About Hewlett Packard
HP founded in 1939 by William Hewlett and David Packard
1990 revenues $13.2 B and profit $739 M
Then, a manufacturer of electronic test and measurement equipment
Now, mostly manufactures computers and peripherals
Peripherals is the second largest group among six product groups
Peripherals: Printers, Plotters, Magnetic disc and tape drivers, Terminals and Network products
Printer Supply Chain
Synopsis of the Case In the given case during the early 1990s, the famous manufacturer of computers and peripherals, Hewlett-Packard (HP), faced several severe problems concerning the inventory management of its very successful DeskJet printer. The printer was produced in HP’s
production facility in Vancouver. The completely finished product was sorted there and then shipped to one of the three distribution centers in North America, Asia and Europe.To guarantee high product availability to the dealers, HP operated its distribution centers (DCs) in a make-to-stock mode. Therefore the DCs acted as inventory stocking points between the manufacturing site and the dealers who sell the printers to the end-customer.Under increasing competitor’s pressure the DCs were forced to hold extremely high safety stocks
to ensure high service levels. Despite the high safety stock not all customer demands could be satisfied. This led to what HP called the “Inventory/Service Crisis”.One of the basic
causes of the crisis was the magnitude of forecast errors. Besides this, safety stock levels were determined by a judgemental rule of thumb which, together with the inaccurate forecasts, resulted in simultaneously high inventory levels and high backorders. The inventory policy was not based on any scientific rule. Furthermore, neither the choice of inventory carrying costs nor the choice of the target line item fill rate as key figures for a sensible and rational inventory policy was defined clearly. Inventory carrying estimates were between 12% and 60% whereas the company target fill rate of 98% was developed by marketing without taking into consideration the effects this rate had on the production and distribution process. There was no coordination between the different divisions of HP and the inventory policy did not implement the figures accurately.Due to the long lead time of 4 to 5 weeks caused by ocean freight, the DCs were not able to react flexible enough to unexpected changes in product mix and consumer needs. In the fast-moving computer technology market products tend to become obsolete within a short time. The inflexible transportation mode is not able to cope with that, thereby causing high inventory levels but at the same time high backorders because the inventory stored does not correspond to the latest trends in the market. Another reason for accumulated inventory at the DCs was that the Profits & Loss statements of HP did not show the impact of inventory holding explicitly. What stroke immediately were the consequences of lost sales which reduced revenues. The
cost accounting and financial reporting were not transparent enough to dispose processes effectively.As the different markets, especially in Europe and Asia, have different requirements for the printer, the product has to be manufactured in many different variants. Although it is the same product in each country, the localization leads to variety which is another reason for high inventory levels. The need for adding country specific power supply modules with the correct voltage and plugs as well as the appropriate manual in a specific language to the printer makes determining appropriate demand-tracking production volumes difficult. It is easier to forecast the total demand of all three markets for a generic product than to forecast country specific demand. In order to reduce inventory and improve the service level resulting in the realization of HP’s mission statement to become a “Recognized World Leader in Low Cost Premium Quality Printers”, countermeasures have to cover the three main uncertainties affecting the supply
chain: 1. Delivery of materials (wrong parts, late shipments) 2. Internal process (process yields and machine downtimes) 3. Demand.
Issues
Significant uncertainty
Too many localization option
Long lead times
Too much inventory in the DeskJet supply chain
Some suggest pumping up more inventory
European and Asian DCs cannot meet because of mismatch.
Analysis In the early 1990s, the DeskJet supply chain consisted of a network of suppliers, manufacturing sites, distribution centers (DCs), dealers, and customers (see Chart 4). The manufacturing process, comprising two key stages, was executed by HP in Vancouver. In the first step - printed circuit assembly (PCAT) - the electronic components were assembled and tested. The second step, final assembly and test (FAT), then involved the assembly of other subassemblies as well as the final testing. The localization of the printers was performed in the FAT-phase at the factory, meaning the appropriate power supply module and power plug as well as the manual written in the appropriate language were added to the printer. After having localized the products, they were sorted into three groups and shipped to the DC they were destined for: North America, Europe, or Asia-Pacific. As goods were shipped to Europe and Asia by ocean, long lead times of 4 to 5 weeks had to be taken into account. No significant inventory, neither raw materials nor finished products, were hold at the factory. The DCs instead operated in make-to-stock mode in order to guarantee high service-levels to the dealers. In order to implement DC localization, some changes in the supply chain as well as at the DC are necessary. Regarding the distribution center, the standardized process traditionally used has to be expanded (for a comparison of the processes before and after implementing DC localization see Chart 6). Traditionally, four main process steps had to be performed: -
Receive complete printers and stock them
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Pick the various products needed to fill an order
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Shrink wrap the complete order and label it
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Ship the order
As additional tasks have to be performed at the DC after implementing postponement, the process had to be adjusted, then comprising three additional steps compared to the “old”
standardized process:
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Receive modules and stock them
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Pick the appropriate modules
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Unpack them and assemble the printer
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Test the printer
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Pack the printer
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Shrink wrap the order and label it
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Ship the order
The DC now has to deal with the problems of selecting and managing suppliers and the management of the bill of materials. Furthermore, it has to take over some manufacturing tasks which were executed at the factory before. FAT therefore is done at the DC instead of the factory within the new process. In order to cope with the new competences and responsibilities, investments in new machinery, capacity and training of the workers would be necessary. The changes necessary at the DC would induce further changes in the whole supply chain. First of all, of course R&D would have to redesign the printer in order to make its localization at the latest step in the supply chain possible. All following processes had to be adjusted to the new product as well. At the same time, some other tasks could be performed at different stages in the supply chain. For example, the DC now could source the parts needed directly from suppliers instead of receiving complete products from Vancouver. The parts could be delivered directly to the DCs in this case. As the DC would be able to select the suppliers itself, it would be an option to source the appropriate power supply modules etc. from the country where the respective DC is located, thereby minimizing lead times and inventory at the DCs. Lead time between Vancouver and the DC should be minimized by choosing different modes of transportation, achieving a more frequent replenishment and, simultaneously, better responsiveness to changing customer demands. Another option when implementing DC localization would be to set up a sister plant in Europe – this would mean setting up a separate DeskJet supply chain in Europe. Whether a redesign of the supplier network and the whole supply chain respectively is worth or not, could be computed by
introducing activity-based costing or any other appropriate costing app roach that provides information to support decision making.
