Inventory Driven Costs (A Case Study of HP)

Is HP’s focus on minimizing inventory costs is feasible for a company operating in a market
where delivery speed is an order-wining factor?

Yes, HP’s focus on cutting inventory costs is feasible especially in this highly competitive
environment where relevant technologies could easily get obsolete or old-fashioned
overtime as in the case of personal computers industry where HP operates in. Managing
inventory entails ensuring that balanced items of stock are maintained at the right quantity,
quality, place and time in a company in order to ensure business continuity (McFarlane,
2014). It basically seeks to ensure availability of goods to keep operation running and to
achieve high quality service level. Realizing this goal comes with a cost (holding cost) to the
company. More importantly, an inventory-driven cost which a hidden cost is most often the
main driver in a company’s as in the case of HP where in 1995 excess inventory was the
main driver of the costs and inventory-driven costs equaled the PC business’s total
operating margin. Thus, cutting down the profitability of HP due to high inventory as a result
of mismatch between demand and supply. It became vital for HP to come up with a better
system to manage and minimize the driven cost in a distinct way (Calloni, Montgros,
Slagmulder, Wessenhove and Wright, 2005).

On the other hand, holding more inventory than is currently necessary are vital to ensure
company’s operations (McFarlane, 2014). It helps to meet both anticipated and
unanticipated demand, reduce lead time and also take care of other situational parameters
such as inflationary pressures, shortage of materials in the markets, and offer quantity
discounts to encourage bulk purchasing. This can help to speed delivery for a HP (and other
similar companies) but however comes with the hidden cost of obsolescence, devaluation
cost among other cost which is a major drain on inventory costs with computers (and some
other technological innovations) being obsolete in as little as six months and price of CPU
devaluing 40% in nine months (Calloni et al., 2005). Such speedily changing values made it
imperative for HP to decide between holding more inventory or minimizing what drives
inventory costs.

Furthermore, it is feasible for a company operating in a market where delivery speed is an

order-wining factor to focus on minimizing inventory costs by also focusing on their supply
chain like HP. Supply chain deals with the steps involve in moving products or materials
from suppliers to customers (James, 2011). For HP, supply chain staff were given a wider
overview of the operations, so they could understand better how their decisions affected
costs in another place in the system (Calloni et al., 2005). The key strategy employed in
achieving optimal delivery speed is integrating manufacturing, purchasing, and delivery into
a well-tuned, communicative system. HP adopted Just in Time delivery (JIT), which limited
the amount of inventory that was idle in storage. By also precisely timing the launching of
new product to synchronize with the final clearance sell-off of older models (Calloni et al.,
2005). This had the desired result of having to write off less inventory due to obsolescence.
Employing these active measures can help company operating in a market where delivery
speed is an order-wining factor to act decisively and quickly to decrease inventory costs,
while still achieving the delivery goals of their customers.

Would you pay a premium for a product or service price for an earlier delivery? For which
type of products or services?

Yes, I would definitely pay a premium for a product or service price to be delivered earlier.
The type of product that falls into this category for me are the ones that are very urgent and
time bound such as a wedding gown or ring or gifts that is needed at a fixed date. In this
case, I don’t want any delay or disappointment that could ruin the event. For me, paying for
speed up shipping depends on if it is for a special event and/or how instantly I need the
item. Thus, I can pay for a premium for items that the success of an event or action is
entirely dependent on. In addition, in cases where an item needed to be shipped from
overseas has a normal delivery time that when delivered would have elapsed the need for
the item or render the item damaged (for example perishable goods), I would seek for an
express delivery to have it delivered quite earlier and at an extra cost.
 References

Calloni, G., de Montgros, X., Slagmulder, R., Wassenhove, L., Wright, L. (2005). Inventory-
Driven Costs.  Harvard Business Review.  Retrieved from https://hbr.org/2005/03/inventory-
driven-costs (Accessed: 21 September 2020)

James, T. (2011). Operations Strategy. Bookboon.

McFarlane, D., (2014). The Challenges of Operations Management for Business Managers.
International Journal of Operations and Logistics Management, [Online] 3(1), pp.16-29.
Retrieved from: http://oaji.net/articles/2014/351-1393621192.pdf (Accessed: 21
September 2020)