Hewlett Packard Case

1. What are the causes of the inventory/service crisis that Hewlett-Packard faces? Develop a relatively comprehensive list. The company had a wide offering of printer models and options. Besides this, the different models needed to be customized for each of the different geographies. Demand was difficult to forecast and the Productions individual forecasts were not accurate, leading to excess inventory of some models while at the same time having shortage of others. There was no consensus around the cost of capital used to calculate the holding cost of the inventory, nor the target service level. Variability in these key components of the EOQ would lead to very different safety stock levels. The company organizations (engineering, production, distribution and marketing) had a series of misaligned incentives and organizational problems (to be addressed in the next question)-

2. From an organizational perspective, what problems does Hewlwtt-Packard face? The Vancouvers management group was pulled from different HP divisions with different practices, making difficult to have a unified culture The different organizations objectives were not aligned. People cared about their individual organization and P&L, instead of thinking about the organization as a whole: o Vancouver plant had a policy of not having any finished goods at the factory, posing a perverse incentive of shipping products to Distribution Centers (even if they were not needed) o DCs main performance measures were based on filling as much orders as possible, and considered inventory levels as a secondary measure o DCs were meant to be considered warehouses with no responsibility or support for the manufacturing processes 3. Evaluate the air freight alternative suggested in the case. What are the advantages and disadvantages of this alternative over the current approach? Advantages: o Lower response time to adapt to demand changes o Lower inventory Disadvantages: o Higher cost of the freight o Having less inventory would mean a lower reaction capacity to immediate orders

4. Put yourself in the shoes of Engineering (R&D). What dont you like about this proposal? What do you like?

Dont like: o A new generic printer will have to be developed. o Theres a big challenge in the design of this printer, because it has to be able to deliver high quality (to keep up with competition), but at the same time, be modular enough to derive in different models. Like: o After focusing in the design of a very good vanilla-box, the development of new models will be easier

5. Put yourself in the shoes of the Distribution Center. Answer the questions in 4). Dont like: o The organization will have to adapt from a Warehouse culture to a Production culture. o More personal will be required at the DCs and they will have to be trained, in the final assembly process. Like: o Indicators of customer satisfaction will improve due to fewer stockouts: Line Item Fill Rate and Order Fill Rate would be increased. o DCs will be able to react faster to changes in customers preferences and demand.

6. Put yourself in the shoes of Material Management (whole organization). Asses the pros and cons of this proposal for HP as a whole. Pros: o Production of the vanilla-box printer and postponement of the localization will allow to better forecasts because aggregate demand is less variable than individual demand. o The pooling system of the generic printers will reduce the inventory levels because the vanilla-box can be used to fill orders of different models, and inventory leftovers will only consist of the power supply, manual and other specific (minor) parts of each model. o Inventories can be reduced even further if the vanilla-boxes are shipped by sea, but the specific (smaller and lighter) parts are shipped by air. Cons: o Organizational changes will be required, specially on the DCs. o Investment will be required on the DCs side, to build the production facilities required for localization, and to hire new teams in charge of doing this task. o Overall production per printer will be more costly, because the economies of scale of producing many printers in the same location are lost (although only for the part of the product not considered generic).

o Company might lose control of the quality of the final products, as a result of having them finalized in different locations.