HEWLETT-PACKARD: DESKJET PRINTER SUPPLY CHAIN

Name: Long Nguyen

Course: MKTG 5770
Professor: Ray Mundy
Hewlett-Packard: DeskJet Printer Supply Chain
Wednesday, 10/19/2016
Cover Memo
This case study is a good example of designing the supply chain. After studying the case, lessons
can be concluded are designing the logistic system to control the logistic cost, the practical
benefits of the postponement strategy, the involvement of supplier in supply chain management
and in the new product development process. In fact, HP really applied the postponement
strategy that play an important role in its success. Demand forecasting are always difficult and
not very accurate. Continuous evaluation of the logistic system and the supply chain is crucial.
An efficient supply chain requires its members to work closely, collaborate and cooperate
together.
DeskJet supply chain can be improved significantly by postponing the integration process.
Europe Distribution Center can reduce its inventory level because they only stocks generic
printers that can be customized later after the order is placed. Other alternatives are unreasonable
because of expensive shipping cost, large investment or unacceptable inventory level.

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Executive Summary
This case study addressed two main issue of HPs supply chain system. The first issue was to
identify an appropriate inventory level that is agreeable among different divisions. The other
issue was to find a best way to improve product availability to enhance customer service level.
Lets study the case by beginning to look at the root of the problems. Inventory/service crisis
must be caused by these following issues:

Inaccurate and outdated forecasting method misled the inventory management.

Long transportation lead time to Europe limited the supply chains velocity
Lacking of incentive to improve challenged cooperation between various HP divisions.
Demand uncertainty made it almost impossible to predict.
Supply uncertainty added difficulty to the problem.
Customization/localization extended the lead time and increase variation.

Next, several alternatives were proposed in order to approach the inventory/service problem.
Inventory carrying cost was calculated and compared to evaluate the expected outcome of each
alternative. Air shipment is irrationally expensive to replace ocean shipping in this competitive
and low margin market. Improving demand prediction was too vague because there were
uncertain parameters to be used such as service level or inventory carrying cost. European
factory solution proposed an annual saving of roughly $500,000 but the required initial
investment is extremely large and unaffordable. Indeed, European volumes were not sufficient to
consider building a new plant. The final option, standardization or postponement strategy is the
best candidate. Its inventory analysis demonstrates an annual saving of almost $900,000 without
any type of major investment. Postponing the localization process until after demand is specified,
that allows distribution centers to focus on aggregate demand and keep only generic parts in
stock. Beside, standardization strategy could possibly bring some other potential benefits to the
company such as expanding the business with the generic products without spending a lot of
money, locally sourcing parts needed for customization, reducing the shipment value by shipping
the bulk or semi finished product. However, in order to apply the strategy, several implement
process is suggested. The recommended procedure is followed:
Getting support from Distribution Center
Redesigning the shipping and product package
Providing support to Distribution Center regarding to operation and production
Applying concurrent/parallel process by using modular product at Vancouver factory.
Finally, standardization strategy proposes the largest saving and is valued as the best alternative.
Different stakeholders would find it difficult to implement at the beginning, especially the
distributors. However, in long term, the company would be benefited from the strategy. The
simple logic of the smaller product variety, the smaller demand variation will be used to
convince other people.
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Discussion
At the end of 1980s, HP was a leader of the printer market with its strategic product line named
DeskJet. After introduction, DeskJet sales increased steadily over the years and it became the
most successful product. HP sold their printers mainly through three distribution centers, while
the production was located in Vancouver, HPs head quarter. The average throughput of printer
production was around one week, while transportation lead time took about 4 to 5 weeks. The
reason of that is the printers either were sent to European and Asian Distribution Centers by
ocean shipping or were trucked to U.S Distribution Center. Because, the fast growth of demand
and high expectation and requirement of customers, HPs management team had to face with a
lot of challenges. The most headache problem namely inventory/service crisis which was
impossible to maintaining an appropriate inventory level while keeping customers happy with
product availability, especially in Europe. In order to understand the problem, several causes
will be addressed below.
First of all, lets look at the company internally. HPs management was limited by its negative
elements which are inaccurate inventory forecasting method, long transportation lead time and
disagreement among HP divisions. As mentioned in the case, the high forecast errors made
product shortages for model demands in some countries and overage inventory of some other
models quite common. Outdated safety stock rules were using to defined the inventory level for
each product line. In addition to forecast inaccuracy, the long lead time of transporting goods
from Vancouver to Europe and Asia had increase the difficulty to satisfy the changing markets.
Because, it took quite a long time, 4 to 5 weeks, to send a shipment by ocean freight, they could
not have a very responsive supply chain. Beside, HPs divisions did not very cooperated in
analyzing the root of the problems. Each of the department had different visions. For example,
marketing focused on revenue generation and profit-driven strategy. There was no incentive for
them to hold responsibility for the increasing inventory cost.
Regarding to external elements, possible cause of the problem was mostly uncertainty: demand
fluctuation within various localization options and suppliers uncertainty. According to the case,
the printer industry was highly competitive. Therefore, in order to compete, HP had to customize
their printers to best fit the customers need, especially in Europe and Asia. The DeskJet product
line were localized by adding proper instructions and power supply package which extended the
production lead time versus added complexity to demand prediction. Moreover, unfinished
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printers had to be stocked at the factory before they were localized and shipped. This would
rise the inventory holding cost dramatically. Moreover, their product variety added difficulty on
top of transportation and demand forecasting problems. Too many options made it even more
complicated to predict the demand and even harder to satisfy the unexpected orders. In addition,
late shipment or wrong parts from suppliers also extend the lead time.
Move on to the next section, average inventory cost of each alternative were computed to
evaluate the saving of each solution. Several possible solutions were proposed in order to address
the problems, including replacing slow ocean shipping by air freight, building an entirely new
production plant in Europe, improving forecasting practices, and postponing the localization
process until generic printers were shipped to European Distribution Center.
Air freight was extremely expensive comparing to ocean shipping, so that it could be irrational
in this highly competitive and low-margin business. Also, distributors were already complaining
about high inventory level, carrying more stock just makes the problem even worse.
The alternative of building a European factory was constrained by the belief of insufficient
demand volumes. In the purpose of demonstrating the saving, inventory holding cost calculation
was performed under followed assumptions. The total lead time including production and
transportation is 6 weeks from Vancouver factory and 1 week from European factory. Product
selling price was $667 and product cost at the distributions was $400. Service level had to be
maintained at 98%. The final assumption is average inventory carrying cost was 30% at
Vancouver and 60% at Europe. It was much more expensive to carry stock at European factory
because the cost included administration cost, R&D, investment interest expense and some other
expenses to establish the new factory. The assumptions will be summarized in table 1, appendix.
First, monthly demand was converted into average weekly demand by assuming there are 4.3
weeks in a month. Then, the safety stock was identified to satisfy the required service level.
Afterward, the inventory holding cost was calculated by multiplying inventory carrying cost with
the average inventory level and unit cost.
Safety Stock during lead time:
zSTD L
Inventory Holding Cost:
safety stockinventory carrying costunit cost

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In result, the inventory analysis is shown in Table 1. The dollar saving in inventory holding cost
depends on the rate of carrying cost used. As the assumption and calculation above, an annual
saving of $500,000 could be recognized. This suggests that, building a European factory could
save the company $500,000, even a large inventory carrying cost was accounted. In conclusion,
the alternative of building a new production plant in Europe yield a positive outcome. In
addition, regardless of large investment requirement, there are some other benefits could possibly
have realized such as

improving customers satisfaction by cutting lead time

enhance product availability,
expanding to serve growing/emerging markets, Europe and Asia-Pacific.

Similarly, the alternative of standardizing the product line and postponing the customization
process until European Distribution phrase was analyzed. Following the analyzing process of
previous alternative, we have average weekly demand and standard deviation of weekly demand.
Safety stock was also computed as well as number of weeks the safety stock spent in warehouse.
The sum of safety stock of each options was almost one third larger than the safety stock of the
generic product. Aggregate demand has much smaller standard deviation than individual
demand. Therefore, the positive effect of postponing localization was recognized, so that the
distribution center can only keep safety stock of the generic printer. The table 2 demonstrates the
inventory analysis and around $900,000 dollar saving annually when 30% inventory carrying
cost was accounted and $400 was the unit price. In addition, some possible benefits of
postponement strategy could also have recognized. They are:

Localized components might be sourced locally, that cutting shipping cost and lead time.
Shipment value contained unfinished parts was lower, that might reduce shipping rate,

handling costs or insurance costs.

Standardized printers can be sent everywhere, included Europe and Asia.

After evaluating each of the options, comparison between proposed alternatives is followed.
As discussed above, holding more inventory to meet the demand is unacceptable and
disagreeable with the distributors. Also, replacing slow ocean shipping with faster air freight is
not affordable because of the prohibitively expensive cost of shipping by air. The promised
European factory seem to be a competitive opponent which saves $500,000 a year and possibly
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brings several potential benefits to the company. However, it required a large sum amount of
initial investment and imply an ambiguous plan. In the same way, it was unknown how to
improve forecast. Even the management team has spent weeks on gathering the forecasting data
and tried to come up with an optimal methodology, it was uncertain which target line fill rate and
inventory carrying cost to be used. On the other hand, standardization or postponement strategy
successfully shown a higher annual saving of $900,000 without requesting any type of major
investment. The algorithm applied in the analysis makes sense of the aggregate demand which
has a much smaller standard deviation than individual demand. This allows the distribution
centers keep stock of only the generic products, reduce safety stock, save money. There are also
many potential advantages involved in implementing a postponement strategy, as mentioned
above. In a nutshell, the standardization strategy is highly recommended.
In order to implement the European product option, the company is recommended to take the
following processes. First of all, Brent has to prove the benefits of postponing the integration
process to the board management as well as the distributors. He has to to convince the
distributors that they have to share the job and risk before recognizing the benefits. The plan can
only be started with an agreement from both parties. Second, the product packaging process has
to be upgraded so that it meets the requirement such as bulk product package contained of
unfinished parts, specification shown on the label, information displayed to custom people, etc.
Third, Vancouver division should provide support to European Distribution Center with their
localization process. Brent should send a team consist of experienced operational people to
Europe to establish a streamline integration system. Fourth, in Vancouver factory, generic
printers should also be redesigned and be produced as a modular product so that both stages of
the manufacturing process, Print Circuit Board and Test (PCAT) and namely Housing & other
Components Preparation (HCP) can be happen concurrently as shown in Figure 1.
The recommended solution which is standardization in Europe would yield many positive
impacts on the supply chain if successfully implemented. The company would experience a
significant drop of the inventory level caused by reducing the safety stock. Generic printers then
could also be stored anywhere or be sent at anytime while distributors pay a little cost of holding
localization parts or even none. Service level, then would rise due to the product availability and
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short delivery time. In addition, low inventory means save money. In fact, the company could
possibly save around $900,000 a year as discussed above. Manufacturing job and inventory
holding cost would be share fairly among the divisions. Customization parts could possibly
source locally. That would also eliminate shipping cost as well as inventory cost.
Different stockholders would have different vision for this implementation. It is expected that
they would be discouraged at beginning because of the effort they have to put in to make it
happen. However, both distributors, customers and manufacturer would soon support the project
after they realized the saving and the improvement in customer service. If I were Brent, I would
recommend that the standardization strategy should be planned carefully before it is put into
action. There are parallel processes and serial process that are related and connected together.
Each of the process contributes to the next processes or affects their parallel one. In conclusion,
it is hard to implement the strategy but their benefits are valuable after successfully applied.
In order to support my recommendation, I would convince people by the simple logic that
producing one generic product line will be easier than producing many different products versus
it obviously has less variation.

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Appendix
Table 1.
Assumption
Product Sale Price
Product Cost
Inventory Carrying Cost
Lead Time
Service Level

Vancouver
Europe Plant
Vancouver
Europe Plant
98%

$667
$400
30%
60%
6
1
z=2.05

Table 2.
OPTIONS
A
AA
AB
AQ
AU
AY
Total

OPTIONS
A
AA
AB
AQ
AU
AY
Total

AVG Monthly
Demand
42.3
420.2
15830.0
2301.2
4208.0
306.8
23108.5
AVG Monthly
Demand
42.3
420.2
15830.0
2301.2
4208.0
306.8
23108.5

STD of Monthly Demand AVGWeekly

Demand
32.4
203.9
5,624.7
1,168.5
2,204.6
103.1

9.8
97.7
3681.4
535.2
978.6
71.4
5374.1

STD of Monthly Demand AVGWeekly

Demand
32.4
203.9
5,624.7
1,168.5
2,204.6
103.1

9.8
97.7
3681.4
535.2
978.6
71.4
5374.1

STDof
Weekly
Demand
15.6
98.3
2712.5
563.5
1063.1
49.7

STDof
Weekly
Demand
15.6
98.3
2712.5
563.5
1063.1
49.7

SafetyStock InventoryCarryingCost
78.5
493.8
13620.6
2829.6
5338.5
249.7
22610.8

$9,418.82
$59,258.53
$1,634,476.36
$339,549.23
$640,623.67
$29,966.20
$2,713,292.80

SafetyStock InventoryCarryingCost
32.0
201.6
5560.6
1155.2
2179.4
101.9
9230.8

Annual Savingin InventoryCost

$7,690.43
$48,384.39
$1,334,544.36
$277,240.78
$523,067.04
$24,467.30
$2,215,394.30
$497,898.51

Table 3.
OPTIONS
A
AA
AB
AQ
AU
AY
Total
Stardization

STDof
Weekly
STD of Monthly Demand AVGWeekly
Demand
Demand
SafetyStock InventoryCarryingCost
42.3
32.4
9.8
15.6
78.5
$9,418.82
420.2
203.9
97.7
98.3
493.8
$59,258.53
15830.0
5,624.7
3681.4
2712.5
13620.6
$1,634,476.36
2301.2
1,168.5
535.2
563.5
2829.6
$339,549.23
4208.0
2,204.6
978.6
1063.1
5338.5
$640,623.67
306.8
103.1
71.4
49.7
249.7
$29,966.20
23108.5
5374.1
22610.8
$2,713,292.80
23108.5
6,244.1
5374.1
3011.2
15120.5
$1,814,456.06

AVG Monthly
Demand

Annual Savingin InventoryCost

$898,836.75

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