1. Evaluate performance of HP deskjet printer supply chain? What are the causes behind the problems faced at European DC? HP’s Deskjet Supply Chain’s 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 σd
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.
Avg. Monthly Demand
Standard Deviation of Monthly Demand
42.3
32.4
90.56
AA
420.2
203.9
569.92
AB
15,830.10
5,624.60
15721.23
AQ
2,301.20
1,168.50
3266.06
AU
4,208.00
2,204.60
6162.04
AY
306.8
103.1
288.17
Customized Models A
Safety Stocks (Monthly)
Sample Calculation :- 42.3*SQRT(1.25)*32.4 = 90.56
3. Evaluate option of shipping by air to European DC. Let’s 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. Safety Stocks Sea Shipping (Monthly)
Avg. Monthly Demand
Standard Deviation of Monthly Demand
Safety Stocks - Air Shipping (Monthly)
42.3
32.4
40.50
113.20
AA
420.2
203.9
254.88
712.40
AB
15,830.10
5,624.60
7030.75
19651.54
AQ
2,301.20
1,168.50
1460.63
4082.57
AU
4,208.00
2,204.60
2755.75
7702.56
AY
306.8
103.1
128.88
360.22
Customized Models
A
Now, let’s do some cost analysis.
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
Avg. Inventory holding cost
Shipping Cost
Total Cost
42.3
113.20
134.35
67175.47
2820339.91
84.6
2820424.51
AA
420.2
712.40
922.50
461248.64
840.4
132969783.47
AB
15,830.10
19651.54
27566.59
13783296.83
31660.2
118737076401.89
AQ
2,301.20
4082.57
5233.17
2616585.49
132968943.07 118737044741.6 9 4279074778.07
4602.4
4279079380.47
AU
4,208.00
7702.56
9806.56
4903277.71
15026332661.53
8416
15026341077.53
AY
306.8
360.22
513.62
256808.29
41219060.45
613.6
41219674.05
A
Total
138219506741.93
Avg. Inventory holding cost
Shipping Cost
Total 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
Alternate Scenario- Air Way for logistics movement
Customi zed Models A AA AB
Avg. Monthly Demand 42.3 420.2 15,830.10
Safety Stock 40.50 254.88 7030.75
Total Avg. Inventory 61.65 464.98 14945.80
Value of Inventory 30825.00 232487.50 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 Total
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 Corrington’s 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
