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! ! Assignment 3
Analyze Hewlett-Packard Supply the DeskJet Printer in Europe case (JCB chapter Inventory Control; see the course package). First answer questions 1, 2, and 3 given at the end of the case. (The current policy referred to in question 2 is described at the bottom of this document.) Then answer the additional question given below. Finally, answer question 4 given at the end of the case. Several hints are provided below. Additional Question: Instead of supplying generic printers to the European market, another alternative that can be considered is to air freight the printers to the European DC. Using air freight will cut the shipment time from 5 weeks to 1 week. The transportation supervisor at HP was convinced that this was the correct approach. She felt that shortening the lead time means faster reaction to unexpected changes in product mix. That should mean lower inventory and higher product availability. Air freight is expensive, but it is worth it. Suppose that air freight cost an additional $10 per unit. Should this option be used instead of supplying generic printers? Hint: Does the reduction in inventory cost per unit offset the increase in the transportation cost per unit? Other Hints to the Case: In comparing different options (e.g., using air freight, localization of a generic printer at DCs, etc.), you need to quantify the benefits from each. The best way to do that is to use the inventory models to calculate the total cost of inventory per unit (for all DeskJet models) under different options. Use demand data from the exhibit entitled DeskJet Demand Data from Europe. For your convenience, the monthly mean and standard deviation have been calculated in the spreadsheet on Connect. Assume a 98% service level. The z value to ensure a 98% Service level is 2.06. Assume 4.33 weeks in a month. Note that this is a fixed time period model with review period = 1 week. Lead time for ocean transit = 5 weeks, and lead time for air freight = 1 week. While calculating annual inventory costs, remember to include pipeline (in-transit) inventory, safety stock, and cycle stocks. The annual average inventory cost is computed as follows: Annual Average Inventory Cost = (Safety Stock + Average In-Transit Inventory + Average Cycle Inventory) ! (unit cost) ! (percent carrying cost).

Note that in a fixed time period model, the ordering cost is fixed and can therefore be ignored. We can find the average inventory cost per printer by dividing the annual average inventory cost by mean annual demand (mean monthly demand ! 12). The total supply chain cost per printer sold is given by (unit cost) + (average inventory cost per printer) + (transportation cost per printer). Your recommendation to HP should be to use the option that minimizes total supply chain cost per printer.

Current Policy for Question 2: The current policy used by HP is not clearly explained in the case. The wording in paragraph 6 is different from the wording in Question 2. To be consistent, use the following interpretation: Target inventory level at the DC = Average inventory at the DC. According to the case, the average inventory at the DC is equal to one-months average sales. Under the fixed time-period model, the average inventory at the DC is the cycle stock plus the safety stock (= Q/2 + SS), where the cycle stock is half of the sales during the review period. For example, for Brand A one-months average sales = 42.3 units, i.e., one-weeks average sales = 42.3/4.33 = 9.8 units. If the average inventory at the DC is set to 42.3 units, then: 42.3 = Cycle Stock + Safety Stock Safety Stock = 42.3 " Cycle Stock = 42.3 " (9.8)/2 = 37.4 It can be shown that given the safety stock of 37.4, the service level for Brand A will be less than 98%. So, under the current policy, inventory for Brand A will probably be lower than that in Question 1 (and thus inventory cost will be lower), but service level will be lower than the required 98%. Note that pipeline (or in-transit) inventory is not carried by the DC, but should be included in the supply chain.

Suggested length: 2 pages.