Supply Chain Management & Logistics
DeskJet Printer Supply Chain (a)
HP’s fundamental challenge is in aligning its supply chain, manufacturing and fulfillment systems with the demands both inside the company originating from DCs and outside the company, from mass merchandisers. The alternatives of creating a Sales and Operations Planning framework, implementing a Supplier Performance Measurement system, or building additional factories are analyzed in this case. Of these alternatives, the first one, implementing a Sales and Operations Planning framework will deliver the most lasting and permanent change to the processes inside HP that today need to fundamentally change to keep the company competitive in the inkjet market.
Hewlett-Packard (HP) began as a premier manufacturer of test and measurement equipment, built by engineers for engineers. The company’s later moves into mainframe and minicomputers were fundamentally the same strategy of building the most technologically elegant product possible for the market targeted. As a result of these strategies HP had developed supply chain, sourcing, and production strategies that were aligned more intricate, highly defined components and smaller production runs than large-scale production processes capable of producing hundreds of thousands, even millions of units per year. Until the launch of the first inkjet printers in 1988, HP continually held onto the product strategies that put engineering excellence at the core of their products and as a result, their channel management, forecasting, production efficiency and in-channel integration strategies never needed to change. The launch of the DeskJet in 1988 however forever changed HP first at the product strategy level, which had an immediate and lasting impact on forecasting, supply chain, inventory management, manufacturing systems and processes, and production scheduling systems and processes. Compounding all this was the global success of the DeskJet on the one hand, and the need for localization to key international markets on the other. Clearly with an entirely new and much larger customer base to serve, with an entirely different type, level and urgency of demand, HP would need to quickly change how the core functions of forecasting, supply chain management, and production scheduling and manufacturing were handled. Further complicating HP’s situation was the rising importance of their indirect channels including the highly successful mass merchandisers and superstores including Price Club and K-Mart. The lack of visibility into demand from these indirect channels was adding another layer of complexity and conflict into the discussions on how to resolve an escalating inventory level globally and an inaccurate mix of products. HP, at a systemic level, was losing control of how to first capture, then interpret and respond to demand from both its international subsidiaries and its indirect channels.
Purpose of the Study
While the escalating inventory positions are a cause for concern, they are just one of many symptoms of a more systemic and root-level problem. The purpose of this study is to analyze why inventory positions are escalating, determine if the mix of DeskJets by country is optimal and if one or more models need to be discontinued, and also to understand why there is significant misalignment of indirect channel requirements and what is produced. In addition there needs to be clarification as the role of Distribution Centers (DC) as integration and customization centers or as distribution-only locations. In addition, the lack of supply chain and channel demand visibility is a major problem for HP in this case study.
Inventories escalating in correlation to Sales are a symptom of a much more systematic and broader set of problems that HP is facing, and the continual lack of synchronization with global demand both from a production volume and model mix standpoint also point to major disconnects in how HP is sensing and responding to demand. Simply put, what has happened is that HP is no longer accurately sensing and responding to demand from both its internal customers and is completely unaware of how to manage the demands from the indirect channels that include superstores and consumer mass merchandisers.
These many challenges are further exacerbate HP’s current situation and this includes the following:
Product and Market Characteristics Accelerating
Shorter product life cycles in the inkjet market will mean higher levels of production efficiency than has been ever attained before Significant new product introductions on a global scale and product line extensions every year as well
Significantly increasing market demand, especially for consumables including ink and paper (this represents an entirely new business model for HP to this point)
High inventory value across all product groups
Consistently high levels of inventory including finished goods and customized components
Increasing levels of supply chain lack of visibility and complexity
HP has no idea today if the supply chains’ performance is part of their inventory problem or not.
Lack of supply chain metrics of performance, and measures of supplier deliveries to forecast
Lack of supply chain visibility multiple layers deep (example of this would be the levels of inkjet print head assemblies going to HP vs. competitors from the same supplier)
Lack of metrics on the performance of suppliers who are providing components from Asian and European parts.
Alternatives to HP
There are many alternatives to HP in resolving the many symptoms that point to a more systemic problem of being out of sync with both internal and external, channel-based demand for their printers, and the lack of visibility into their supply chains. The three most feasible alternatives include the following:
Alterative 1: Create a Sales and Operations Planning framework that is global in scope and includes forecasting and replenishment for both internal and external, indirect channels. Figure 1, from AMR Research (4) highlights how this framework could be created. The role of forecasting is included in the Sales and Operations Planning area as part of Policy Deployment. This is in effect an entire infrastructure that mixes both traditional and lean manufacturing strategies, which is specifically what HP has to deal with today. What this framework can also help with is the mix of products produced in each geographic region.
The costs of implementing a system like this vary by vendor (AMR Research 16) ranging from $250K to over $1M with an average implementation time of over 13 months.
Defining a Sales and Operations Planning Framework
Alternative 2: Implement a Supplier Performance Management (SPM) System and use a scorecard to track ongoing performance. This is a critical area for HP to gather additional insights into, as there is presently no knowledge of how their supply chains are impacting their ability to managing suppliers to specific production forecasts globally. While HP is not yet feeling the pinch of competitive pricing, they will as the inkjet market becomes more entrenched in price competition. According to Aberdeen Group (1) the majority of manufacturers gain the benefit of price competitiveness as a result of adopting this strategy. SPM-based analytics will also help to see just how costly and time-consuming it is to keep marginally selling product versions in production across multiple manufacturing locations. Further as HP builds out a global supply chain, the company will find that the ability to quickly respond to logistics challenges will become a significant competitive advantage (Aberdeen Group (a) (2)).
The costs of implementing an SPM are in the $250K range, yet for HP and the coming commoditization of inkjet printers, this is a necessary investment. Gaining insights into supply chain data and then counterbalancing this with HP’s regional demand will quickly give the company an accurate reading of their cost structures and to-date hidden time constraints of supporting so many different models.
Alternative 3: Build additional factories in the Asian and European markets. The implications for HP in its current situation of creating additional factories are a third alterative that in the short run could resolve inventory issues. The costs of building an entirely new inkjet manufacturing plan can easily top $750M to $1B, in addition to the government fees and the need to create a supply chain in the country where the manufacturing plant is located at. The benefits of this strategy however is that it provides HP with quick response to local market requirements, and alleviates the need for taking between 4 and 5 weeks to ship printers from Vancouver to Europe.
What is the most realistic, prudent and viable alternative is to first attack those processes that are broken and that in turn are causing so much confusion in the company today. These include forecasting, model selection and optimization and the role of the channel in integration and localization. Underscoring these and many other problems is a lack of forecasting and synchronization of HP’s manufacturing centers with both internal and external customer demands. As a result, Alternative 1, the creation of a Sales and Operations Planning framework is essential in that it first forces HP to look at what processes are most in need of repair, and then brings in a disciplined series of systems and processes to alleviate the many disconnects in the system today. The framework also has performance measurements and value-stream mapping to both monitor and change processes as need. What HP is in need of is a re-vamping of core processes for sensing, responding to, and managing customer demand.
HP needs to quickly gain insights into which core process areas of their Printer Division are not functioning correctly, starting with the forecasting systems between DCs and Vancouver manufacturing first, and then between DCs, mass merchandisers, and Vancouver second. Extensive process re-engineering is required, yet it cannot be completed in a vacuum, it needs to be part of a broader Sales and Operations Planning framework.
This framework needs to be quickly created through first mapping out then modifying the core process areas including forecasting, supply chain planning, manufacturing and production scheduling, and the adoption of lean manufacturing principles. These are all critical process areas that must first be redefined and then organized into a Sales and Operations Planning framework so HP can find the scalability of production efficiencies they are searching for. Only by attacking this problem at a process level will lasting change ever be attained.
AMR Research. The Handbook of Sales and Operations Planning Technologies. Boston, MA. 2006
Manufacturers, Do you Know How Well Your Suppliers Perform? Boston, MA. 2005
Aberdeen Group (a). Global Supply Chain: What Are Innovators Doing? Boston, MA. 2006
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