HP Deskjet Supply Chain

1. Evaluate performance of HP deskjet printer supply chain?
What are the causes behind

the problems faced at European DC?
HPs Deskjet Supply Chains main characteristics:
-
Centralized manufacturing (Vancouver)

DCs fulfilling pure distribution functions (with respect to Printer division)
Long ocean transit time
Kanban - lean manufacturing shifts inventory burden to DCs.
Major issues are uncertainty in following three aspects that could affect supply chain:
1) Delivery of incoming materials (late shipments, wrong parts, etc.)
2) Internal process (process yields and machine downtimes)
3) Demand (Forecast accuracy).
With efforts of manufacturing group in Vancouver has reduced uncertainty in first two
areas.
Major effect of demand uncertainty,
Inventory Imbalance - Some product options having excess inventory, while some others
having shortages.
They were failing in their objective of creating a best way to satisfy customer needs in
terms of product availability while minimizing inventory
Causes which resulted in above issue,

Localization, Many customized product options due to geography (Language / Physical
specifications)
Long DC replenishment lead time
Highly uncertain market (Higher standard deviation Exhibit 4)
Intuition (Thumb rule) based safety stock system
Initial incoordination among functions
Similar kind of inventory strategies for all the models
2. Determine optimal safety stock inventory level for European DC.

Assumption: - Manufacturing time of 1 week is not taken into consideration as a
additional lead time. All calculation are done on the basis of Lead Time=4-5 Weeks= 5
weeks (Max) =1.25 Months
Safety Stock Inventory = ZSL
x d
Here, SL = 98% (As required by Marketing department)

So ZSL = 2.5 (Approx. - For 99% Service level, ZSL=2.5)
Lead Time = Mean Sea Time = 1.25 months (5 weeks) -> As we have lead time and
standard deviation in the same time unit. We will calculate safety stock inventory for all
6 customized models in European DC.
Customized
Models
Avg. Monthly
Demand
Standard
Deviation of
Monthly Demand
42.3
420.2
15,830.10
2,301.20
4,208.00
306.8
32.4
203.9
5,624.60
1,168.50
2,204.60
103.1
A
AA
AB
AQ
AU
AY
Safety
Stocks
(Monthly)
90.56
569.92
15721.23
3266.06
6162.04
288.17
Sample Calculation :- 42.3*SQRT(1.25)*32.4 = 90.56
3. Evaluate option of shipping by air to European DC.

Lets first analyze impact of shipping by Air on Safety stock quantity. As Mean Air Time :
0.25 month (Given), We can perform the same calculation of safety stock for Lead time
of 0.25 months.
Customized
Models
A
AA
AB
AQ
AU
AY
Avg. Monthly
Demand
Standard
Deviation of
Monthly Demand
Safety
Stocks - Air
Shipping
(Monthly)
42.3
420.2
15,830.10
2,301.20
4,208.00
306.8
32.4
203.9
5,624.60
1,168.50
2,204.60
103.1
40.50
254.88
7030.75
1460.63
2755.75
128.88
Now, lets do some cost analysis.
Safety
Stocks Sea
Shipping
(Monthly)
113.20
712.40
19651.54
4082.57
7702.56
360.22
Reduction
in Safety
Stock
64.22%
Total Inventory Cost- (Q/2+SS)*H + (D/Q)*S

As there is no ordering cost, Total Inventory Cost- (Q/2+SS)*H
H= 0.25 $ / $ of inventory per year
Q= Avg. monthly demand (According Exhibit-4)
SS=Calculated In last problem
As lead time is 1.25 months, we have to include this duration to calculate inventory
holding cost.
Current Scenario- Sea Way for logistics movement
Custom
ized
Models
Avg.
Monthly
Demand
Safety
Stock
Total
Avg.
Inventory
Value of
Inventory
A
AA
42.3
420.2
113.20
712.40
134.35
922.50
67175.47
461248.64
AB
AQ
AU
AY
15,830.10
2,301.20
4,208.00
306.8
19651.54
4082.57
7702.56
360.22
27566.59
5233.17
9806.56
513.62
13783296.83
2616585.49
4903277.71
256808.29
Avg. Inventory
holding cost
Shipping
Cost
2820339.91
132968943.07
118737044741.6
9
4279074778.07
15026332661.53
41219060.45
84.6
840.4
2820424.51
132969783.47
31660.2
4602.4
8416
613.6
Total
118737076401.89
4279079380.47
15026341077.53
41219674.05
Total Cost
138219506741.93
Alternate Scenario- Air Way for logistics movement
Customi
zed
Models
Avg.
Monthly
Demand
Safety
Stock
Total
Avg.
Inventory
Value of
Inventory
42.3
40.50
61.65
30825.00
AA
420.2
254.88
464.98
232487.50
AB
15,830.10
7030.75
14945.80
7472900.00
AQ
2,301.20
1460.63
2611.23
1305612.50
AU
4,208.00
2755.75
4859.75
2429875.00
AY
306.8
128.88
282.28
141137.50
Avg. Inventory
holding cost
Shipping
Cost
118772.58
253.8
119026.38
6756304.71
2521.2
6758825.91
6980529301.25
94980.6
6980624281.85
213078000.02
13807.2
213091807.22
738036564.45
25248
738061812.45
2489974.24
1840.8
2491815.04
Total
Total Cost
7941147568.84
As we can see from the above tables, Shipment from Air ways (at rate of $6) can also
result in significant saving in terms of total inventory cost due to reduction in safety
stock(68%).
4. If you were Brent Cartier what would you do?

As Brent Cartier, I am having following four options based on case details,
-
Switch to air shipments of printers from Vancouver:

According to number given in problem handout, we have contribution of $166.67 /unit
(Sales-Cost). As shown in calculation of last problem, we can use Air shipping in times of
higher demand for specific customized products.
Build a European factory

European volumes are not sufficient to justify building a new factory
Hold more inventory at the European DC

Inventory is already a problem; more would only magnify the problem
Improve forecasting practices

Dr. Billy Corringtons team has created one data model, but it requires validation
over time.
One other strategy HP should focus on,

-
Ship Generic (Basic / Bare Model) printers to the European DC and localizing them
based on local demand
By having bigger inventory of Generic printer and creating a small unit to work on local
modification / customization, we can cater local demand with shorter lead time and
smaller safety stock of specialized models.
We can even further tweak this model by following current existing procedures for AB
model, which is having 68% share in total average monthly sales, and at the same time
localizing other models (A, AA, AQ, AU, and AY) in Europe.
Current: Factory-Localization
MFG
DC
Customers
European DC -Localization
MFG
DC
Customers

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1. Evaluate performance of HP deskjet printer supply chain?

What are the causes behind

Centralized manufacturing (Vancouver)

Causes which resulted in above issue,

2. Determine optimal safety stock inventory level for European DC.

Here, SL = 98% (As required by Marketing department)

Sample Calculation :- 42.3SQRT(1.25)32.4 = 90.56

3. Evaluate option of shipping by air to European DC.

Now, lets do some cost analysis.

Total Inventory Cost- (Q/2+SS)H + (D/Q)S

Alternate Scenario- Air Way for logistics movement

4. If you were Brent Cartier what would you do?

Switch to air shipments of printers from Vancouver:

Build a European factory

Hold more inventory at the European DC

Improve forecasting practices

One other strategy HP should focus on,

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