Hewlett-Packards Deskjet Printer Supply Chain Cases (A) & (B) Discussion Guide & Answers Ranjan Ghosh

HPS DESKJET
Industry characteristics: competitive, fast growing, exploding in Europe, changing distribution channel, rapid technological advances. Product characteristics: quite, medium price, high print quality, leading technology, commoditylike, lighter and smaller, reasonable speed. Supply chain characteristics: centralized manufacturing, DCs fulfilling pure distribution functions, bulky products resulting in long ocean transit, lean manufacturing shifts inventory burden to DCs.

Inventory-Service Crisis
What crisis: inventory imbalance, i.e., some product options having excess inventory while some others have shortages.

What caused it:

many product options due to geography, long DC replenishment lead time, highly uncertain market, inflexible design : not easy to rework one option to make it into another, out of control inventory system, uncoordinated functional interests (manufacturing, distribution, marketing, engineering )

Curse of Product Variety

High inventory Poor customer service High manufacturing cost High cost of after-sales support Forecasting nightmare High obsolescence at end-of-life High overhead support

Short Term : Rationalize Safety Stock

Inventory control system used: Periodic review, order-up-to system. Key drivers of safety stock: 1. Service target 2. Variability: Std deviation of demand 3. Lead time 4. Review period

Safety Stock Example: Europe Option AB

Safety stock = Safety factor *Std. Dev of exposure demand
(Lead time + Review Period)*Std. Dev of Demand Mean weekly demand Std Dev of weekly demand Lead time (weekly) Review period Std Dev of exposure demand Safety factor Safety stocks Safety stock in weeks of supply 3653 2702 5 1 6619 1.89 12536 3.4

Longer Term Alternatives

Alternatives Air shipment European factory Universal model Product line restructuring Improve forecast method Shorten review period More inventory Drivers Affected Reduce lead-time Reduce lead-time Reduce variance Less headache Reduce variance Reduce review period Increase service

Factors to Consider
Air transport economics freight and frequency. Economies of scale for new factory in Europe. Tax implications for new factory. Investment opportunities. What is the key driver to safety stock? Can forecasting be improved significantly? Marketing implications for product line restructuring. Cost of inventory (holding, obsolescence ) Feasibility of universal option Supply sources of localization materials. Engineering requirement of localization Value of risk pooling.

Evaluating the Alternatives

Alternatives Air shipment European factory Universal model Product line restructuring Improve forecast method Shorten review period More inventory Effectiveness Very expensive Volume not high enough Excessive cost Cannot afford A dream Lose transport economics Deeper in the hole

DC Localization Strategy
Current: Factory-Localization
Mfg DC customers

DC-Localization
Mfg DC customers

Risk Pooling Analysis: Europe

Open A AA AB AQ AU AY Total Mean Monthly Demand 42 420 15830 2301 4208 307 23109 Std. Deviation Monthly Dem 32 204 5625 1169 2205 103 6244 Coefficient of Variation 0.77 0.49 0.36 0.51 0.52 0.34 0.27

Safety Stock Reduction ?

Alternative Current DC-Localization Aggregate Safety Stock (units) 21,414 13,129 Aggregate Safety Stock (Weeks of supply) 4.0 2.5

More Costs and Benefits (of DC-Localization)

Stock of localization materials higher at DCs. Lower value of transit inventory. Potential freight reduction. Investment to install localization capability at DCs. Quality assurance. Procurement of localization materials. Value of manufacturing local market presence. Potentials for other products. Customs and duties implications. Green effects.

How to Make it Happen

Needs R&D support for product redesign. Why are they resisting? Product working, Why touch it; no incentive. Needs DC support. Why are they resisting? Not part of job; risk of dropping the ball; no incentive. Shipping generic product efficiently. How? New packaging design. Needs investment localization lines, procurement system support at DCs.

What Happened?
Deskjet redesigned to be DC-localizable.
Implementation in early 1992. Millions of dollars saved, from inventory and service improvement, and freight reduction. Innovative packaging won patents. All Vancouver products now DC-localized. Vancouver as showcase for Design for Localization. Best practice spreads to other HP divisions.

Summary
Rationalized inventory management as a short term treatment of supply chain problems. Attack drivers of safety stock. Use of models to analyze strategies Postponement as a supply chain strategy. Cross-functional integration critical for successful implementation Look for every detail as an opportunity.

Inventory Analysis
_______________________________________________________________________________________________________ Europe Monthly Monthly Coeff of Weekly Weekly Mean Std Dev Safety Safety Safety Stock Options Mean Std Dev Variation Mean SD LT(wks) Exp Dem Factor Stock Wk of Sup A 42 32 0.77 10 16 5.0 38 2.18 83 8.5 AA 420 204 0.49 97 98 5.0 240 2.01 483 5.0 AB 15830 5625 0.36 3653 2702 5.0 6619 1.89 12536 3.4 AQ 2301 1168 0.51 531 561 5.0 1375 2.03 2790 5.3 AU 4208 2205 0.52 971 1059 5.0 2594 2.04 5294 5.5 AY 307 103 0.34 71 50 5.0 121 1.87 227 3.2 Total 23109 4376 0.40 5333 2102 5.0 5149 1.94 21414 4.0 Generic 23109 6244 0.27 5333 3000 5.0 7348 1.79 13129 2.5 ____________________________________________________________________________________________ Asia-Pac Monthly Monthly Coeff of Weekly Weekly Mean Std Dev Safety Safety Safety Stock Options Mean Std Dev Variation Mean SD LT(wks) Exp Dem Factor Stock Wk of Sup A 115 282 2.46 26 135 4.0 303 2.54 770 29.1 AB 332 266 0.80 77 128 4.0 286 2.16 617 8.1 AG 1006 604 0.60 232 290 4.0 649 2.06 1336 5.8 AK 31 23 0.76 7 11 4.0 25 2.14 54 7.6 AU 449 556 1.24 104 267 4.0 597 2.32 1382 13.4 Total 1932 507 0.90 446 243 4.0 544 2.17 4160 9.3 Generic 1932 750 0.39 446 360 4.0 806 1.89 1526 3.4 ________________________________________________________________________________________________________________ N.Am Monthly Monthly Coeff of Weekly Weekly Mean Std Dev Safety Safety Safety Stock Options Mean SD Dev Variation Mean SD LT(wks) Exp Dem Factor Stock Wk of Sup A 26432 7377 0.28 6100 3544 0.2 3882 1.46 5685 0.9 AB 146 130 0.89 34 63 0.2 69 1.94 133 3.9 AG 15 30 2.06 3 15 0.2 16 2.24 36 10.6 AK 16 24 1.45 4 11 0.2 12 2.12 26 7.0 AU 3 5 1.71 1 2 0.2 2 2.18 5 8.5 Total 26612 7328 0.28 6142 3520 0.2 3856 1.47 5885 1.0 Generic 26612 7384 0.28 6142 3547 0.2 3886 1.46 5680 0.9