Hewlett-Packard's Vancouver division is facing a challenge with their inventory management. The sales of the Deskjet printers have grown steadily and so has the inventory level. The Vancouver division is the centralized manufacturing division that also takes care of the localization of the products and ships off the final products to three of distribution centres located globally. Printer market is a highly competitive market and hence being able to meet customer demands is crucial to maintain position in the market.
Issue 1: To satisfy customer needs in terms of product availability while maintaining minimum inventory. Currently their distribution centres were piling up inventory of the much demanded Deskjet printers. However, the European distribution centre was claiming that inventory levels needed to be increased in order to make products available to customers satisfactorily. There was an imbalance between demand and availability of products. There were often shortages for models of some countries while there was a pile up of inventory of models of other countries. This low availability could lead to high waiting time. The products went through localization, i.e. customizing to cater to local markets, in the Vancouver manufacturing plant itself. There is a delivery lead time of 4-5 weeks from their centralized manufacturing unit in Vancouver, Washington to the European and Asian distribution centres. The long replenishment lead time can also throw off the forecasts. By the time, the products reach the market, anticipated demand pattern could alter. Also the long lead time takes away the DC's ability to response quickly to the fluctuating demands of different versions of the product is limited.
Issue 2: To get agreement and consensus among different functions involved regarding the appropriate amount of inventory level that should be maintained. Every function has their own agenda to fulfill and their goals are conflicting. E.g. Production department claims that dealing with the inventory would be a Materials department issue. It is important to make all the functions realize that they are all working for the common goal of the profitability of the organization and issues in the inventory level could affect the profitability of the organization and that in turn could affect each of these functions. Currently there is no consistent method in effect and there is no consensus among the members of different functions regarding setting the appropriate inventory level. There is further discrepancy between how sales force in Europe see the inventory situation versus how distribution centre or warehouse sees the inventory level situation. Marketing wants 98% service level and product availability while distribution wants minimum inventory. The issue is to find a balance amongst these expectations.
Issue 3: Sources of uncertainties that could affect the supply chain are an issue given the manufacturing is centralized and even localization happens at the same plant. There is already a long lead time. If there are issues in the supply chain that that will further extend the lead time, thereby affecting the product availability. Vancouver prided in being an almost "stockless" factory and practiced just-in time production and hence reliability of supplies is crucial. The main sources of uncertainty were regarding the delivery of incoming materials, the internal processes (including downtime and process yields) and demand factor. These could increase lead time in manufacturing thereby delaying in the replenishment. The uncertainty with demand could lead to ineffective forecasts, backorders or inventory pile ups at the DCs. These uncertainties further press for a more efficient supply chain process or a better calculated safety stock level that can allow to buffer for any sort of uncertainties without increasing lead time.
Analysis HP's target service level is 98%, i.e. they want products to be available to customers when demanded. Currently HP controls the printer market in USA. However, they face a stronger competition in Europe and Asia and are not yet the market leader in those continents. Therefore, to gain that competitive success, efficient service is crucial and for that product availability is key. Despite Vancouver shipping large amount of products to the European DC, they still receive complaints from sales that they have shortages of product availability. At the same time they get complaints from the warehouse that there is no space to stock up the amount of goods sent. This discrepancy happens due to the fact that there is inefficient forecasting which leads to the warehouse ending up with excessive unproductive assets, i.e. localized product of country perhaps for which demand is not as high and shortage in supply of another product for which there is demand.
Their lean manufacturing process is placing the burden of inventory management on the distribution centres as they do have the freedom to respond to the different customer needs and have to depend on Vancouver to send the completed products. It is important to find a safety stock amount that would be responsive to the demand uncertainties and take into consideration the lead times for replenishment. In the past the target level was based on taking into consideration an arbitrary amount of safety stock and that has to be altered. Air transportation could reduce lead time. However, it is an expensive option. Nevertheless, it is important to look into reducing lead time. If the lead time could be reduced then it would not be necessary for the DCs to maintain a high level of inventory. They would be more responsive and would not require a significant safety stock to act as a buffer and ensure availability of products to clients. The re-order level could be reduced thereby bringing down holding costs. Appendix-1 highlights the required level of safety stock given the lead time. A service level of 95% has been considered. This means that during the lead time, the DCs should be able to meet the demands of the clients at least 95% of the time. The safety stock should be thus maintained taking this into consideration. Inventory carrying cost ranges from 12% - 60% and is a wide range which can make it difficult to calculate an effective and realistic economic order quantity and even to allocate the costs of the inventory. HP needs to improve forecasting and communication as well between departments, and DCs and Vancouver facility. They could reduce the models they offer and standardize and make a universal product but then that would not satisfy the consumers and hence might affect profitability given this is such a competitive market. Alternatives
Alternative #1 Set up a manufacturing plant in a location somewhere in between Europe and Asia to support the growing demand of the European market. This will significantly reduce lead time and also delivery/transportation cost of the finished products to the distribution centres. Freight cost is a major cos. If need be, they could then also look into utilizing faster modes of transportation like air shipment as the costs would comparatively be lower due to reduced travel distance. This could also allow them to locally procure materials required for the localization of the basic model as per country needs. This can make supplies of these materials more convenient and cheaper, reducing the uncertainty of delivery delays. The concern to this alternative is whether there is enough demand in these markets or not to sustain the cost of a full new manufacturing plant. This will also alter the centralized manufacturing process that has current potential to enjoy economies of scale because of the large volume of production.
Alternative #2 HP could implement product postponement (Appendix -3). The products undergo localization in Vancouver, to meet the needs of the local market/countries within Europe. They are thereby customized. HP could do assembly postponement and this way they could concentrate and focus on other areas and distribute resources more efficiently without inappropriate inventory buildup. The generic design could be completed and then the products would get shipped to the European and Asian DC and later assembled-to-order. The power supply, cords, manuals and other localization tasks could be completed in the respective DCs when there is a demand pull, i.e. order. This can help meet the customer demands while not having to increase inventory significantly. It will also prevent having in stock excess inventory of one localized product and lack of inventory of another as the DCs will be storing standardized inventory. This will enable HP to take advantage of market-oriented supply chain management strategies. This way they do not also have to forecast too much in advance, which has a potential of ineffective forecast. This would mean having a smaller plant in Europe or an extension to the warehouses to carry out the final assembling before sending it out to the customers.
Alternative #3 Calculate the safety stock (As shown in Appendix - 1) based on the demand pattern for each of the products and take into consideration the lead time and accordingly pull for products. Whenever, inventory for a product reaches a certain level, they should manufacture and ship out more. For example, when product A reaches 143 units, they should ship manufacture and ship more of A's for the European DC. These leftover 143 amounts will serve as to meet the demand for the product while the new ones are on their way and they are in the lead time. This will ensure the product's availability during the lead time while keeping inventory low in the warehouse. This may increase shipment amount if they were to send out each product based on its order quantity and in effect the order costs. There is a diverse range of products as they are all localized in Vancouver.
Recommendation and Justification Alternative 2 is recommended given this scenario. HP should implement the postponement strategy and produce standardize DeskJet printers in the Vancouver location and ship them out to the different DCs, who can then assemble to localize their products before selling to the end customer. The assembling required to localize should be fairly simple so that the new assembling units in the DCs do not required significantly trained employees. For that they may need to tweak the design of the standardized printer at the Vancouver location. They should look to implement those changes to the basic design. They could also package these standardized products in bulk and in a more manner as the final packaging and sorting will take place after the localization in the respective DCs. This way they could reduce on space required for shipment and hence ship more for the same costs. If it is standardized then they need to keep a safety stock of 15,407 units (Appendix 2). However, if they want to keep safety stock of each individual localized product in the European dc then the amount of deskjet printer needed in safety stock sums up to 22,159 units. This shows that by shipping standardized products to the European Dc they will be able to increase their availability as well as keep their inventory to the minimum level. There will be some initial investments required to set up the assembling unit at the DCs. This way they could try to please all the departments by responding to their concerns. Distribution does not need to store unnecessary items that are not in demand and marketing can have products available as per customer needs. There will be more flexibility to meet customer needs. They do not have to succumb to the uncertainties of supplies that significantly. HP can thus take advantage of market-oriented supply chain management strategies. The supplies needed for the localized customization will be cheaper and more available in the local area. They can localize as per the local demands directly close to the market and not have to undergo significant lead time.They definitely need to maintain a safety stock that is calculated by a more reliable method as shown in the Appendix - 1. This will also reduce lead time significantly. Their measures of line item fill rate and order fill rate will improve as well given they can serve customers more aptly. Backorder can be prevented by assembling at the DCs as they are more responsive now and do not have to wait through the long lead times. Over the long term, they could look into implementing an ERP system that could enhance communication among different departments more cohesive as they will have access to centralized information and could understand each other's perspective better.
Conclusion HP needs to look into their process of localizing all products in their centralized manufacturing plant and then sending it out to the DCs. They need to delegate the task of localization to the DCs thereby preventing wastage and reducing lead time and keeping inventory to a minimum while increasing responsiveness and availability of the products.
APPENDIX - 1 See attached Excel Sheet
APPENDIX - 2
Units Total Safety Stock with multiple products (current Vancouver Localization) 22,159 Total Safety Stock with standardized products (postponement strategy) 15,407
APPENDIX - 3