Challenges for Supply Chain Management

introduction

The biggest challenge facing the Vancouver manufacturing plant was that for the rest of Hewlett Packard, there was no “problem”; “When it comes to real dollars, inventory costs do not enter into the P & L statements, but losses hurt our revenues. Don’t talk to us about inventory-service trade-offs. Period.” Vancouver was held up as a model of efficiency (Kanban) and the DeskJet printer range was a runaway success. A culture of territorialism and poor communication exacerbated the lack of urgency. Damaging internal rivalry was rife as a result of disjointed an myopic decision-making in the absence of any truly global approach to the supply chain key performance indicators (KPIs); the “bullwhip” effect was writ large all over the firm’s supply chain. The problems brewing were real and mounting and we argue that the best solution would require a fundamental overhaul of HP’s production and supply chain resulting in the need to establish a new manufacturing plant in Europe.

“The consumer electronics industry is the very embodiment of [key] aspects of supply chain management and related risks,” (Sohdi, 2004), due to the short product lifecycles, tough competition, and global nature of the business. The DeskJet printer business presented a new challenge for HP as the firm’s expertise was in highly customized, low volume, and long lead-time manufacturing and supply chain. In DeskJet, high volume, short product lifecycles, and high obsolescence risk were the name of the game. Printers were in transition from an innovative product to a functional product but the supply chain did not reflect this. HP used OEMs to source components and then did their own assembly. HP made high margins on the cartridges, and the printer was the conduit. HP’s success in Europe was beginning to rival the home market in sales, adding further complications due to the need to modify power sources and languages for local markets. In Europe, product option “AB” had the highest monthly mean demand, and demand was more dispersed over the options than in North America, where virtually the entire sales were in option “A”. Monthly standard deviation in demand for the popular options was quite high at +- 30%. Even more importantly, the company was holding large and expensive safety stock due to the long shipping lead times and the prohibitive cost of air freight.

The success of HP’s DeskJet printer range in spite of an un-optimized supply chain suggests that there were significant potential gains in profitability if the right solution were found. In addition, despite high inventory levels, stock-outs were still occurring, threatening the most precious asset of all in the highly competitive printer market: customer loyalty and sentiment. Questions of internal efficiency and customer fulfilment had to be evaluated against the backdrop of a rapidly growing printer market, which was exploding along with the proliferation of desktop PCs.

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Despite organizational inertia and competing priorities, a number of avenues were open to HP at the time, including inventory management-the benefits of postponing final assembly-product design, and the introduction of JITD. We examine each and delve deeper into the business and customer benefits of launching a production site in Europe to fully capitalize on the surge of the printer market. The market is evolving rapidly and needs a strategic realignment of its supply chain. Creating a European manufacturing facility, plus “integrated financial performance and risk management” (Hahn & Kuhn, 2009) will also improve shareholder returns (by improving inventory management and hence cash flows) and will mitigate risk.

Postponement strategy

To be successful the DeskJet supply chain must match customer demand. It must be in the zone of “strategic fit,” with a better match in Europe between responsiveness and uncertainty. It must integrate sales, manufacturing, distribution, and operations. Postponement is a solution to support future DeskJet expansion in Europe and to meet European demand. A successful postponement strategy requires significant degrees of cohesion; departmental barriers will need to be brought down, processes restructured and products redesigned. However, the rewards of implementing a successful postponement strategy are great. HP is not without challenges to implement a successful postponement strategy. Significant organisational change and coordination would be required.

As Pagh and Cooper state (1998), “The notion of postponement is to maintain the product in a neutral and noncommittal status as long as possible in the manufacturing process.” In order to support this, characteristics of the DeskJet that have to be localised should be added at the last moment. Standardising the DeskJet would make inventory management and forecasting easier. It is also a way to allow cost-effective end user customisation. By creating customisation, additional lines can be introduced and consumer needs are met more easily. Customisation will assist HP in differentiating itself and in capturing the market. Based on Cooper (1993), we propose the use of the deferred packaging postponement strategy. The DeskJet peripherals are not common to all markets whilst the formulation is common.

Postponement requires tight integration of processes and the formation of a holistic view. In the case of DeskJet printing, redesigning the product to make it more modular will increase manufacturing costs, but would lower the total supply chain costs. A modular design will standardise the design and thus standardise procurement processes. Making the DeskJet design more modular will also limit the inclusion of components that differentiate the product until the latest possible moment. Other benefits of modularity are identified by Feitzinger and Hau (1997), including the ability to manufacture modules separately or in parallel, thereby reducing production time and assisting with problem diagnostics in identifying quality problems.

When considering a supply chain strategy, all elements from the design, procurement, manufacture, sales and distribution must be considered in unison. For example, making the DeskJet power supplies universal voltage may be more expensive, but it would provide HP with a more flexible use of inventory and would reduce forecasting errors. Marketing must be involved in the design process to validate that product variety and customisation meet market requirements. Finance must be engaged to provide activity-based costing, (ABC) statistics to support scenario analysis. All stakeholders and their differing viewpoints must be considered in order to build a holistic model of the revised supply chain.

Successful postponement requires that organisational boundaries are traversed. HP should work with resellers and distributors to provide some product localisation and customisation tasks. In many cases resellers will require significant support, training, and systems to carry out these tasks. The long term value outweighs the short term investment. In all cases, postponement partnerships must be made on the basis of empirical evidence and having considered the interdependencies of the model. The decision to build European manufacturing capability and interfacing this capability with European distribution is crucial to support DeskJet sales in Europe. We support establishing a European plant as a strategy given European demand. However, in addition to the plant, distribution centres across Europe should be capable of managing product localisation and replenishment of all localisation materials.

Opening a new facility in Europe

Companies becoming global and enjoying growing revenue and expanding market shares across geographies face an important challenge: inertia. Being agile and being able to react quickly to changing conditions sometimes requires risky decision in volatile, uncertain environments, and sometimes mandates direct investment in foreign locales. The company must admit that what sustained past success will no longer work and must be adapted. This is the challenge Hewlett Packard faced when the Vancouver facility, which served the U.S. market, at the time HP’s largest, could no longer meet the needs of growing overseas markets which were becoming progressively more important in terms of units sold. (Monthly mean of 23,108 units in Europe vs. 26, 611 units in North America). Hewlett realized that in terms of lead time, inventory optimization, transportation costs, and localization/customization, trying to serve European clients with its U.S. manufacturing facility was no longer viable despite various attempts at technology innovation and optimization, changes in product design, and shifts in its logistic processes; the problem could not be solved. (Transit time by sea takes up to five weeks.) As the European market matured, it needed one or more manufacturing locations geographically close to local suppliers and to end customers. However, selecting the correct locations in which to put one or many distribution centers and manufacturing facilities required performing scenario analysis (Sodhi, 2003) and considering several important criteria in a “holistic framework for value-based performance and risk management in [robust] supply chains” (Hahn & Kuhn, 2009):

• Customer and supplier location, concentration and importance: the ideal location is a “center of gravity” based on weight clustering, transportation cost, the geographical location and relative importance of difference suppliers and customers. Order delivery time is a “critical unifying dimension” (Tempelmeier, 2001) when selecting a location that serves downstream needs. However, the “center of gravity” has to be modified by introducing additional constraints as listed below. In other words, optimization under many constraints must be performed. And this has to be done dynamically, including current data and future projections.
• Labor: The skills, training, and demographics of the workforce, unemployment trends, productivity, cost of labor, unionization, work regulation, work culture all vary widely across Europe and have to be considered.
• Cost and availability of land: The real estate environment of the area under consideration has to be analyzed: sites, building availability, construction cost, regulation, including environmental regulations, the availability and reliability of utilities, local construction companies, and maintenance providers.
• Corporate taxes and incentives: taxes are another layer of costs that have to be taken into account. Local authorities and governments may be competing to attract foreign direct investment and job-creating investments, offering tax and other financial incentives which can contribute to returns and lower risks.
• Logistical infrastructure: HP needs to evaluate connections to highways, rail transport, and the proximity to airports and seaports, all of which have to be reliable and cost effective. They also have to find credible logistic/transportation partners.
• Other criteria include the local climate and exposure to natural disasters.
• Finally, the company must provide expatriate personnel to manage the operation and its labor so quality of life issues must factor into the selection of the location.

The process of selecting the optimal location is a multi-stage, top-down one, where initial screening produces a short list of countries or regions and then additional and more demanding criteria are added to narrow down the initial list through several iterations until one or two final locations are selected.

The benefits of a manufacturing facility in Europe are significant and affect every step in the supply chain which now has a better strategic fit. Physical, financial, and information flows are better aligned. The market is as large as the U.S. but more diverse and will be better served. Raw materials procurement becomes more streamlined. Inventory days fall because one benefit of standardization (with local customization) is that inventory can be moved from one region to another so as to avoid piling up inventory in one region and stock-outs in another. The chain has moved to more of a “push-pull” system. Lead times are shorter. Finished product also does not pile up. The cost of manufacturing goes down and since printers were “rapidly becoming a commodity product,” economies of scale and cost savings are vital since customers “choosing between two inkjet printers of equal speed and quality” will make their decision based on cost and reliability. From a management perspective, handling the supply chain becomes easier since it is optimized to regional needs but still integrated in a global framework that captures the benefits of HP’s scale in buying power. The supply chain better serves customer needs and enables the company to grow more effectively in Europe and also is a model for other regions as they develop. The company can better manage its risks; it has reduced its exposure to inventory and transportation risk and improved its ability to manage supply chain supply and demand uncertainties in Europe. (Uncertainty metrics like margins, forecast error, stockout rates are all lower.) Finally, the improved supply chain should improve shareholder returns since operating margins, asset turns, and cash flow are positively affected.

Other Improvement Opportunities

As HP’s management moves forward, it should take into account the following additional recommendations:

• A clear, overarching strategy for Europe needs to be defined and implemented across HP’s corporate headquarters. Conflicting and competing corporate interests need to be reconciled with a clearly delineated command and communication structure. A clear company-wide and bottoms-up consensus should be reached about the framework necessary to achieve lasting success in Europe.
• HP needs to adopt improved corporate communication and defined spheres of responsibility and accountability across the organization. The case reveals that some of the company’s most important technological advancements have been discovered by happenstance. Enhancing its technological advancement process with a more rigorous collaboration and innovation model would render technological and supply chain process improvements less susceptible to chance. For example, common global KPIs on inventory would be a good starting point.
• HP should remove “organizational barriers” to reduce lead time. (Billington & Lee, 1992).
• The company should establish a dedicated “European Localization Management Team” to assess current local market trends as well as the viability of the suggestions above.
• The company should explore further trade opportunities within the European Union and in Eastern Europe, beyond just the tax and other cost-savings options.
• HP should exploit e-commerce, using the internet to take orders and organize distribution.
• The company should develop a supply chain risk-management framework to anticipate and mitigate any disruptions. A new or enhanced supply chain is an opportunity to integrate “currency risks, cyber attacks, failed communication with suppliers…terrorism…non-compliance.” (Bosman, 2006).
• HP should modify its local marketing strategies based on national and cultural consumer demographics. The marketing and PR teams should also utilize available resources to identify such opportunities and participate within the European supply chain community.
• There are “green” opportunities within the supply chain that could be exploited.

Technology & Information processing: JITD

New systems and better forecasting will make the problem visible but not solve it. The greatest gains are fundamental: Streamline design of the product to facilitate manufacture at the DCs and build capability at the DCs. However, there are still technical gains that can be made.

Conclusion

The HP case is an example of how effective supply chain management requires both a revised management paradigm (strategic change) and more sophisticated tools and techniques (optimization). The “postponement” strategy is a better strategic fit between the supply chain and HP’s product life cycle across the key strategic and competitive variables: innovation, customer service, and cost leadership since printers are rapidly transitioning to maturity. Establishing a manufacturing plant in Europe, a major change in HP’s printer supply chain, will improve the company’s performance in four critical areas: costs, customer satisfaction, shareholder returns, and risk management. The company’s physical flows, financial flows, and information flows will all be more aligned and efficient. After the initial capital cost of establishing the plant, the company should experience substantial cost savings from lower material costs, better predictability, improved supply assurances (no shortages), and lower inventory carrying costs. There is a tight linkage between sales, inventory, and product availability, (Raman et al, 2009), and so customer satisfaction, as measured by lower lead times, reduced variability in demand, fewer stock-outs, and enhanced ability to customize by region, should improve. The company will also position itself for future growth. HP should see the benefit of improved customer satisfaction in rising sales and market share in Europe. Shareholder value will be enhanced by the positive impact the supply chain changes will have on inventory and working capital and hence on operational value drivers like operating margins, asset utilization, and cash flow. Finally, the company will enjoy significant improvements in risk management. (Hahn & Kuhn, 2009, referring to others). Certain risks, like being out of stock of a key component or product, will be entirely eliminated. Others can be mitigated through improved ability to contingency-plan and catch problems earlier. The company will be able to offload other risks or share them with suppliers and customers. And it will be able to consciously select risks, rather than passively absorbing them. Overall, the revised supply chain and the new manufacturing plant in Europe will be a catalyst for dramatic improvements in HP’s operating and financial performance, not just on the Continent, but around the world.

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