HP and Inventory Driven Costs
Summary paper Callioni et al. (2005) Inventory driven costs (IDC)
This case considers the firm HP, which is active in the PC industry. This example deals with an industry, which is highly dynamic, short product life cycles, high completion, low margins
Mismatching of demand and supply could lead to excess inventory. The most traditional inventory cost item is: holding cost of inventory, which covers both capital cost of money and physical costs of having inventory (warehouse space, storage taxes, insurance, rework breakage, spoilage).
New research leaded to the identification of four other types of IDC.
1) component devaluation costs: key components such as microprocessor chips and memory typically drop in price quickly and steeply. The price op a CPU, for instance might fall as much as 40% during 9month life cycle, and the penalty for holding excess parts when a price drop occurred could be enormous. Oplossing: Option to reduce this reducing the number of nodes in the SC, consolidating manufacturing facilities, taking possession of components on a JIT basis, paying the going price at that time and working with suppliers to minimize inventory when a price drop was anticipated.
2) Price protection costs: If HP dropped the market price of a product after units already been shipped to a sales channel, it had to reimburse its channel partners for the difference for any units that had not yet sold, so the channel partner didn’t have to sell at a loss. Als de prijs 1000 is en na 5 weken is de prijs 950, dan moet HP de 50 euro compenseren aan Media Markt. oplossing Hp had to be certain that channel partners inventory never exceed the minimum number of days required to ensure the desired availability, so that no excess inventory had to be protected. Keep manufacturing turnaround times short and replenishment cycles frequent. Hp offered also to channel partners (media markt) to keep inventory low.
3) Product return costs: distributors can return unsold
This case considers the firm HP, which is active in the PC industry. This example deals with an industry, which is highly dynamic, short product life cycles, high completion, low margins
Mismatching of demand and supply could lead to excess inventory. The most traditional inventory cost item is: holding cost of inventory, which covers both capital cost of money and physical costs of having inventory (warehouse space, storage taxes, insurance, rework breakage, spoilage).
New research leaded to the identification of four other types of IDC.
1) component devaluation costs: key components such as microprocessor chips and memory typically drop in price quickly and steeply. The price op a CPU, for instance might fall as much as 40% during 9month life cycle, and the penalty for holding excess parts when a price drop occurred could be enormous. Oplossing: Option to reduce this reducing the number of nodes in the SC, consolidating manufacturing facilities, taking possession of components on a JIT basis, paying the going price at that time and working with suppliers to minimize inventory when a price drop was anticipated.
2) Price protection costs: If HP dropped the market price of a product after units already been shipped to a sales channel, it had to reimburse its channel partners for the difference for any units that had not yet sold, so the channel partner didn’t have to sell at a loss. Als de prijs 1000 is en na 5 weken is de prijs 950, dan moet HP de 50 euro compenseren aan Media Markt. oplossing Hp had to be certain that channel partners inventory never exceed the minimum number of days required to ensure the desired availability, so that no excess inventory had to be protected. Keep manufacturing turnaround times short and replenishment cycles frequent. Hp offered also to channel partners (media markt) to keep inventory low.
3) Product return costs: distributors can return unsold