Hewlett-Packard Company: Network Printer Design for Universality - Essay Example

Hewlett-Packard Company: Network Printer Design for Universality Adopting a universal power supply is definitely a postponement strategy for Hewlett-Packard Company because this step leads to delay in making a decision about the particular Rainbow printer target market. Such strategy allows a company to maximize the number of standard components it uses in different forms of the product, to assemble those components for all product options in the earlier stages of the production process, and postpone the addition of the components that differentiate the product until the later stages of the process. Without a universal power supply Hewlett-Packard is committing itself to the network printer's country of destination before the process of producing the printer's engine even started, no matter that the other differentiating components will be added at the distribution centers. Introducing universal power supply will increase the flexibility because the modifications will be added at the latter stages of assembling, the forecasts for particular markets will have to be done less time in advance, and thus be more accurate, and the excess or shortage can be balanced by means of transshipment without a reconfiguration required. It, in turn, will help HP to achieve a better order fulfillment rate. As an alternative postponement strategy, the customized power supplies can be added at the distribution centers together with the market-specific components. The cost of adding a universal power supply to the Rainbow model is indicated to be at the $30 level, while the printer engine costs approximately $1,000. Let us take the sales of 450,000 units and additional material costs of $13.5 million, as correctly pointed out in David Hooper's citation. The printer's life cycle is estimated at 18 months. Forecasted average monthly demand is equal to 25,000 units, including 15,000 (60%) for the North American market and 10,000 (40%) for the European market. Knowing that the forecasts can be off 80-90% for the ramp-up stage, and about 40% for the maturity and end-of-life stages, standard deviations of the monthly demand are shown in Table 1: Table 1: Monthly Demand for Printers Mean demand St. dev. : Ramp-up St. dev. : Maturity and end-of-life North America 15,000 12,750 6,000 Europe 10,000 8,500 4,000 I assume that all three stages of the printer's life cycle are of approximately the same length and each takes 6 months. For the ramp-up stage, as the shortages are critical and result in heavier losses of profit and customer loyalty than during the next two stages, the target cycle service rate should be as close to 1.0 as possible. I used for calculations the target cycle service rate of 0.999, corresponding to it z-value is equal to 3.0902. Then the monthly stocking quantity at the ramp-up stage should be equal to (see Table 2): 54,400 = 15,000 + 3.0902*12,750 for the North American market 36,267 = 10,000 + 3.0902* 8,500 for the European market For the maturity stage, the target cycle service rate equals to 0.98, and z-value - 2.0537. The stocking quantities for the North American and European markets are at 27,322 and 18,215 correspondingly. For the end-of-life stage when high order fulfillment is not the top priority and new products are being introduced to the market, I have assumed the target cycle service rate of .7 (z-value of 0.5244). Given that annual holding cost amounts to 30% of the inventory value and assuming the price for the new printer equal to $5,500, the monthly cost of holding 1 printer in stock is $137.5. Monthly holding costs (Table 2) have been calculated as Q/2*per unit monthly holding cost, then I calculated total holding costs (6*monthly holding costs). Table 2: Inventory Holding Costs without Universal Power Supply Inventory, units Monthly holding costs, $ Total holding costs, $ North America Ramp-up 54,400 3,740,032 22,440,191 Maturity 27,322 1,878,421 11,270,529 End-of-life 18,146 1,247,565 7,485,391 Europe Ramp-up 36,267 2,493,355 14,960,127 Maturity 18,215 1,252,281 7,513,686 End-of-life 10,072 692,457 4,154,743 Total 67,824,666 For the end-of-life stage when transshipments and reconfigurations take place, the expected leftovers are 10,000* E (z) = 10,000 *0.19. The incurred transshipment costs (by air) are $142,500 and the reconfiguration costs are $475,000, totaling $617,500. With universal power supply no excessive stocking during the any of the stages are required because the air shipment of the printer is always possible due to compatibility. Then, cost of understocking 1 unit is simply cost of air shipment ($75); cost of overstocking 1 unit is equal to cost of holding one printer in inventory for one day ($4.58). Therefore, critical ratio equals to 0.942 and z-value to 1.62. The corresponding holding costs are indicated in Table 3. Decrease in holding costs due to the universal power supply is $67,824,666 - $52,087,295 = $15,737,371. Savings from no longer necessary reconfigurations are $475,000. Table 3: Inventory Holding Costs after Introduction of Universal Power Supply Inventory, units Monthly holding costs, $ Total holding costs, $ North America Ramp-up 35,655 2,451,281 14,707,688 Maturity 24,720 1,699,500 10,197,000 End-of-life 18,146 1,134,150 6,804,901 Europe Ramp-up 23,770 1,634,188 9,805,125 Maturity 16,480 1,133,000 6,798,000 End-of-life 10,066 629,097 3,774,581 Total 52,087,295 Even without taking into account increased order fulfillment rate, and improvement in the customer satisfaction, which are hard to assess given the limited data available, savings from decrease in holding costs and reconfigurations no longer required amount to more than $16.2 million and outweigh the additional material costs of $13.5 million. The universal power supply should be adopted for the new networking printer Rainbow. In addition it can be recommended to HP Boise: To improve its SCM with regard to managing relationships with suppliers: the monopoly of the supplier on the critical component is undesirable. To investigate variant of central warehouse for the printers' storage before being sent to the distribution centers. One of the DCs, for example European, can serve as such warehouse in order to avoid continuous transshipping back and forth, as Rob Segel pointed out. To calculate base and safety stocks for both shipping by sea and shipping by air and develop the procedure for ordering the air shipment when inventory hits the determined level. Read More