Hewlett-Packard Company was founded by William Hewlett and David Packard, in 1939 and has its headquarters in Palo Alto, California. It grew consistently over the next fifty years. In 1990 HP had over 50 operations worldwide and was having the revenue of $13.2 billion and net income of $739 million. It was organised partially by product group and partially by function. HP has six product groups out of which the Peripherals Group was the second largest. Peripherals Group had set technological standards with many of its products and brought many new innovations, it was also recognized for its ability to identify and profitably exploit market opportunities. It's most successful product is the Desk Jet printer which was introduced in 1988. Its sales gradually went up and reached to 600000 units and $400 million in 1990.
The market was mature in the US and Western Europe but was still developing in Eastern Europe and in the Asia-Pacific region. The Vancouver division used the Kanban concept and converted the factory to stockless production and reduced the inventory and the cycle time, because of this no significant buffer inventories were kept. There were three sources of uncertainty that could affect the supply chain and this would lead to delays in the manufacturing lead time to replenish the stocks at DCs and because of this the DC's ability to respond to fluctuations in the demand was limited. There were some challenges with the distribution process and also the choice of inventory carrying cost to be used in safety stock analyses was one of the issues continuously coming up. The root of all the problems was horrible forecasting system. This report would highlight some the issues that HP is having along with the detailed analysis of the issues and the alternatives to the issues with final recommendation for Brent.
Key Issues
Issue 1: Lack of safety stock methodology/fluctuating demand/long lead time
(Satisfying customer needs in terms of product availability while minimizing inventory.)
There was lack of forecasting and this lead to long lead time creating high level of inventory, resulting to high costs.
Vancouver division couldn't build the right products in the right quantities.
It took 4-5 weeks to ship the printers to Europe and Asia, so it was difficult to carry as little inventory as possible, yet maintaining a high level of availability to end users.
There were three major sources of uncertainty that could affect the supply chain and this resulted to delays in the manufacturing lead time and it also lead to inventory buildup or backorders at the DCs.
Because of the long lead time, the DC's ability to respond to fluctuations in the demand for different versions of the product was limited.
To satisfy the customers, the European and Asian DC's had to maintain high levels of safety stock.
The goods were shipped by ocean, so it took 4-5 weeks to ship the product, which increased the lead time.
Magnitude of demand imbalance in Europe as they faced shortage for model demands from some countries, while inventory of some others model kept on piling up.
Issue 2: How to get agreement among various parties that they had the right level of inventory
Every DC had its own way and method of working so the functions of each DC were ungainly.
Europe was claiming that inventory levels there needed to be raised even further to maintain satisfactory product availability. All this was because of high demand fluctuations in European market. So Europeans needed higher levels of safety stock.
According to the European DC, there was the dip in product availability levels for some versions but Vancouver shipped more printers to Europe and so there was a concern that European's DC had run out of space to store Vancouver's products.
Production department was concerned about proliferation of models and options.
Issue 3: High Inventory carrying Cost.
Inventory carrying cost was used in safety stock analysis.
The target of the company was 98% which was developed by marketing
The inventory carrying costs varied from 12% to 60%.
Analysis
Qualitative Analysis
Desk Jet printer was HP's most successful product and its sales had been increasing steadily. During 1979 the cycle time for printer was 8-12 week and 3.5 months of inventory, and with this inventory the Vancouver division would be doomed to fail. HP had experience just in building low volume and highly customized products using batch processes but in the printer market, high volume process was required and this resulted in failure of HP- Vancouver Division. In 1982, Vancouver division executed Kanban concept and converted the factory to stockless production, it also reduced inventory from 3.5 months to 0.9 months, with drastic reduction in cycle time. Vancouver had not yet introduced a successful, high volume product that would take the full advantage of the advanced production line. But in 1988, it introduced the Desk Jet printer, a new model with near letter-quality resolution using standard paper.
The manufacturing of Desk Jet was done by HP in Vancouver; there were two key stages in the manufacturing process- PCAT and FAT. Customizing of the printers to meet the language and power supply requirement of the local countries was required because of "Localization Process", which included assembling the appropriate power supply model of correct voltage requirement and power cord terminator (plug) and also the manual written in appropriate language. The localization of the printer was performed at the factory as the design of the product was such that the assembly of the power supply module had to be done as part of the final assembly and test process. Therefore the factory consisted of the printers destined for all the different countries which were then sorted into three groups meant for North American DC, European DC and Asia-Pacific DC. In Vancouver, just the inventories of raw material were maintained to meet the production but no buffer inventories between PCAT and FAT stages were kept and even no finished goods inventory was maintained at the factory. Than from DC's the products were shipped to distributers, resellers and retailers. The goods were shipped through ocean which took 4-5 weeks for it to reach Europe and Asia, which result to long lead time. Because of the increasing pressure to provide high levels of availability at the DC's for reseller, management decided to operate the DC's in a make-to-stock mode. Manufacturing of the Desk Jet printer operated in a pull mode and the production plans were set to replenish the DC's "just-in-time" to maintain the target inventory levels. There were certain uncertainty that could affect the supply chain viz delivery of incoming materials, internal process and demand. The first two resulted in the delays in manufacturing lead time and the third lead to inventory buildup or backorders at the DCs. There were two major costs outbound - freight and salaries. In addition DC estimated the percentage of efforts to support a particular product line. The Desk Jet printer fit well into the standard process but it was different for other products so it was difficult to accommodate in the standard process and this disrupted the material flow. Moreover the DC's material management systems just supported distribution and not support manufacturing. Also they did not have MRP nor BOM explosion systems and the DC's were not having adequate people trained in component procurement. This created frustration within the distribution organisations as the top management stressed the DC's role as a warehouse and also needed to continue to do what they were best at- distribution. The progress made on improving process yields and on reducing downtime had been admirable, but still improvement of forecast accuracy was a difficult task. The magnitude of demand imbalances were prominent in Europe as the safety stock was calculated using the rule of thumb, so there was a need to revisit the safety stock rule. The company was having an issue of the choice of inventory carrying cost, as the estimate within the company ranged from 12% to 60% which gave rise to the choice of target line item fill rate to be used.
Alternatives
Alternative 1: Have a proper forecasting system- invest in getting a system and find ways to reduce the magnitude of demand uncertainties. Have a proper safety stock model same for all the DCs
Pros-
A proper system can be used to forecast the demand and have an idea of the trend depending upon the sales.
A proper forecasting method can reduce the variance and in turn reduce the fluctuation.
The safety stock model can clearly show what amount of safety stock is required and also help in minimising the inventory level
Cons-
Market in Europe was not mature so it was a bit challenging to forecast the demand accurately.
It is difficult forecast as the demand for printers is going to change with the change in technology.
For better forecasting a lot of employees are needed and this can increase the expenses of HP.
Alternative 2: Sending goods through Air shipment and also by having localization strategy and postponement strategy.
Pros-
The time is reduced, because if the goods are sent through ship, it took 4-5 weeks to reach.
In the current state the factory is localizing the products but if the manufactured goods are sent as it is to the DC and the DC does localisation, a lot of work load at the factory is reduced, and so the stock level is higher at DCs.
The freight costs would be reduced
Cons-
Cost is high for air shipment
Localizing the process at European market will increase the work load of the European DC.
Alternative 3: Increase the inventory level
Pros-
No shortage of goods
Can easily satisfy customers, with the product they want.
Cons-
Cost of maintaining the inventory will go high, like the holding cost.
With the new technology new printers would come so if there is a lot of old goods is going to be an overstock and loss to the company
Alternative 4: Start with e-commerce, online selling.
Pros-
No need for keeping the extra stock or inventory.
Can avoid the cost of storing goods, warehouse cost or the cost associated with the distributors.
Cons-
A professional will have to be hired to make the website.
Initial cost will be higher.
Recommendation and Justification
HP should use the localization strategy and let the DC perform all the process of changing the voltage plugs and manuals. This can help the company to save a lot of time and also save the work load of the factory. The problem of inventory can be solved if postponement strategy is used, that the product is customized at the end of the process, this may be attractive to build the generic portion of the product to stock. They can manufacture the printers without power supply and documentation, and postpone customization until the printers reach the DC in Europe. By pooling demand across countries, this policy can make more efficient use of safety stock and reduce obsolescence costs. This can reduce the warehouse charges of Vancouver and also the inventory cost is reduced and also the backorder can be reduced. The carrying or shipment charges will also be less because of compact package. Along with this the company can have cross trained employees who are capable of staffing multiple functions. The result of having cross trained employees is reduced staffing requirements relative to the same system staffed only by specialized workers. Along with that the company needs to make the shipment through Air so that the lead time of 4-5 weeks is reduced. If the lead time is reduced the customers can be served in a short time and the customer can be satisfied. Forecasting of the demand is a very tough job and also costly so it is better to minimize the inventory but satisfy the customers. R&D department should be sent for a visit of the European and Asian DCs to know for the demand and working of those DCs. The managers of all the DCs should be made to sit together and shown the change at Vancouver because of Kanban and try to explain the importance of reducing the inventory level and having a proper safety stock can help to reduce the cost and also the lead time and even the customers can be satisfied.
Conclusion
In this world of technology, it is tough to have a position in the market. The printer market for Deskjet printer is competitive, so HP needs to change the inventory management system, and provide customer satisfaction along with maintaining low level of inventory. The European market has still not reached at its maturity stage so there is a need of focusing on that market. This can be done by satisfying the customers with the services.
Refrences-
OM text book
Material provided for case 2 on slate.
