UBCSauder School of Business

COMM 204: Logistics and Operations

Management
Sections 206-208, Tom McCormick
Assignment3:HPDeskJetcase
Recall that you can work on this assignment (and other assignments in this
course) either individually, or in groups of up to four total students (you can
organize groups on your own, from any students in Sections 206-208). Your
written assignment is due on or before 9:30am the morning of Tuesday, 15
March, to the assignment dropbox on the courses Connect webpage.
Remember to write the names and students numbers of all students in your
group on your submitted assignment.
Read the HewlettPackardCompanyDeskJetPrinterSupplyChain(A)case.
Answer these five questions (the current policy referred to in question 2 is
described at the bottom of this document):

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.
2. Compare your results from question 1 to the current policy of carrying
one months average inventory at the DC.
3. 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.
4. 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?)
5. What is your recommendation to HP?

OtherHintstotheCase:

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 zvalue 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 fixedtimeperiodmodel(periodicreviewmodel)
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.
We can find the average inventory cost per printer by dividing the
annual average inventory cost by mean annual demand (mean
monthly demand 12).
The total supply chain cost per printer sold is given by(unit cost) +
(average inventory cost per printer) + (transportation cost per printer).
Your recommendation to HP should be to use the option that
minimizes total inventory cost per printer.
CurrentPolicyforQuestion2:
The current policy used by HP is not clearly explained in the case.
According to the case, the the target inventory levels at the DCs were based
on safety stocks that were a result of some judgmental rule of thumb (p. 7),
which you should assume is equal to one-months average sales. To be
consistent, use the following interpretation: Target physical inventory level
at the DC = Average physical inventory at the DC. Recall that
(avg physical inv) = (avg cycle stock) + (safety stock),
whereas
(avg inv position) = (avg physical inv) + (avg pipeline inv).
Thus if we are keeping one months average sales as physical inventory, then
we have
(1 months avg sales) = (avg cycle stock) + (implied level of SS), or
SS = (1 months avg sales) (avg cycle stock).
Since we know that
(avg cycle stock) = (avg demand during T)/2,
and since T = 1 week, we get
SS = (1 months avg sales) (1 weeks avg sales)/2.
Under the fixed time-period (periodic review) model, the average inventory
at the DC is the cycle stock plusthe safety stock (= Q/2 + SS), where the
cycle stock is half of the sales during the review period. For example, for
Option Aone-months average sales = 42.3 units, i.e., one-weeks average
sales = 42.3/4.33 = 9.8 units. If the average physical inventory at the DC is
set to 42.3 units, then:
42.3 = (avg cycle stock) + Safety Stock
Safety Stock = 42.3 (avg cycle stock) = 42.3 (9.8)/2 = 37.4 items.
You should be able to compute that if the safety stock is 37.4, then the
service level for Option Awill be less than 98%. So, under the current
policy, inventory for Option Awill probably be lower than what you
computed in Question 1 (and thus inventory cost will be lower), but the
service level for Option A will be lower than the required 98%.
Note that pipeline (or in-transit) inventory is not held by the DC, but its cost
should be included in the supply chain cost.
Suggested length: 2 pages, possibly more when Excel printouts are included.