NATIONAL ECONOMICS UNIVERSITY OPERATION MANAGEMENT CASE HEWLETT PACKARD SUPPLYING THE DESKJET PRINTER IN EUROPE GROUP 5 Nguyễn Tuấn Thành Ngô Đan Nhật Hà Nguyễn Phương Thảo Hoàng Tú Anh Trần Phương Ma[.]
NATIONAL ECONOMICS UNIVERSITY OPERATION MANAGEMENT CASE HEWLETT-PACKARD - SUPPLYING THE DESKJET PRINTER IN EUROPE GROUP Nguyễn Tuấn Thành Ngô Đan Nhật Hà Nguyễn Phương Thảo Hoàng Tú Anh Trần Phương Mai Trần Ngọc Huyền Table Of Contents I Describe the theory relevant to the case Definition .3 Types of inventory management models 2.1 Economic Order Quantity (EOQ) 2.2 Inventory Production Quantity .3 2.3 ABC Analysis II Identify case Summary case Identify the key issue in the case and the responses to these issues Answer question .6 Conclusion Reference 10 I Describe the theory relevant to the case Definition Inventory is the stock of any item or resource used in an organization Inventory management refers to the process of ordering, storing, using, and selling a company's inventory This includes the management of raw materials, components, and finished products, as well as warehousing and processing of such items Types of inventory management models Three of the most popular inventory management models are Economic Order Quantity (EOQ), Inventory Production Quantity and ABC Analysis 2.1 Economic Order Quantity (EOQ) The economic order quantity (EOQ) is a company's optimal order quantity that meets demand while minimizing its total costs related to ordering, receiving, and holding inventory The EOQ formula is best applied in situations where demand, ordering, and holding costs remain constant over time One of the important limitations of the economic order quantity is that it assumes the demand for the company’s products is constant over time.z The formula for EOQ is: where: Q = EOQ units D = Demand in units (typically on an annual basis) S = Order cost (per purchase order) H = Holding costs (per unit, per year) 2.2 Inventory Production Quantity Also known as Economic Production Quantity, or EPQ, this inventory control model tells you the number of products your business should order in a single batch, in hopes of reducing holding costs and setup costs It assumes that each order is delivered by your supplier in parts to your business, rather than in one full product This model is an extension of the EOQ model The difference between the two models is the EOQ model assumes suppliers are delivering inventory in full to your customer or business Calculate your Inventory Production Quantity: √ K = Setup (Order) costs D = Demand rate h = Yearly holding cost per product x = D/P KD h(1−x ) (P = Yearly product rate; D = Yearly demand rate) 2.3 ABC Analysis ABC analysis is an inventory management technique that determines the value of inventory items based on their importance to the business ABC ranks items on demand, cost and risk data, and inventory mangers group items into classes based on those criteria This helps business leaders understand which products or services are most critical to the financial success of their organization The most important stock keeping units (SKUs), based on either sales volume or profitability, are “Class A” items, the next-most important are Class B and the least important are Class C Some companies may choose a classification system that breaks products into more than just those three groups (A-F, for example) ABC analysis in cost accounting, or activity-based costing, is loosely related but different from ABC analysis for inventory management Accountants use activitybased costing in manufacturing to assign indirect or overhead costs like utilities or salaries to products and services ABC Analysis Relates to Pareto Principle: The Pareto Principle says that most results come from only 20% of efforts or causes in any system Based on Pareto's 80/20 rule, ABC analysis identifies the 20% of goods that deliver about 80% of the value Therefore, most businesses have a small number of "A" items, a slightly larger group of B products and a big group of C goods, a category that that defines the majority of items Classes in ABC Inventory Management Type Importance Percentage of Annual Controls Records Total Inventory Consumption Value Class A High dollar value 10% - 20% 70% - 80% Tight High Accuracy Class B Medium dollar 30% 15% - 20% Medium Good 50% 5% Basic Minimal value Class C Low dollar value The Pareto Principle may not always be completely accurate However, analysis shows that valuable things tend to bend toward an 80/20 distribution ABC analysis identifies the "sweet spot" where most of a business's revenue comes from with relatively little effort The formula for ABC inventory analysis: (Annual number of items sold) x (Cost per item) = (Annual usage value per product) II Identify case Summary case The DeskJet printer was introduced in 1988 and became one of Hewlett-Packard's (HP) most successful products Sales have grown steadily Unfortunately, inventory growth has closely tracked sales growth HP distribution centers are filled with DeskJet printer pallets The printer industry is so competitive that resellers want to limit inventory as little as possible and at the same time provide a high level of service As a result, pressure is growing on HP as a manufacturer HP management decided to reserve DCs to maintain high availability and assemble a team of employees to implement a plan to address the issue About the network of suppliers, manufacturing sites, distribution centers (DCs), agents, and customers for DeskJet products that make up the DeskJet supply chain Selling DeskJets in Europe requires customizing the printer to meet the appropriate power and language requirements of local countries, a process known as "localization" A continuing occurrence was the selection of inventory book prices for use in the safe-warehouse analysis Management decided to use 25 percent for this study Their distribution process consists of four stages: receiving products from suppliers and stocking them; choosing the right products according to the customer's orders; collapsing complete orders and labeling; and sending the order through the appropriate carrier DeskJet printers fit into the standard process; however, some special products require "integration" (additional keyboard and manuals) Although this addition does not require much additional labor, it was difficult to meet the standard process and disrupt the material flow However, HP leadership felt that the integration of products in the warehouse was extremely valuable because it allowed common products to be integrated sent to DC with the final product configuration done right before shipping to the customer They were therefore very interested in studying the value of this approach as it could be applied to machines in DeskJean Identify the key issue in the case and the responses to these issues - Difficulty in forecasting demand, determining safe stock levels in inventory : Product shortages for models demanded by some countries were common, while inventories of other models remained piled up HP assembled a team of staff to help implement a system science-based, secure reserve system capable of responding to additional timing and forecast errors They propose a new methodology for calculating the appropriate level of safety stock - The following inventory book prices are selected for use in safe stock analysis: Management has decided to use 25 percent for this study - Safe stock probabilistic choice for the model :The company decided to use the 98% probability - When conducting "integration"and addition to specialty products, it is difficult to meet in standard process and disrupt material flow : Management decided to study the merits of this approach as it could be applied to DeskJet printers - Long shipping time due to sea transit and time to clear customs and taxes at the port of entry : The factory sends a weekly print shipment to DC in Europe - "Localize"the products to match the power and language in different countries : The printers have been edited and improved to suit all different countries Answer question Q1 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 Exhibit 15.15 apply your model and calculate the expected yearly investment in DeskJet printer inventory in the Europe DC - HP uses Make-to-Stock model Periodic Review Model of Inventory can be used to tackle the Inventory issue faced by HP - Order up to Level (OUTL i.e Maximum Order-able Quantity) = μ(R+L) + Zασ(R+L)ασ(R+L) - Inventory carrying Cost is 30% of the Product Price - 98% of times products should be available in the stock (Zασ(R+L) = 2.054) - Lead time by Ship = 5+1.5 = 6.5 weeks - Lead time by the Air = + 1.5 = 2.5 weeks - Per unit Transportation by Ship is $15 and $30 by air - We have calculated the data per week in the Excel - We have shown Inventory carrying Cost and Freight Charges for both the Modes of Transport I.e Sea and Air Parameters Maximum Safety Stock Inventory Order-able Freight charges Holdings cost By ship Quantity 58036 23468 6298293 870537 By air 27849 14554 2569396 835485 Difference 30186 8914 3628896 35051 As we can infer from the table above and the spreadsheet attached in the Appendix, the difference between the inventory holding cost and the freight charges is to the tune of USD 376,3948 This difference is mainly due to the warehousing cost The level of inventory i.e safety stock if we ship using Ship is almost 1.6 times that of cost if shipped using Air Also, in case of uncertain spikes in the demand of printers, it can be fulfilled by the air at much rapid rate as compared to by ship Q2 Compare your results from question 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 (13639.3 items) AU: SS = 4208-(971.8/2) = 3722.1 items (