821
17752
489702
101735
191942
8976
812928

23
144
3960
823
1552
73
6574

2281
14357
396038
82276
155230
7259
657442