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Hewlett-Packard Company
Deskjet Printer Supply Chain

Processes and Operation Management 2015

1st Assignment

1. What has caused the so-called inventory crisis?

The inventory crisis was caused by a number of issues disclosed below:

The New Vancouver plant does not hold stock of finished products. The only buffer that exists
is in the different components necessary to produce each printer.

Magnitude of demand forecast uncertainty is very high leading to overstocked models as well
as, to some understocked models.

The long transportation time by boat (4 to 5 weeks) makes forecasting even more important and
since the demand forecast is inaccurate this has a huge impact on the inventory levels in Europe
and Asia.

The integration step that the distribution centers are executing now is not fully integrated in
their processes leading to bad performance (Distribution Centers are designed to only perform
warehouse services).

Safety stocks definition is not structured in a clear reasoning, leading to frequent under and over
stock problems.

2. What are the drivers of safety stock?

HP wants to maintain a service level of 98%, meaning that they are assuming a stock out probability of
only 2%. To fulfill this objective the company considers the creation of safety stocks to compensate for
the following aspects:

Imbalances in the demand and inaccurate forecasts, is very important to consider and precisely
calculate the safety stock to avoid shortages of products that could lead to sale losses and
customer dissatisfaction.

Production delays that may occur in the Vancouver plant due to delays in the supply of raw
materials or parts and delays in the production process.

The absence of any finished printers stock in the Vancouver plant

Retailers and resellers not wanting to hold inventory, due to space limitations, investment and
holding costs. On the other hand, these resellers want products availability in the short time by
the manufacturers.

Since alternative air transportation is more expensive, safety stock becomes important to
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ensure that sea transportation deliveries dont affect product availability.

Printers became to be perceived as complementary products. Customers brand loyalty is low,

meaning customers are not willing to wait for a particular printer model of a brand. In such
competitive market, HP strives to keep high levels of availability by safety stocks of their
products to negative effect on market share.

3. Recommend quantitative target inventory levels for the six European options, assuming weekly periodic
review replenishment.

Considering the information provided in Exhibit 4 we calculated the annual quantity using the monthly
data and then converted to weekly demand, considering that a year has 52 weeks.
Afterwards, we considered that the weekly standard deviation is the monthly standard deviation times
the Square root of 12 (months) divided by the square root of 52 (weeks).
To come up to the results we have considered the following assumptions:

The probabilistic model is based on the fixed period system (P system);

As stated in the case, the time between orders is one week;

We have assumed that demand has a normal distribution and in order to reach a service level
of 98% the Z value (calculated by the NORMINV excel formula) is 2.05;

We calculated the lead time as 5.5 weeks, since HP factory takes 1 week to produce and the
boat shipping from the US to Europe takes on average 4,5 weeks.

Table 1 Results for Safety Stock, On hand Inventory and Replenishment level.
Europe Options
A
AA
AB
AQ
AU
AY
Total

Weekly
Demand
10
97
3653
531
971
71
5333

Time between
Lead Time
orders
1,0
5,5
1,0
5,5
1,0
5,5
1,0
5,5
1,0
5,5
1,0
5,5
1,0
5,5

Z
2,05
2,05
2,05
2,05
2,05
2,05
2,1

Weekly Std
Safety Stock
Dev
16
81
98
512
2 702
14 122
561
2 934
1 059
5 535
50
259
3 000
23 443

On hand
Replenishment
Inventory
level
130
140
997
1 094
32 387
36 040
5 589
6 120
10 390
11 362
613
684
50 107
55 439

Safety stock was calculated using part of the fixed period system formula ( + ).
On hand Inventory was calculated considering the value of safety stock plus 5 weekly demands that
were already shipped to Europe (for this calculation we assumed the shipping worst case scenario
time of 5 weeks).
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Replenishment level is the On hand Inventory plus the weekly demand, meaning the total amount of
products necessary to replenish the operation flow in its full level

4. Assuming a 20% gross margin for each printer, sea transportation costs of $1 per printer and air
transportation costs of $10 per printer (air shipment lead-time is 3 days), evaluate the various
alternatives available to address the inventory and service problem.

The evaluation of transportation means alternatives, by sea or by air, is made estimating the profits
of each one of these options, considering scenarios of carrying amount of inventories (CAI) ranging
from 12% to 60%. After evaluating these scenarios we reached the conclusion that in the extremes of
12% and 60%, the best transportation option changes (in case of a CAI of 12% profits are maximized
by sea, while, in case of 60%, by air).
So, its relevant to come up with the exact percentage of inventory carrying cost a printer has that
would make indifferent the selection of the mean of transportation - a point of equilibrium. Such
information will also determine the turning point where changing the type of transport would yield
higher profits .

In order to do so, we developed the following equation to come up with the exact percentage at which
the profits maximization is not influenced by the choice of transportation:

$1 + (% ) = $10 + (% )

We defined the average inventory stock at the warehouse by a function of safety stock (dependent on the
lead time), and on the type of transportation selected. The table and consequent values are shown below:

Sea
A
AA
AB
AQ
AU
AY
Total

Air
A
AA
AB
AQ
AU
AY
Total

Weekly
Time between
Lead Time
Demand
orders
9.8
1.0
5.5
97.0
1.0
5.5
3653.1
1.0
5.5
531.0
1.0
5.5
971.1
1.0
5.5
70.8
1.0
5.5
5332.8
1.0
6

Z
2.05
2.05
2.05
2.05
2.05
2.05
2.05

Avrg wkly standard

GIT
Safety Stock Inventory Avrg Inv @ WH
deviations
15.6
53.7
81.38
135.1
86.3
98.0
533.3
512.00
1,045.3
560.5
2,702.0 20,092.0 14,121.78 34,213.8
15,948.3
561.3
2,920.7
2,933.77
5,854.5
3,199.3
1,059.0
5,340.9
5,535.11 10,876.0
6,020.6
49.5
389.4
258.91
648.4
294.3
2,999.5 29,330.1
23,443.0 52,773.1
26,109.3

Weekly
Time between
Avrg wkly standard
Lead Time
Z
Demand
orders
deviations
9.8
1.0
1.43 2.05
15.6
97.0
1.0
1.43 2.05
98.0
3653.1
1.0
1.43 2.05
2,702.0
531.0
1.0
1.43 2.05
561.3
971.1
1.0
1.43 2.05
1,059.0
70.8
1.0
1.43 2.05
49.5
5332.8
1.0
1.43 2.05
2,999.5

GIT
14.0
138.5
5,218.7
758.6
1,387.3
101.2
7,618.2

Safety Stock Inventory Avrg Inv @ WH

49.74
312.96
8,631.94
1,793.27
3,383.33
158.26
14,329.5

63.7
451.5
13,850.6
2,551.9
4,770.6
259.4
21,947.7

54.6
361.4
10,458.5
2,058.8
3,868.9
193.7
16,995.9

By solving the equation we found that the point of equilibrium is 53%. As we can observe from the
graph below, the profits for printers that have a percentage of inventory carrying cost below 53%,
should be transported by sea, since the profits are higher comparing with transportation by air.
Whereas for any percentage higher than 53%, air transportation should be used.

As a possible solution, in order to cope with demand variability of each country and reduce the stock
customized for a specific country, the localization process (assembly of power suppliers and power
cords, as well as manuals, packaging and other materials specific to each country) could be done in a
facility (one per continent, in Europe and Asia),in which unfinished printers would arrive from Vancouver
and customized according to the demand fluctuations of each country.