Hp Deskjet Case - Assignment 3

Assignment 3: HP DeskJet case

1. Develop an inventory model for managing the DeskJet printers in Europe assuming that the Vancouver plant continues to produce the six models sold in Europe.  Using the data in the Europe table in Exhibit 4, apply your model and calculate the expected yearly investment in DeskJet printer inventory in the Europe DC.

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The expected yearly investment in DeskJet Inventory in the Europe DC is the same as the average annual inventory cost and equals to $3,249,658.

1. Compare your results from question 1 to the current policy of carrying one month’s average inventory at the DC.

For all options, one week’s average sales = 23108.6/4.33=5336.859 items.

 (Average cycle stock) = (Average demand during T)/2,

Average cycle stock (weekly) = 5336.859/2= 2668.43

One month’s average sales = SS – average cycle stock

Safety stock = 23108.6 – 2668.43 = 20440.2 items

So, compared to the data we received in Question 1, the safety stock under the “current policy” is lower than the safety stock at the cycle service level of 98%. (20440.2 units < 22642 units). So, under the “current policy” the cost is lower, but CSL is also lower. As a result, HP has a higher probability of stocking out in a cycle, which leads to product shortage and poor customer service. So far, the inventory model in Q1 addresses HP’s problem better than the “current policy.”

Moreover, we can see that the “current policy” causes inventory build-up for models AB and AY, because the safety stock is too high.

A: SS under the “current policy” = 42.3-(9.8/2) = 37.4 items (<78.6 items)

AB: SS = 15830.1-(3655.9/2) = 14002.15 items (>13639.3 items)

AU: SS = 4208-(971.8/2) = 3722.1 items (<5346 items)

AA: SS = 420.2-(97/2) = 371.7 (<494.4 items)

AQ: SS= 2301.2-(531.5/2) = 2035.45 (<2833.5 items)

AY: SS=306.8-(70.9/2) = 271.35 (>250 items)

1. Evaluate the idea of supplying generic printers to the Europe DC and integrating the product by packaging the power supply and the instruction manual at the DC just prior to delivery to the European resellers.  Focus on the impact on DC inventory investment in this analysis.

Assuming it was possible for Europe DC to take on “integration” process by adjusting material management systems to support manufacturing, it would have some positive results. First of all, cost per unit and pipeline inventory are the same for both options. Therefore, the major difference between supplying all options and generic printers is the amount of safety stock. Supplying generic printers would considerably reduce safety stock from 22,642 to 15,141.2 items. As a result, total inventory cost would decrease from $3,249,658 to $2,780,867.54; inventory cost/unit would also decrease from $11.7 to $10. The generic model is worth taking into consideration, because it decreases the amount of inventory and, as a result, costs.  

1. Instead of supplying generic printers to the European market, another alternative suggested by Kay Johnson (the Transportation Department supervisor at HP) was to air freight the printers to the European DC. Using air freight would cut the shipment time from 5 weeks to 1 week. She said (on p. 8 of the case) that “Shortening the lead time means faster reaction time to unexpected changes in product mix. That should mean lower inventory and higher product availability. I tell you, air freight is expensive, but it is worth it.” Suppose that air freight costs an additional $10 per unit. Should this option be used instead of supplying generic printers? (Hint: Does the reduction in inventory cost per unit offset the increase in the transportation cost per unit?)
2. What is your recommendation to HP?

Other Hints to the Case:

In comparing different options (e.g., using air freight, localization of a generic printer at DCs, etc.), you need to quantify the benefits from each. The best way to do that is to use the inventory models from class to calculate the total cost of inventory per unit (for all DeskJet models) under different options.

• Use demand data from the Europe table in Exhibit 4. For your convenience, the European data from Exhibit 4 have been pre-entered into a spreadsheet posted on Connect, along with computation of the monthly mean, standard deviation, and coefficient of variation, and a template for further computations.
• Question 1 asks for an “inventory model”; this just means that you need to compute the safety stock SS for each option: We already know that we are using the periodic review policy.  This policy requires that you figure out SS for each printer option.  Then this SS would give you the Target level, which would allow you to compute the order quantities each week.  Computing SS also allows you to compute average total inventory.
• Assume a 98% Cycle Service Level. The z value to ensure a 98% CSL is F-1(0.98) = 2.05.  
• Assume 4.33 weeks in a month.
• P. 8 says that inventory carrying cost estimates ranged from 12% to 60%; you should assume h = 25% and the manufacturing cost of each printer is C = $250.
• Note that this is a fixed time period model (periodic review model) with review period = 1 week.  
• Lead time for ocean transit = 5 weeks, and lead time for air freight = 1 week.  
• While calculating annual inventory costs, remember to include pipeline (in-transit) inventory, safety stock, and cycle stocks.  
• The annual average inventory cost is computed as follows:  

Annual Average Inventory Cost = (Safety Stock + Average In-Transit Inventory + Average Cycle Inventory) × (unit cost) × (percent carrying cost).

Note that in a fixed time period model, the ordering cost is fixed and can therefore be ignored.