Case: Hewlett-Packard-Supplying the Deskjet Printer in Europe The DeskJet printer was introduced in 1988 and has become one of Hewlett-Packard’s (HP’s) most successful products. Sales have grown steadily, reaching a level of over 600,000 units in 1990. Unfortunately, inventory growth has tracked sales growth closely. HP’s distribution centers are filled with pallets of the DeskJet printer. Worse yet, the organization in Europe claims that inventory levels there need to be raised even further to maintain satisfactory product availability. THE DESKJET SUPPLY CHAIN
The network of suppliers, manufacturing sites, distribution centers (DCs), dealers, and customers for the DeskJet product make up the DeskJet supply chain (see Exhibit 17.14). HP in Vancouver does manufacturing.
There are two key stages in the manufacturing process: (1) printed circuit assembly and test (PCAT) and (2) final assembly and test (FAT). PCAT involves the assembly and testing of electronic components (like integrated circuits, read-only memories, and raw printed circuit boards) to make logic boards used in the printer. FAT involves the assembly of other subassemblies (like motors, cables, keypads, plastic chassis, gears, and the printed circuit assemblies from PCAT) to produce a working printer, as well as the final testing of the printer. The components needed for PCAT and FAT are sourced from other HP divisions as well as from external suppliers worldwide.
Exhibit 17.14 HP DeskJet Supply Chain
Selling the DeskJet in Europe requires customizing the printer to meet the language and power supply requirements of the local countries, a process known as “localization.” Specifically, the localization of the DeskJet of different countries involves assembling the appropriate power supply module, which reflects the correct voltage requirements (110 or 220) and power cord plug, and packaging it with the working printer and a manual written in the appropriate language.
Currently, the final test is done with the actual power supply module included with the printer. Hence, the finished products of the factory are “localized” versions of the printer destined for all the different countries. For the European Market six different versions are currently produced. These are designated A, AA, AB, AQ, AU, and AY as
indicated in the Bills of Materials shown in
Exhibit 17.15 HP DeskJet Bill of Materials
The total factory throughput time through the PCAT and FAT stages is about one week. The transportation time from Vancouver to the European DC is five weeks. The long shipment time to Europe is due to ocean transit and the time to clear customs and duties at port of entry. The plant sends a weekly shipment of printers to the DC in Europe.
The printer industry is highly competitive. Resellers want to carry as little inventory as possible. Consequently, there has been increasing pressure for HP as a manufacturer to provide high levels of availability at the DC. In response, management has decided to stock the DCs so that a high level of availability is maintained.
THE INVENTORY SERVICE CRISIS
To limit the amount of inventory throughout the DeskJet supply chain and at the same time provide the high level of service needed has been quite a challenge to Vancouver’s management. The manufacturing group has been very successful in reducing the uncertainties caused by delivery to the European DC. Forecasting demand in Europe, though, is a significant problem. It has become common to have product shortages for model demands from some countries, while inventory of other models keeps piling up.
In the past, the target inventory levels at the DCs were based on safety stocks that were a result of some judgmental rule of thumb. Specifically, target inventory levels, equal to one-month average sales, were set for each model carried in the DC. Now, however, it seems that the increasing difficulty of getting accurate forecasts means the safety stock rules should be revisited.
HP has put together a team of employees to help implement a scientifically based safety stock system that will be responsive to forecast errors and replenishment lead times. They are to recommend a method for calculating appropriate safety stock levels for the various DeskJet models carried in the European DC. The team has a good sample of demand data that can be used for developing the safety stock methodology (see Exhibit 17.16). HP hopes this new methodology will solve the inventory and service problem.