Managing the inventory imbalance at the European DC
With the DeskJet market booming in Europe, retailers are demanding high availability of products. The core problem for HP is that it is piling up inventory in its European Distribution Centre (DC) to meet this demand, but there are still complaints of product shortages. This is because: * Wrong/unpopular country-specific product models are stocked up, while the popular “localized” models run out- caused by ineffective demand forecasting, arbitrarily set reorder points, and a disconnect in communication between the different departments. * Supply is not fast enough in responding to demand- caused by demand fluctuations and long lead time
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The goal is to find the optimal quantity to order at which the total inventory costs are at a minimum (i.e. inventory purchasing, ordering, and holding costs), while meeting demand. For this calculation, annual demand, cost per unit, setup cost, and storage cost of inventory are needed. Exhibit 1 shows the formula HP would use to determine its Qopt, incorporating inventory costs and demand. For the ROPs, HP currently uses a “rule of thumb” to determine these values; however, this is inaccurate since it does not consider the possibility of stock out during the lead time, the time between when an order is placed and received. Thus, the ROP must incorporate the demand during the lead time and the safety stock the firm wishes to maintain. Safety stock is the excess inventory a company keeps to respond to demand fluctuations based on demand’s standard deviation during lead time and the desired service level- determined to be 98% for HP. A service level this high (98% ) means that there is only a 2% chance that the DC will experience product shortages, which is achieved by maintaining large amounts of safety stock. Exhibit 2 includes the correct ROPs to use for the European models.
Currently, when a product reaches the European DC, it has been customized for a specific country, and hence cannot be shared to compensate for a product shortage for another country. It would be ideal if product supply for all of the