Supply Chain Management

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1. What has caused the so-called Inventory/Service "Crisis"?1

2. What are the important "drivers" of safety stock?2

3. Recommend quantitative target inventory levels for the six European options, assuming a weekly periodic review replenishment.4

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 three days), evaluate the various alternatives available to Brent Cartier to address the inventory and service problem.6

5. Bibliography8

1. What has caused the so-called Inventory/Service "Crisis"?

In 1990’s, Hewlett-Packard faced several problems with inventory levels for the Deskjet Printer product line. This printer was produced in Vancouver’s facility and from there was shipped to a distribution center. HP has three distribution centers (DC), in North America, Asia Pacific and Europe that at the moment were filled of Deskjet stock. Each DC have a make-to-stock system to guarantee product availability and deal different with the problem resulting in problems to Vancouver Division that couldn’t build the right products in the right quantities. HP need to reach an optimal solution that balance the customers’ needs and keep a low inventory level, getting an agreement among the DC’s. Through this situation, HP faced an Inventory/Service “Crisis”. One of the main causes, mentioned as the “root of the problem” by a summer intern student from Stanford University, was the forecasting system. The demand oscillations and wide range of products due to localization often contributed to forecast errors. This innacurate forecasts were the basis for safety stock calculation creating high inventory levels and backorders. DC’s were discoordinated and divided in terms of inventory policys due to the lack of a scientific rule on this. The magnitud of demand helped to this Inventory/Services crisis because having such a changeable demand made life harder to the DC’s that wanted to keep safety stocks to cover demand. Products took 4 to 5 weeks to reach DC’s in Europe and Asia, representing long lead times that raised less capability to respond to orders. Other situation that contributed to this crisis was the make-to-stock system that due to all the lacks in forecasts and to long lead times, creates high levels of inventory in the DC’s resulting in carrying costs. By using push system, HP has to calculate at great lenght its inventory levels avoiding stock-out and overstock. HP produces goods to other continents such as Europe and Asia, comericalizing products with different voltages and plugs consonant the market in which they are sold. This variety in products contributes to high levels of inventory because there’s more products to keep in safety stock and to forecast expected demand. Another issue is that inventory costs are not taked in consideration in Proftis and Loss statements, showing that HP financial departments don’t have the accurate information about these costs that they had shown so important.

2. What are the important "drivers" of safety stock?

Worldwide market is each time more competitive, therefore the delivery of the products on time and customers satisfaction is a real concern. To avoid stock out situations, most of the companies are forced to form safety stocks that represent bulk costs. Having inventory brings many benefits like maintain independence of operations; meet variation in product demand; allows flexibility in production schedule; provides a safeguard for variation in raw material delivery time; and to take advantage of economic purchase order size. However it implies holding costs, setup costs, ordering costs and shortage cost.

HP use the Fixed-Time period Model (P-Model). This Model, determine that exist a fixed date to make the orders. The Safety Stock will depend basically in three pillars: lead time (L),...
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