HP DeskJet Printer Supply Chain

Case Solution
For fulfillment of the course on

Operations Management
by
Group 1

Akshay Soni, 1511077

Mohan Raj, 1511103
Rupsa Dasgupta, 1511120
Sachin, 1511122
Vanshraj Roy, 1511140

Under the guidance of

Prof. Jishnu Hazra

Post Graduate Program in Management

Indian Institute of Management, Bangalore
October 2015
Question 1:

Consider the periodic-review, order-up-to model. Consider the air freight option
by examining the cost of inventory for all models in Europe, using a 98% service
level and the data given in Table 1 of the case. If the lead time is 5 weeks with
sea freight and 1 week by air, and if the review period is 1 week because of
production cycles at the factory, what savings in average inventory are
available? Assume that the marginal production cost is roughly $300 and the
selling price is $450. Per unit transportation cost is $10 by sea and $25 by air.
Inventory carrying costs are 24% per year.
Given data:

Mode of Lead time Marginal

transport (in weeks) production cost $300  
Sea freight 5 selling price $450  
Air 1  
Review Inventory
period (in Transportation by carrying cost
weeks) 1 cost per unit sea $10 per year 24%
by
service level 98% air $25  

Formulae used:

Conversions used:

Weekly demand = Monthly demand * 12/52

Weekly demand S.D = Monthly demand S.D * √(12/52) (square root is used since it is standard deviation)

Safety factor for area of 98% = 2.054 (calculated using excel function =NORMSINV(0.98))

Safety stock week of supplies = safety stock per week/demand per week

Total cost = Inventory carrying cost + Total transportation cost

 Sea freight
option              
Europe
options A AA AB AQ AU AY Total
Monthly mean
demand 42.3 420.2 15830.1 2301.2 4208 306.8 23108.6
Monthly S.D
of demand 32.4 203.9 5624.6 1168.5 2204.6 103.1 6244
Weakly mean
demand 9.7615385 96.96923 3653.1 531.0462 971.07692 70.8 5332.754
Weakly S.D of
demand 15.564457 97.95039 2701.97 561.3292 1059.0556 49.52764  
Review period
T (In weeks) 1 1 1 1 1 1  
Lead Time L
(In weeks) 5 5 5 5 5 5  
L+T (weeks) 6 6 6 6 6 6  
√L+T 2.4494897 2.44949 2.44949 2.44949 2.4494897 2.44949  
σ L+T 38.124977 239.9285 6618.449 1374.97 2594.1458 121.3174  
Safety factor k 2.054 2.054 2.054 2.054 2.054 2.054  
Safety Stock
(per week) 78.308702 492.8131 13594.29 2824.189 5328.3755 249.186  
Safety Stock
week of
supplies 8.0221681 5.082159 3.721304 5.318161 5.4870786 3.519577  
Order up to
quantity 136.87793 1074.628 35512.89 6010.466 11154.837 673.986 54563.69
Average
inventory per
week 83.189471 541.2977 15420.84 3089.712 5813.9139 284.586 25233.54

Cost calculation for Sea freight:

average
inventory per =average inventory per
year week *52 1312144.2
Transportatio =$10*average inventory
n cost ($10) - per year
A 13121442
Inventory =0.24*$300*average
holding cost - inventory per year
B 94474385
Total cost
per year =(A+B) 107595828
 Air freight
option              
Europe
options A AA AB AQ AU AY Total
Monthly
mean
demand 42.3 420.2 15830.1 2301.2 4208 306.8 23108.6
Monthly S.D
of demand 32.4 203.9 5624.6 1168.5 2204.6 103.1 6244
Weakly
mean 9.761538 96.9692 531.046 971.0769 5332.75
demand 5 3 3653.1 2 2 70.8 4
Weakly S.D 15.56445 97.9503 561.329 1059.055 49.5276
of demand 7 9 2701.97 2 6 4  
Review
period T (In
weeks) 1 1 1 1 1 1  
Lead Time L
(In weeks) 1 1 1 1 1 1  
L+T 2 2 2 2 2 2  
1.414213 1.41421 1.41421 1.41421 1.414213 1.41421
√L+T 6 4 4 4 6 4  
22.01146 138.522 3821.16 793.839 1497.730 70.0426
σ L+T 6 8 3 4 8 6  
Safety factor
k 2.054 2.054 2.054 2.054 2.054 2.054  
Safety Stock 284.525 7848.66 1630.54 143.867
(per week) 45.21155 8 9 6 3076.339 6  
Safety Stock
week of 4.631600 2.93418 2.14849 3.07044 3.167966 2.03202
supplies 9 6 6 2 3 9  
Order up to 64.73462 478.464 15154.8 2692.63 5018.492 285.467 23694.6
quantity 7 2 7 8 8 6 7
Average
inventory 50.09231 333.010 9675.21 1896.06 3561.877 179.267 15695.5
per week 9 4 9 9 5 6 4

Cost Calculation for Air freight:

average
inventory per
year =average inventory per week *52 816167.89
Transportation
cost ($10) - A =$10*average inventory per year 20404197
Inventory
holding cost - =0.24*$300*average inventory per 58764088
 B year
Total cost per
year =(A+B) 79168285
Savings in total costs (transportation and inventory holding costs) across all models in Europe when
using Air freight over Sea freight:

Total costs per

year Sea freight option 107595828

Air freight option 79168285

The difference in costs is the savings = $ 28427542

Utilizing air transport has the following advantages:

1. The above calculation shows that transport by air is a better option compared to transport by
sea and incremental savings obtained per year is substantial.
2. The Safety Stock week of supplies decreases from 5.185 weeks to 2.99 weeks which implies that
the safety stock levels in relation to the demand have fallen. This in turn will lead to better
product availability even at lower inventory levels

Question 2:
Use the same method to evaluate the inventory savings associated with a
generic European product that would be assembled-to-order in the
European Distribution Center. What are the advantages/disadvantages of
this generic printer option?

Data and Assumptions:

In this problem the product offered is generic unlike previous problem where we had different types of
options such as A,AA,AB,AQ,AU,AY. And the product is assembled and distributed directly from the
European Distribution Centre.

Since the product is assembled to order in European Distribution Centre, the lead time due to transport
by air (1 week) and sea (5 weeks) is assumed to be Zero. Hence the lead time in this case is only 1 week.

Now solving for the inventory savings as done in the previous problem gives the following solution:
 Lead
Time L Safet Safety Safety
Monthl Monthly Weakly Weakly (In y Stock Stock Order up Average
y mean S.D of mean S.D of weeks factor (per week of to inventory
demand demand demand demand ) σL k week) supplies quantity per week
23108.6 6244 5332.754 2999.521 1 2999.521 2.054 6161.015 1.155316 11493.77 8827.392
Generic option in Europe:

Here Distribution centre is present in Europe itself, and the transportation is assumed to be made via
sea. Hence the cost of inventory will include only the inventory holding cost which is at the rate of
24% per year.

average
inventory per
year =average inventory per week *52 459024.39

Transportation =$10*average inventory per year 4590243.9

cost ($10) - A
Inventory
holding cost - =0.24*$300*average inventory per
B year $ 33049756
Total cost per
year =(A+B) $ 37640000

Comparison of inventory total costs when using the 3 different modes of distribution:

Mode of distribution Ship with Air with Generic options Establishing a

Europe options Europe options using European factory in Europe
Distribution
centre
Average inventory per 25233.54 15695.54 8827.392
week 8827.392
Safety Stock week of 5.185 2.99 1.15 1.15
supplies
Total cost per year $ 107,595,828 $ 79,168,285 $ 37,640,000 $ 33,049,756

From the above table it can be concluded that distributing generic European product that would be
assembled-to-order in the European Distribution Center would have advantages and disadvantages
such as
Advantages:

Lower safety stock levels and average inventory

The safety stock levels reduces considerably when the transportation is done via air compared
to ship and those levels can further be reduces when using a separate distribution channel in
Europe.

Lower inventory holding costs:

As we see from the above table, the inventory holding costs decreasing substantially which is
mainly because of the lower average inventory in the warehouse.

Zero transportation costs when a factory can be established:

When a factory can be established along with a separate distribution centre the transportation
cost of $10 when shipped by sea and $25 when shipped by air is saved.

Lower safety stock week of supplies

The safety stock week of supplies which indicates how many weeks of demand would the safety
stock levels service which is calculated by dividing safety stock levels by demand. This shows
that product availability is taken care of even at reduced safety stock levels.

Reduced Lead time:

The lead time for the whole process is decreased substantially from the order of Few weeks to
the order of days thereby helping in reducing the lost sales.

Disadvantages:

Additional Capital Expenditure:

Establishing Distribution centre along with a factory in Europe is a capital intensive process, the
capital expenditure should be accounted while fixing the selling price of the product to cover
the additional cost incurred.

Root of the problem still unresolved:

As per the enthusiastic student Brent from Stanford University, the root cause of the problem is
the horrible forecasting system and establishing distribution centre in Europe though can help
in reduce the cost of inventory, the problem of forecasting the demand is still unresolved.