Introduction

In early 1990s, Hewlett-Packard Company (HP) faced an Inventory/Service

crisis for their Desk Jet printer portfolio. Despite increasing inventory levels
at the distribution center in Europe, their channel partners were facing issue
of shortage of few printer model.
Task has been assigned to Mr. Brent Carter, manager of Vancouver division to
determine possible solution of supply chain problem faced by HP in Europe.
The below analysis is a combination of analysis and solution which involves
reconfiguration of operation strategy related to supply chain.
The parameters used for analysis are given below:

The total factory time (PCAT and FAT) = 1 week

Transportation time from factory to US DC = 1 day

Transportation time from factory to Europe DC by ocean = 5 week

Transportation cost from factory to Europe DC by ocean = $10 per unit

Transportation time from factory to Europe DC by air = 1 week

Transportation cost from factory to Europe DC by air = $30 per unit

Reorder interval, R = 1 week

Total lead time, L = Total factory time (1 week) + transportation time

Cost of production = $400 per unit

Inventory carrying cost (25% of product cost) = 0.25 400 = $100 per
unit per month

Line item fill rate (cycle service level) = 98% (corresponding z value =
2.05)

Using the periodic review order-up-to model:

Fluctuation in demand during L+R period, L+R= L+R
Where, = Standard deviation of demand per unit time
Safety stock, SS = Z L+R
Z is the safety factor
Order up to quantity, S=D(L+R)+SS
Where, D = Average demand

Average inventory, AI=DR/2+SS

Material cycle time, AT=AI/D

Question 1:
Develop an inventory model for managing the Desk Jet printers in Europe
assuming that the Vancouver plant continues to produce the six models sold
in Europe.
All calculations are done on a per weekly basis. The lead time and review
time has been converted to a week.
We calculated Weekly mean and S.D. from Exhibit 4 given in case.
Weekly mean () = (Monthly mean) *12/52
Standard deviation () = (Monthly standard deviation) *12/52
All mean and S.D. calculations are included in Exhibit-1
Safety Stock (SS): Z x ( x (L+R))
Order Quantity (S): Demand (L+R) + SS
Total Carrying Cost (CC): (/2 + SS) *0.25 *400
Total Transportation Cost (OC): (/2) *Cost for respective mode of transport
Total cost (TC): CC+OC
Total cost calculation by Air and sea are included in Exhibit-2 and 3 resp.
Note: All calculations rounded to 2 decimal digits
Results:
Air:
Total Safety stock= 8738.44
Order quantity= 19403.95
Total cost= $ 1567102.31
Sea:
Total Safety stock= 15135.48

Order quantity= 47131.95

Total cost= $ 3273351.52

From the data from Exhibits, we can draw conclusion that the safety stock
levels and required order quantity by air is less than by sea route. And, air
transport is costing less to the company in the given circumstances. We are
concluding that along with better forecasting, company should consider air
transport.
Question 2:
Compare your results in question 1 to the current policy of carrying one
months average inventory at the DC
With 4 weeks average inventory, we have calculated quantity at re-ordering
point (ROP) and total cost incurred by this method.
Formulae used:
Reordering Point (ROP)

= 4 x (weekly average demand)

Carrying Cost/unit (CC)

= 0.25 x 400 = 100

Carrying cost (CC)

= ROP x CC

Transportation Cost (OC) = (Transport Charges) x 400

Total cost (TC)
ROP

CC+OC

= 21331.015

Total Ordering Cost (Air) = $1663819.2

Total Ordering Cost (Sea) = $1237198.89
Comparing demand and cost by EOP method with the periodic review
inventory model, we found that even though the cost in question model is
looking lesser it will be higher, if we calculate cost with 4 weeks as review
period in first model than the EOP model we developed in this question.

What are the different alternatives available to Brent that can

improve the service level? How would you tackle the
inventory/service crisis?
1. Localization at the Distribution Centre:
The HP Vancouver plant itself handles the localization responsibilities at the
Final Assembly and Test (FAT) stage. It is recommended that they shift their
localization process to the Distribution Centre (DC) where it could incorporate

The power supply module according to the country's power (voltage and
plug) requirement
Specific working manual as per the language spoken in that country.

This would help reduce freight cost and customs cost. It may also facilitate
procurement of these products locally at a much cheaper rate. Although a
part manufacturing setup would have to be installed at the Distribution
Centre for this purpose.
2. Air Transportation for Shipping:
We can infer from our calculations above that even if the air transportation
cost per product is three times the water transportation cost per product, it
significantly reduces the inventory carrying cost. Furthermore, it would also
reduce the lead time drastically from 5 weeks in case of sea transportation to
1 week in case of air transportation and would also increase product
availability. This would help in solving the inventory management problem
and could also handle the fluctuations in the demand of the printer.
3. Using both Air Transportation and Sea Transportation:
The cost involved per unit is $30 for air transportation while it is $10 for sea
transportation. HP can leverage from both, the low transportation cost
through sea transportation and low lead time through air transportation.
Thereby it can handle dynamic demand through air transportation. This
would further help in reducing the safe stock level and also reduce the
inventory holding cost associated with it. Further, HP could continue with its
existing forecast model and wouldn't require to spend it's time in developing
a new forecast model, thereby saving time and money.
4. Setting up a new plant in Europe:
There was a big gap in actual and forecasted demands in the European
market and hence there was an inventory mismanagement issue. Setting up

a new manufacturing plant in Europe would be the least recommend

approach for HP as this would not solve the root cause of inventory
management and improper forecasting. Setting up a new plant would reduce
the lead time drastically and would also minimize the transportation cost to a
very large extent. It would also help to minimize the safe stock levels and
cost associated with holding the inventory which ranged from 12%- 60%. But
the cost involved in setting up a new plant would be very high and the
capital expenditure involved might not justify setting up of new plant.
Exhibit-1: Weekly Mean and Standard Deviation Calculation

Options

Monthly Mean

Monthly Std. Dev

Weekly Mean

A
AA
AB
AQ
AU
AY
Total

42.3
420.2
15830.1
2301.2
4208
306.8
23108.6

32.4
203.9
5624.6
1168.5
2204.6
103.1
6244

9.76
96.97
3653.10
531.05
971.08
70.80
5332.75

Weekly Std.
Dev
15.56
97.95
2701.97
561.33
1059.06
49.53
2999.52

Exhibit-2: Cost Calculation for Air Transportation

A
AA

Avg.
Deman
d
19.52
193.94

AB

7306.20

AQ

1062.09

AU

1942.15

AY

141.60
10665.5
1

Optio
ns

Total

Std.De
v

Safety
Stock

22.01
138.52
3821.1
6

45.34
285.36
7871.6
0
1635.3
1
3085.3
3
144.29
8738.4
4

793.84
1497.7
3
70.04
4241.9
6

Stock
64.87
479.30
15177.8
0
2697.40
5027.48
285.89
19403.
95

Carrying
Cost(25
%)
5510.52
38232.61
1152469.
63
216635.5
4
405640.2
3
21508.79
1407119
.70

Transpo
rt Cost

Total
Cost

292.85
2909.08
109593.
00
15931.3
8
29132.3
1
2124.00
159982.
62

5803.36
41141.69
1262062.
63
232566.9
2
434772.5
4
23632.79
1567102
.31

Transpo
rt Cost

Total
Cost

292.85
2909.08

11075.05
81425.11

Exhibit-3: Cost calculation for Sea Transportation

Optio
ns
A
AA

Avg.
Deman
d
58.57
581.82

Std.De
v

Safety
Stock

Stock

38.12
239.93

78.54
494.25

137.11
1076.0

Carrying
Cost(25%
)
10782.21
78516.04

AB

21918.6
0

6618.45

AQ

3186.28

1374.97

AU

5826.46

2594.15

AY

424.80
31996.
52

121.32
7347.2
9

Total

13634.
00
2832.4
4
5343.9
4
249.91
15135.
43

7
35552.
60
6018.7
2
11170.
40
674.71
47131.
95

2459330.4
7
442557.71
825717.11
46231.39
3113368.
90

109593.
00
15931.3
8
29132.3
1
2124.00
159982.
62

2568923.4
7
458489.10
854849.42
48355.39
3273351.
52

Exhibit-4: Cost calculation by EOP Method

Optio
ns

Weekl
y
Mean

Weekl
y Std.
Dev

9.76

15.56

ROP=
4*(Wee
kly Avg
Demand
)
39.05

AA

96.97

97.95

AB

3653.1
0

AQ

531.05

AU

971.08

AY

70.80
5332.7
5

Total

Carrying
Cost(CC)=
ROP*CC

Transpor
tation
Cost
(Air)

Total
Cost(Air)

3904.62

1171.38

5076

387.88

38787.69

11636.31

50424

2701.9
7

14612.4
0

1461240

438372

1899612

561.33

2124.18

212418.46

63725.54

276144

3884.31

388430.77

283.20
21331.0
2

28320
2133101.5
4

1059.0
6
49.53
2999.
52

116529.2
3
8496
639930.4
6

504960
36816
2773032

Transpor
tation
Cost(Sea
)
11713.85
116363.0
8
4383720
637255.3
8
1165292.
31
84960
6399304.
62

Total
Cost(Sea)
15618.46
155150.77
5844960
849673.85
1553723.08
113280
8532406.15