HP Case Report
1. Causes for the Inventory Problem: HP was used to guarantee maximum order fill without putting major attention to stock level. The inventory problem was raised from a corporate order that business needed to meet customer needs with less inventory quantities. In fact, the situation was increasingly deteriorating due to the growing sales in European and Asian-Pacific, resulting in increased inventory levels to ensure satisfactory product availability. From our point of view, the main reasons for this crisis were: •
Customer loyalty was dropping, which increased the pressure to ensure quick satisfaction of costumers’ orders and avoid loss of sales. This fact, associated with a dramatic growth of sales resulted in an increasing inventory on the European and Asian divisions. The lack of capacity of the DCs’ materials management systems to support manufacturing and take ownership of the “localization” process for products to be sold at the region’s markets. This fact resulted in two major consequences: o The use of a sole factory in the US that combined with HP’s decision to use sea transportation to Europe and Asia and customs process, originated lead times that ranged from 4 to 5 weeks. o The fact that the US factory handles product customization for all three markets (US, Europe and Asia) means that independent stocks for each market need to be managed. This means additional complexity due to an increased number of materials (SKUs) and an overall increase of the stock levels. The lack of agreement between the various organizational parties regarding the definition of the correct level of stock, resulted in an important organizational and process gap, aggravated by the fact that major internal performance measures focused order filling and relegated inventory levels to second plan. Uncertainty in the manufacturing process was also a major contributing factor to the stock crisis, since: o Unexpected shortages in raw materials supply and process downtimes could result in manufacturing lead time increase; o Variations in demand could lead to inventory buildup or backorders at the DCs of the different markets. The estimation of demand using a rule of thumb system associated with a major uncertainty in the demand of the markets served by the European and Asian DCs resulted in the adoption by HP of a make-to-stock system.
2. What are the ‘drivers’ of safety stock? In our opinion there are three major ‘drivers’ for safety stock being used in the case of HP.
Firstly, we consider the company strategy, secondly the factory internal processing and lastly the DC’s needs. The company strategy clearly defines that their policy is make-to-stock and that the eventual cost for unavailability justifies the high cost of stocking. On the factory’s side, they consider important to have minimal raw material stock. In parallel they have to cope with processing lead times and their overall complications such as machinery downtime, motivated by maintenance or breakdown, which generates the need for a finished product safety stock. Finally, because of the demand’s variability (seasonal, discount or promotion) and variation on the lead time (transportation), DC’s tend to have the need for a safety stock on their Business Units.
3. Recommend quantitative target inventory levels for the six European options, assuming a weekly periodic review replenishment. The exhibit below illustrates how the HP factory supplies the regional distribution centers. The hexagons symbolize points of intermediate inventory used to turn the several operations independent from each other. According to the case the inventory immediately out of the factory is extremely small, leading to the conclusion that the factory produces as make-to-order and not as a make-to-stock. European Distribution Center
Asia-Pacific Distribution Center
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