Case Analysis of HP DeskJet Printer Supply Chain

Submitted to Professor Jishnu Hazra Indian Institute of Management, Bangalore

Submitted By Group Number # 1 Gopikrishnan V (1011316) Shravan Chandra Sharma (1011355) Siddharth Parthasarthy (1011360) Tejas Kulkarni (1011367) Umang Agarwal (1011368)

1. SITUATIONAL ANALYSIS
Market & the Product HP s one of the most successful product the DeskJet printer was introduced in 1988. North America, Europe and Asia-Pacific formed the three broad markets for this product. HP s DeskJet line of printers operated in the 2000 million (10 Billion x 20%) global market of inkjet printers. HP s revenue in this category was close to Rs 400 million (in 1990) of which 111 million was contributed by the European Market. The product offering was similar across regions with localization mostly limited to the power pack and the manual. European market comprised 6 similar offerings. Value Chain HP DeskJet printer s value chain comprised of four nodes (a) Suppliers (b) Manufacturing (c) Distribution centers and (d) Dealers. Manufacturing was based out of a single unit located in Vancouver (USA). Production unit maintained adequate safety stocks for raw materials. Production was based on Kanban concept. Production unit did not carry inventory and functioned on made to order scheme to replenish stocks at Distribution centers. Supply variability was minimal due to Kanban and safety stocks. Stocks produced at the Vanucouver unit were shipped to three distribution centers one in each region i.e. North America, Europe and Asia Pacific. The entire supply chain process involved 1 week of factory cycle time. For transportation to places within the US, it took an additional day whereas for orders outside the US (Europe and Asia), there was additional 4-5 weeks due to ocean transit and time to clear customs and duties at port of entry.

Process The manufacturing stage consisted of PCAT (Printed Circuit Assembly and Test) followed by the FAT (Final Assembly and Test). The former included assembling and testing electronic components to make logic boards while the latter included assembly of peripherals likes motors, cables etc and the printed circuit assemblies. Process flow diagram for DiskJet production is presented below:

PCAT
Inputs
IC Mfg

FAT
Finished goods
Print Mech Mfg

Final assembly and testing brings in localization and differentiates products sold in different region. Shifting FAT operation to regional distribution center would allow for homogenization of output Ex-factory (generic) and this would provide an opportunity to lower inventory levels at the distribution center on account of reduced variance in demand.

Distribution Centers and Dealers Distribution centers and dealers are region specific. Given the highly competitive nature of printer industry, high service levels were critical. This essentially translated to high inventory levels in the supply chain. Dealers carried minimal inventory and most of the inventory was held at the distribution center. The inventory at the distribution center was in finished good form. Safety stock at distribution center primarily covered for demand variation. High demand variation owing to the nascent nature of the industry, some distribution centers were overflowing with DiskJet pallets, others claimed that inventory levels needed to be raised further to ensure sufficient supply availability. Long lead times further worsened the situation.

2. PROBLEM STATEMENT
Improve supply chain efficiency of HP Diskject Printers

3. OBJECTIVES
The purpose of this analysis is to come up with recommendations to Lower inventory in European region Lower distribution costs (Warehousing + Freight ) to European Region Maintaining desired serviceability levels.

4. CRITERIA FOR EVALUATION

The various criteria for evaluation of options are: 1. Distribution costs reduction 2. Average inventory level reduction 3. Initial investment requirements

5. OPTION GENERATION
Based on the situational analysis, following options have been considered for evaluation.
1. Option A : As it is : no change 2. Option B: Air freighting finished products to Europe 3. Option C: Setup a factory in Europe to perform the Final Assembly and Test (FAT) only 4. Option D: Setup a factory in Europe to perform FAT operations and air freight partial FG Other options like setting up a full-fledged factory at Europe and/or improving demand forecasting systems were not considered in scope of the analysis

6. ASSUMPTIONS
In order to evaluate the options, the following assumptions have been made: 1. The following cost estimates have been made: a. Product cost: $400 b. Sea freight cost: $9 c. Air freight cost: $32 2. The inventory cost estimates by the company have been assumed to be the true range. 3. The freight costs of partially finished goods have been taken equal to that of the fully finished goods. 4. Vancouver unit has capacity to meet demand in the long term

7. EVALUATION OF OPTIONS
As previously mentioned, there are 3 options that HP can consider apart from it s as-is position. In this section, we would like to present calculations for the costs associated with each of the options. Since the lead time associated with air freight (Option B) is significantly less than the sea freight, we need to calculate the average inventory levels per month under the new assumptions of the model. The table below shows details these calculations for each options.

42.3 32.4 0.25 1.25 98 2.05 39.7 81.5 86.8 42.3 32.4 0.25 0.25 98 2.05 22.9 47.1 52.4 Sea reight ase Units d
d

l r

verage nventory

= d x

2 ss

ut

10146.9

3727.5

348.7

1984.6

188.1

a.

Option A: As it Is : no change

The table below details the cost calculations for this option where HP continues with its current method and levels of inventory management Description Average Demand p.m Freight cost per unit Total Freight Cost p.m Average Inventory p.m Min Inventory Cost p.m Max Inventory Cost p.m Warehousing Cost min Calculation (a) (b) (c)= (a) x (b) (d) (e) (f) (g) = (e) x (d) Units units USD USD USD units units USD Option A 23108.6 9 207977 26374 48 240 1265971

 

Safety stoc

Standard Deviation (

l r= d x

s rt(

ut ut

3977.2 8168.1

1558.9 3201.5

144.2 296.1

826.2 1696.9

72.9 149.8

9. 44 .

ss = Z x

   

 

     

 

Standard Deviation e view period e ad time Desired service level Safety factor

 

verage

o nthly Demand

d
d

ut month ut month months months ( )

5624.6 0.25 0.25 98 2.05

2204.6 0.25 0.25 98 2.05

203.9 0.25 0.25 98 2.05

1168.5 0.25 0.25 98 2.05

103.1 0.25 0.25 98 2.05

44 . .

 

ir reight ase

Units

Product wise manufacturing for u rope U Q 15830.1 4208.0 420.2 2301.2

Y 306.8

Total 2 .

verage nventory

"

Safety stoc

ss = Z x

l r

ut ut

14147.6 16126.4

5545.2 6071.2

512.9 565.5

2939.1 3226.8

259.4 297.7

2 4 . 2

= d x

2 ss

4.4

eneric Prod 2 .

     

Standard Deviation (

l r= d x

s rt(

ut

6888.7

2700.1

249.8

1431.1

126.3

4 . . 94.

244. .2 .2 9 % 2.

9 .2

 

     

 

Standard Deviation e view period e ad time Desired service level Safety factor

 

verage

o nthly Demand

ut month ut month months months ( )

5624.6 0.25 1.25 98 2.05

2204.6 0.25 1.25 98 2.05

203.9 0.25 1.25 98 2.05

1168.5 0.25 1.25 98 2.05

103.1 0.25 1.25 98 2.05

 
244. .2 .2 9 % 2.

Product wise manufacturing for u rope U Q 15830.1 4208.0 420.2 2301.2

Y 306.8

Total 2 .

eneric Prod 2 .

"

   

Warehousing Cost max Total cost min Total cost max

(h) = (f) x (d) (i) = (c) + (g) (j) = (c) + (h)

USD USD USD

6329855 1473948 6537833

The total minimum and maximum costs are important when we will compare the option with others.

In the present option, we evaluate the absolute costs based on the assumption that the airfreight will cost HP $32 per unit vs. $9 that we assumed in sea freight. In this case, since the lead time will reduce significantly. The inventory calculations previously displayed give an average monthly inventory level of 16,448. Again, performing a similar set of calculations for the total costs as Option A yields Description Average Demand p.m Freight cost per unit Total Freight Cost p.m Average Inventory p.m Min Inventory Cost p.m Max Inventory Cost p.m Warehousing Cost min Warehousing Cost max Total cost min Total cost max Calculation (a) (b) (c)= (a) x (b) (d) (e) (f) (g) = (e) x (d) (h) = (f) x (d) (i) = (c) + (g) (j) = (c) + (h) Units units USD USD USD units units USD USD USD USD Option B 23108.6 32 739475 16448 48 240 789510 3947549 1528984 4687024

(FAT) only For this option, the inventory level assuming a sea freight has been performed previously leading to an average inventory per month of 18,594. We will consider only the costs associated with shipping and storing inventory here due to lack of availability of data on the new factory setup. Thus, the costs only for inventory excluding the capital investment are as follows

c.

Option C Setting up a factory in Europe that would perform the Final Assembly and Test

b.

Option B Air freighting finished products to Europe

Description Average Demand p.m Freight cost per unit Total Freight Cost p.m Average Inventory p.m Min Inventory Cost p.m Max Inventory Cost p.m Warehousing Cost min Warehousing Cost max Total cost min Total cost max

Calculation (a) (b) (c)= (a) x (b) (d) (e) (f) (g) = (e) x (d) (h) = (f) x (d) (i) = (c) + (g) (j) = (c) + (h)

Units units USD USD USD units units USD USD USD USD

Option C 23108.6 9 207977 18594 48 240 892518 4462589 1100495 4670566

FAT operations there This case is similar to the previous one apart from the freight method. This leads us to a different inventory level due to the difference in lead time. The cost calculations without the capital investment required to create a setup for finishing the goods in Europe are as follows

&

d.

Option D Air Transporting partially finished goods and setting up a factory to perform

Description Average Demand p.m Freight cost per unit Total Freight Cost p.m Average Inventory p.m Min Inventory Cost p.m Max Inventory Cost p.m Warehousing Cost min Warehousing Cost max Total cost min Total cost max

Calculation (a) (b) (c)= (a) x (b) (d) (e) (f) (g) = (e) x (d) (h) = (f) x (d) (i) = (c) + (g) (j) = (c) + (h)

Units units USD USD USD units units USD USD USD USD

Option D 23108.6 32 739475 11956 48 240 573896 2869482 1313371 3608957

8. RECOMMENDATIONS
Average n ventory u nits 2 3 n ventory reduction % Annual Distribution cost Distribution Cost saving % m illion U D Capital n vesment 22% 28% 3 % - il High High

Option

Description

Considering the various options above, we see that inventory reduction and distribution cost saving is maximum in option D. Thus, from a purely operational perspective option D should be chosen. However initial capital investment in option C and D is unknown to us. High initial capital investment for setting up a sophisticated EU sub-assembly unit would result in high amortized cost of the capital investment over an extended period of time. After considering these costs we expect option C and D would overall be more expensive than option B. Option B also results in a 38% inventory reduction and 22% distribution cost saving at no additional capital investment. Taking both financial and operational considerations into account, we recommend that option B should be pursued.

77

2 .

17 44 8

EU ub assembly Air reight

EU sub assembly

2 %

3 .

74 38

Air reight

38%

3 .3

14 33

'

As - s

8.

'

) (

) (

'

21 3

' 0 9