Inventory Management: Case Study: Hewlett-Packard

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CASE: Hewlett-Packard – Supplying the DeskJet Printer in Europe – Teaching Note
First review the Reorder Point model and the Equal Order Period model (this could be done on the day prior to when the DeskJet case is being discussed. It’s important that the average inventory calculations are covered, since this is no covered in the book.)

Let’s use some different numbers, just for another problem example. d = 20 units/day, std. dev. = 4 unit/day
L = 10 days
96% confidence
Q = 600 units
ROP (min level) = D(lead time) + SS
D(lead time) = 10 * 20 = 200
SS = 1.75 * Std dev(lead time) ---- sqrt( 10*4^2) = 12.65
SS = 1.75 * 12.65 = 22.14
ROP = 222 unit
What is average inventory? Q/2 + SS = 600/2 + 22 = 322
Equal Order Period model
Max Level = D(lead time + review period) + SS
Review period is 30 days
D (T+L) = (30+10) * 20 = 800
SS = 1.75 * Std dev (lead time + review period) -- sqrt (40*4^2) = 25.3 SS = 1.75 * 25.3 = 44.271 –> 44
Max Level = 20 * (30+10) + 44 = 800 + 44 = 844
suggest the
average inventory to be?
Let’s consider model AB
Monthly mean 15,830.1, Std Dev = 5,624.6
Review Cycle = 1 week
Lead Time = 6 weeks
Average Weekly Demand = 15,830.1/4 = 3,957.525
Std. Dev. = sqrt (5624.6^2/4) = 2,812.3
Average inventory = 3957.525/2 + 2.1 * sqrt(7 * 2,812.6^2)
= 17,260 units
These are worth $250 each = 4,315,000 total value of inventory Inventory carrying cost = 4,315,000 * .25 = $1, 078,950
This is compared to HP’s current policy of carrying 1 month’s worth of inventory for the model AB. This cost is (15,830.1 * 250 * .25) = $989,381.25. In this case the model would suggest that additional inventory be kept. Next bring up the spreadsheet (from the Student CD, Website-ROM) and do the calculations for the rest of the items. The calculations are then done for the pooled demand. The savings are pretty dramatic as can be seen from the following completed spreadsheet.
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