Risk pooling would take place within the European distribution center to greatly reduce the safety stock for low-volume product lines (for small countries) where demand is most variable.
2a. What are the different alternatives available to Brent to address the inventory/service crisis? What are the advantages and disadvantages of each?
The alternatives to address the inventory/service crisis are as follows:
Alternative 1: Ship to European distribution center by air rather than by sea:
- Advantages: Considering all the models Safety stock is 5445 units lower when shipping by air to Europe
- Disadvantages: Total costs of supply chain is $3,322,016 more when shipping by air to Europe.
Alternative 2: Perform final assembly for localization in Europe’s distribution center.
- Advantage: Risks are pooled across all lines in the European distribution center, thus reducing the required safety stock, particularly for low-volume skus going to small countries.
- Disadvantage: European distribution center would have to stock localized items separately, and would have to change processes to accommodate assembly tasks.
Alternative 3: Since both players are within the same company, they could switch from a periodic review to a continuous review via online data exchange to reduce order lead time as well as order cost.
Advantages: Order lead time and costs would be reduced, and both players would benefit.
Disadvantages: Minimal, aside from process change.
Alternative 4: To further reduce total cost of operation, HP may want to further consolidate all languages within a single manual, standardize the power supply, leaving only the power cord and a voltage regulator switch as the variables for localization. The costs per manual and per power supply may increase, but the more generic units allow assembly costs to be reduced and risks to be pooled, thus reducing inventory costs (i.e., safety stock).
Advantages: Though Bill of Material is not provided in the case, stocking localized manual and power cords is less expensive than stocking entirely localized skus.
Disadvantages: Cost per manual and per power supply may increase.
2b. Consider a periodic-review, order-up-to model to evaluate the various alternatives available (air shipping and ocean shipping) to Brent Cartier to address the inventory and service problem. Use the same methods to evaluate the inventory savings associated with a generic European product that would be assembled-to-order in the European distribution center under each shipping option.
2c. If you were Brent Cartier, what would you recommend? How would you expect the different stakeholders to feel about this proposal? How would you sell your recommendation to these stakeholders?
Answer:
Specifically, HP should postpone localization assembly until the moment demand for a localized configuration is known, which is in the European distribution center, closest to the customers that drive demand.
We would expect Vancouver manufacturing team to protest against Distribution centers performing assembly, as they would think they would be losing control on the manufacturing. They would think why the distribution centers, who cannot provide proper forecast are taking away some of their tasks. The European distribution center (and other DCs) would feel changing the processes is not warranted and the inventory management should be a shared responsibility of Vancouver Manufacturing center with the DCs. They wouldn’t be comfortable to change the processes in order to perform final localization assembly tasks.
We would sell the recommendation by emphasizing the total cost of operation will decrease, and risks can be pooled closer to the source of variable demand in order to prevent stock outs and overages. We would further assert that the Vancouver manufacturer and European distribution channel must broaden their viewpoints in order to optimize operations across the entire supply chain.
We also recommend HP continue to ship to European distribution center by sea as we can see from Appendix , from overall supply chain cost perspective, shipping by Sea is a cheaper option compared to shipping by Air. We would recommend shipping by air only if costs of a stock out offset costs air freight, and to prevent any customer satisfaction issues.
To further reduce total cost of operation, HP should consider further consolidation of all languages within a single manual, standardize the power supply, leaving only the power cord and a voltage regulator switch as the variables for localization. The costs per manual and per power supply may increase, but the more generic units allow assembly costs to be reduced and risks to be pooled, thus reducing inventory costs (i.e., safety stock).
For the following two questions, consider only option AB solid in Europe:
2d. The Marketing Department is concerned about increasing competition from other manufacturers and ha proposed that the target fill rate for all products be raised to 99.5%. What is the incremental average annual cost of attaining the higher target service level for option AB, assuming all products are shipped by sea?
Answer: Option AB’s incremental average annual cost is $371,225.10 by increasing the safety stock by 3,569 units, which is a 6.43%.
2e. A detailed market study shows that only a small segment of the Europenan market representing 30% of sale, requires 99.5% fill rate. HP can maintain its competitive position in the rest of the European market with its current 98% service level. The Logistics Department has proposed a differentiated service policy whereby inventory is physically separated and allocated to each of the two market segments in order to achieve the 99.5% and 98% fill rates, respectively. (Consider the distribution demand for each region.) What is the cost impact of such a policy, compared with the current practice of providing the higher service level to all customers (such as the previous question)? (Assume that all products are shipped by sea). Should this practice be adopted?
Answer: The required safety stock increases when providing service level at differential fill rates and costs increase by 6.38%. Whenever variability is divided into more parts, variability overall increases because risks are no longer pooled. We would not recommend this policy segmenting fill rates as costs would increase, unless the customer was willing to compensate us for the costs.
APPENDICES:
Sample Demand Data:
Shipping by Sea:
Shipping by Air:
AB Europe Revised Fill Rate:
AB Europe Multiple Fill Rates:
