Purpose of HP DESKJET PRINTERS & SUPPLY CHAIN is to propose a solution for HP for keeping low inventory levels of DeskJet printers and getting an agreement among the DC’s in order to meet customer needs, especially in the European region. For effective inventory management throughout the DeskJet printers’ supply, HP’s Vancouver Division faced multiple challenges of the poor forecasting system, a make-to-stock system of distribution and multiple products. These challenges had created inefficient demand forecast, longer lead time and disagreement on the right level of inventory among distribution centers. To combat this crisis of inventory and service there alternatives were proposed; air shipment, new plant and improved forecasting system accompanied by MRP (material resource planning) and BOM (bills of material). Each of the alternatives had advantages and disadvantages. After evaluation of each alternative, improved forecasting system and localization at European distribution center were thought to be most appropriate for Vancouver Division. With improved forecasting system, the Vancouver Division may be able to make accurate safety stock calculations to avoid overstock and backdoor problems at European Distribution. MRP and BOM at distribution centers may provide the needed support to the manufacturing process at Vancouver Division. The better safety stock management would lead to reduced lead time and lower inventory carrying cost at European Distribution Center. Further, the service mess could be resolved by shifting the localization process from Vancouver division to European Distribution Center. This may also enable the management to easily meet the fluctuations of DeskJet printer demand in the European region.
HP DESKJET PRINTERS & SUPPLY CHAIN:
In 1939, the foundation of Hewlett-Packard Company, also known as HP, took place by William Hewlett and David Packard. HP headquartered in Palo Alto, California was structured by product group as well as functions. It had six divisions which acted as SBUs for a specific set of products which
included printers, plotters, magnetic discs, tape drives, terminals, and network products. Among these SBU’s Peripherals Group was the 2nd largest with revenues of $4.1 billion in 1990. The peripherals Group was admired and recognized for bringing innovations in the company and exploiting new market opportunities such as the LaserJet printer, which was its most successful product. HP, by commencing as an electronic test and measurement equipment, had diversified successfully into computers and peripherals products. Having operations in more than 50 countries worldwide, HP’s revenues were $13.2 billion with net income $739 billion in 1990.
The changing dynamic of retail market of printers, mature in the U.S, still developing in Western Europe and Asia-Pacific, presented opportunities inject printers producers as they were becoming a commodity product, customers were choosing them on the basis of cost, reliability, quality, and availability regardless of brand name.
Vancouver Plan and its quest for zero inventories: In 1979, Vancouver production plant was established in Washington. Vancouver, where four divisions’ activities of personal printers had been consolidated, soon became the main division of the Peripheral Group for designing and manufacturing of inkjet printers. Here, HP’s production management team faced the problems of the longer cycle time of 8-12 weeks and 3.5 months inventory, which it resolved by implementing Kanban process (JIT) to have the stockless factory. It had resulted in a drastic reduction in cycle time, and inventory time was reduced from 3.5 months to 0.9 months. In 1988, the personal printer market offered a different scenario and thus Vancouver introduced the DeskJet printer, a new model with near letter-quality resolution with standard paper. This was a huge success and gave Hp a need edge to emerge as the market leader in the inkjet printer market.
The DeskJet supply Chain: it comprised of suppliers, manufacturing sites, distribution centers, dealers and customers. There was two manufacturing process of inkjets based on pull-mode at Vancouver; Printed circuit board assembly and test (PCAT) and Final assembly and test (FAT). PCAT comprised of ASICs (application-specific integrated circuits) and ROM (read-only memory. There was also a process, called ‘localization’ to customize the products for selling in Europe and meeting the language and power supply requirements. Then finished products were sorted into three groups and shipped to three distribution centers: North America, Europe, and Asia-Pacific, which were working on make-to-stock mode. The total factory cycle time between two stages of production was about 1 week. The transportation time from Vancouver to U.S DC was about 1 day, whereas it took 4-5 weeks to ship the printers to Europe and Asia. At Vancouver, no finished goods stock was maintained, however sufficient inventories of raw material and components were maintained to meet the production requirements. Here, the whole supply chain could be affected by the delivery of incoming materials, internal process, and demand forecasts.
Distribution Process:
The DeskJet printer, being the high volume products has successfully fit DCs’ standardized and, simple distribution process which could not support the integration process required for other products. Due to lack of MRP (material resource planning) and BOM (Bill of Material) systems, it only supported distribution. This process, however, had performance measures of Line item fill rate (LIFR) and Order fill rate (OFR).
Problem Statement:
This case study emphasizes on inventory management and challenges that HP faced in the supply chain of DeskJet printers. HP faced a problem of “how to keep low inventory levels of DeskJet printers and get an agreement among the DC’s in order to meet customer needs especially in European region”.
There were three major challenges of the poor forecasting system, make-to-stock system of distribution and multiple products which had created inventory and services crisis for HP. These challenges had also led Vancouver’s management to face the daunting task of limiting the amount of inventory throughout the DeskJet supply chain and providing a high level of services needed. These challenges had also resulted in greater lead time and insufficient stocks at European Distribution Centre, which was unable to meet the unforeseen surge in demands of DeskJet printers.
Make-to-stock system:
it guaranteed product availability for resellers but created problems of high inventory levels and greater carrying costs for DC’s. However, this system accompanied with push system allowed HP to calculate at great length its inventory levels in order to avoid stock-outs and overstock situations at DCs.
Multiple products:
The high volume nature of Deskjet printers along with the integration of other electronics created a mess for standardized distribution process at DC’s. This also contributed to high levels of inventory in order to keep safety stocks and forecast expected demand.
Poor forecasting system:
HP had to face huge problems in the supply chain of DeskJet printers due to forecast errors resulting from demand oscillations, a wide range of products and localization. Moreover, these forecasting errors also led to inaccurate safety stock calculations creating high inventory levels and backorders. This lack of scientific method contributed to dis-coordination and disputes in terms of inventory policies among DC’s (Helms, Ettkin,& Chapman, 2000).
Alternative solutions:
- Air Shipment
- New Plant
- Improved forecasting system
Each of these alternatives has pros and cons:
Air Shipment:
This was a better option to resolve the issues of inventory mismanagement immediately. The supply through air shipment may also enable the DC’s to have smaller safety stocks and buffer inventories. Moreover, the lead time which was about 6 weeks by ocean may come down to a week by air shipment. Another benefit of this alternative was that it best suited the Asian and European distribution centers which had to receive more frequent orders. However, this option also came with some drawbacks; firstly this option may result in lower ROI and greater shipment cost as compared to ocean travel. Secondly, the root issues of inaccurate forecasts due to variations of demand and problems of localization may not be resolved with this alternative (Stewart,1995).
New Plant:
The Vancouver Division also considered the option of installing a new plant somewhere between Europe and Asia. This plant may contribute to smaller transportation costs and lead times. Moreover, it may also resolve the issues of localization and multiple products and thus lead to lower carrying cost for European and Asian distribution centers. However, this option had some drawbacks such as it may cause huge capital investments as well as raw material inventory issues back at Vancouver Division. Moreover, having a production facility nearest to the distribution centers may not guarantee meeting fluctuations in demands and better material planning processes which were needed at DC’s (Ip, Chan & Lam, 2011).
Improved forecasting system:
this option new safety stock methodology, designed after collecting huge demands and sales date, could lead to lower inventories at European DC and reduced problems of overstock or backdoors. It may also solve the root of the horrible forecasting system. Moreover, it may also guarantee the targeted service level of 98% at European DC. However, there were still concerns regarding localization which had lead to complicating the inventory management of materials and finished goods at European DC (Towill,1996).
Decision and Recommendation:
Brent Cartier, Manager of special projects in the materials department of Vancouver Division is recommended to have improved forecasting system accompanied with MRP and BOM. This improved forecasting may reduce uncertainty throughout the supply chain of DeskJet Printers and decrease inventory carrying costs for European distribution center. Moreover, the better and reduced lead time can be achieved by this improved forecasting system. The management may also be able to easily manage fluctuations in local market demands of European countries ((Towill,1996).
Moreover, Brent should also consider having localization process at European DC. In this way, European division can acquire material from local sourcing, saving huge cost associated with shipment and inventory holding. Further, Vancouver Division may be able to manage localized products, which may contribute to decreasing lead time and result in declining in safety stocks which can save inventory holding cost. These alternatives are most appropriate in contrast to other alternatives as they may not require huge capital investment and decrease the ROI. Moreover, the disputes among DC’s may also be resolved through these alternatives (Christopher & Holweg,2011).
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