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Exercise 1 – Inventory/Service Crisis
a) During the early 1990s, the famous manufacturer of computers and peripherals, Hewlett-Packard (HP), faced several severe problems concerning the inventory management of its very successful DeskJet printer. The printer was produced in HP’s production facility in Vancouver. The completely finished product was sorted there and then shipped to one of the three distribution centers in North America, Asia and Europe.
To guarantee high product availability to the dealers, HP operated its distribution centers (DCs) in a make-to-stock mode. Therefore the DCs acted as inventory stocking points between the manufacturing site and the dealers who sell the printers to the end-customer.
Under increasing competitor’s pressure the DCs were forced to hold extremely high safety stocks to ensure high service levels. Despite the high safety stock not all customer demands could be satisfied. This led to what HP called the “Inventory/Service Crisis”.
One of the basic causes of the crisis was the magnitude of forecast errors. Besides this, safety stock levels were determined by a judgemental rule of thumb which, together with the inaccurate forecasts, resulted in simultaneously high inventory levels and high backorders. The inventory policy was not based on any scientific rule. Furthermore, neither the choice of inventory carrying costs nor the choice of the target line item fill rate as key figures for a sensible and rational inventory policy was defined clearly. Inventory carrying estimates were between 12% and 60% whereas the company target fill rate of 98% was developed by marketing without taking into consideration the effects this rate had on the production ...