Hewlett-Packard: Desk Jet

Printer Supply Chain

Second case submission
Operations Management

Submitted to
Professor Jishnu Hazra

Submitted by:

Group No: 13

P. Arunsathyaseelan – 1211280

Chandan Satapathy – 1211254

Jagannath J. – 1211267

Puneet Manuja – 1211320

Rohit Jaiswal – 1211293

Sukrit Dhar – 1211306

 1. Consider the periodic-review, order-up-to model. Consider the air freight option by
examining the cost of inventory for all models in Europe, using a 98% service level and the
data given in Table 1 of the case. If the lead time is 5 weeks with sea freight and 1 week by
air, and if the review period is 1 week because of production cycles at the factory, what
savings in average inventory are available? Assume that the marginal production cost is
roughly $300 and the selling price is $450. Per unit transportation cost is $10 by sea and $25
by air. Inventory carrying costs are 24% per year.

The following formula were used to arrive at the Safety stock and Average inventory:

Safety stock = k*σl+r

Average inventory = µ*R/2+Safety stock
Shipping
Monthly Monthly Lead Review Service Zα Safety Average
Options mean SD time Period level (0.98) Sigma (L+R) stock Inventory
A 42.3 32.4 1.25 0.25 0.98 2.05 39.6817338 81.3475544 86.635
AA 420.2 203.9 1.25 0.25 0.98 2.05 249.725479 511.937233 564.462
AB 15830.1 5624.6 1.25 0.25 0.98 2.05 6888.7 14121.835 16100.598
AQ 2301.2 1168.5 1.25 0.25 0.98 2.05 1431.11438 2933.78448 3221.434
AU 4208 2204.6 1.25 0.25 0.98 2.05 2700.07254 5535.14871 6061.149
AY 306.8 103.1 1.25 0.25 0.98 2.05 126.271196 258.855952 297.206
Total 26331.484

Air
Monthly Monthly Lead Review Service Zα Safety Average
Options mean SD time Period level (0.98) Sigma (L+R) stock Inventory
A 42.3 32.4 0.25 0.25 0.98 2.05 22.9102597 46.9660324 52.254
AA 420.2 203.9 0.25 0.25 0.98 2.05 144.179073 295.567099 348.092
AB 15830.1 5624.6 0.25 0.25 0.98 2.05 3977.1928 8153.24524 10132.008
AQ 2301.2 1168.5 0.25 0.25 0.98 2.05 826.254274 1693.82126 1981.471
AU 4208 2204.6 0.25 0.25 0.98 2.05 1558.88761 3195.7196 3721.720
AY 306.8 103.1 0.25 0.25 0.98 2.05 72.9027091 149.450554 187.801
Total 16423.345

Consolidated
Total
Carrying Average Inventory Transport % savings
Mode Cost/unit cost Inventory costs Costs Total Costs (inventory)
Shipping 300 6 26331.484 157988.9037 0 157988.904
Air 300 6 16423.345 98540.06874 0 98540.0687 37.63%

Thus the inventory savings are reduced by 38% in air freight as compared to sea freight.
 2. Use the same method to evaluate the inventory savings associated with a generic European
product that would be assembled-to-order in the European Distribution Center. What are the
advantages/disadvantages of this generic printer option?

The same formula used in Q1 is used. But here the lead times are different.
Assumption: The lead time is assumed to be……….. (similar to the US case)

Assembly
Monthly Monthly Lead Review Service Zα Average
Options mean SD time Period level (0.98) Sigma (L+R) Safety stock Inventory
Total 23108.6 6244 0.25 0.25 0.98 2.05 4415.174742 9051.108221 11939.683

Costs associated:

Consolidated
Total %
Carrying Average Inventory Transport savings %savings
Mode Cost/unit cost Inventory costs Costs Total Costs (inv) (costs)
Shipping 300 6 26331.484 157988.9037 0 157988.904 0
Air 300 6 16423.345 98540.06874 0 98540.0687 37.63% -73.81%
Assembly 300 6 11939.683 71638.09932 0 71638.0993 54.66% 22.19%

In this case of assembly carried out at Europe both savings in Average inventory and costs are
significant. Hence that is the best option (Transport by ship and assemble in Europe).