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 Mai
Trần Ngọc Huyền
 Table Of Contents
I. Describe the theory relevant to the case.....................................3
1. Definition....................................................................................... 3
2. Types of inventory management models.......................................3
2.1. Economic Order Quantity (EOQ)...............................................3
2.2. Inventory Production Quantity...................................................3
2.3. ABC Analysis..............................................................................4

II. Identify case................................................................................ 5

1. Summary case................................................................................ 5
2. Identify the key issue in the case and the responses to these issues
........................................................................................................... 6
3. Answer question............................................................................6
4. Conclusion..................................................................................... 9

Reference........................................................................................ 10
I. Describe the theory relevant to the case
1. 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.
2. 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

√ 2 KD
ℎ (1− x)
D = Demand rate
h = Yearly holding cost per product
x = D/P
(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 activity-
based 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
value
Class C Low dollar value 50% 5% Basic Minimal
The Pareto Principle may not always be completely accurate. However, analysis
shows that valuable things do 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

1. 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.
2. 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.
3. 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)
- Inventory carrying Cost is 30% of the Product Price.
- 98% of times products should be available in the stock (Z = 2.054)
- Lead time by Ship = 5+1.5 = 6.5 weeks.
- Lead time by the Air = 1 + 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 Freight charges
Order-able Holdings cost
Quantity
By ship 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 1 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 (<78.6 items)

AB: SS = 15830.1-(3655.9/2) = 14002.15 items (>13639.3 items)

AU: SS = 4208-(971.8/2) = 3722.1 items (<5346 items)

AA: SS = 420.2-(97/2) = 371.7 (<494.4 items)

AQ: SS= 2301.2-(531.5/2) = 2035.45 (<2833.5 items)

AY: SS=306.8-(70.9/2) = 271.35 (>250 items)

Q3. 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.

Assuming it was possible for Europe DC to take on “integration” process by adjusting

material management systems to support manufacturing, it would have some positive
results. First of all, cost per unit and pipeline inventory are the same for both options.
Therefore, the major difference between supplying all options and generic printers is the
amount of safety stock. Supplying generic printers would considerably reduce safety stock
from 22,642 to 15,141.2 items. As a result, total inventory cost would decrease from
$3,249,658 to $2,780,867.54; inventory cost/unit would also decrease from $11.7 to $10.
The generic model is worth taking into consideration, because it decreases the amount of
inventory and, as a result, costs.

Q4. What is your recommendation to HP?

Based on the analysis done above, it is highly recommended that HP proceed with the
localization of the DeskJet printer in the distribution centers provided that an effective
quality assurance policy will be implemented.
4. Conclusion
To sum up, it is to conclude that HP Company was founded in 1939, which manufactures
peripherals and computer products. It introduced Deskjet printers in 1988. In early 1980s
Canon and HP pioneered the inkjet technology. The manufacturing cycle time have
reduced from 8-12 weeks to 1 week and average inventory reduced from 3.5 months ti 0.9
month. The Final Assembly and Test (FAT) and Printed Circuit Assembly and Test
(PCAT) are two stages in the manufacturing process.A company source components
required for FAT and PCAT from external suppliers and other HP divisions. There are
three major sources of uncertainty which are highly affecting the HP supply chain
including; Incoming material delivery (wrong part, late shipment), Internal process
(machine down times, equipment efficiency) and Demand.

In addition to this, the company had to minimizing the inventory, improve the forecast
accuracy and reduce the uncertainty caused by the incoming material delivery, provide the
high level of service and determine the right inventory level (best safety stock amount).It
is important for the company to focus on the localization at the DC in order to reduce the
cost at the manufacturing site and it should proceed with the localization of DeskJet
printer in the DC. The localization would improve the level of inventory and it would cost
the company in terms of decreased holding cost and unchanged shipping cost, inefficient
performance with Europe DC (causing time, human capital and extra process).
Reference

Hayes, A. (2022) Inventory management defined plus methods and Techniques,

Investopedia. Investopedia. Available at:
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Fernando, J. (2022) Economic order quantity: What does it mean and who is it important
for?, Investopedia. Investopedia. Available at:
https://www.investopedia.com/terms/e/economicorderquantity.asp#:~:text=Economic
%20order%20quantity%20(EOQ)%20is,has%20been%20refined%20over%20time.

Lauren (2022) What are the most common inventory control models?, Sortly. Available at:
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