MBA Case Study - HP network printer design for universality.doc

Lingnan MBA CenterLingnan (University) College, Sun Yat-sen UniversityCase OverviewThe Hewlett-Packard Managers from each department had a meeting to discuss about whether using a universal power supply for the next generation of network laser printer called “Rainbow” is beneficial or not. They have the authority to make the decision while strong justification should be provided to defend their proposal.HP is developing its new generation network printer while it has been struggling from 3 main issues l The power specification for the printer is different in North American (110 volt) and European (220 volt). This differences brings a big challenge in HPs market forecasting and the subsequent stockout and transshipment between regrions; l HP needs to provide the specifications to its major partner in Japan at least 14 weeks ahead due to the abovementioned different power standard issue;l The specification readiness time can be postponed for 2 months if a universal power supply is used, however an extra cost of $30 for each printer will be needed.Case Questions1. In what way is a universal power supply a postponement strategy?HP has two specifications for its printers, 110-volts for North American region and 220-volts for European region. One of the crucial part of the printer is engine. It is built by one of HPs manufacturing partner in Japan who needs the specification 14 weeks in order prepare for production. However production period only takes four weeks. The dilemma is that should HP were to develop universal power supply, it can have the flexibility of postponing the specification requirement to its partner by 2 months. On the other hand, should the universal power supply strategy is implemented, HP can respond the demand in the individual market by optimizing is inventory and reducing its indirect cost that hits is SG&A.2. What are the costs and benefits of a universal power supply (feel free to make assumptions)?Costsl If HP incorporate the universal power supply and sell 450,000 units of Rainbow, it will cost the company approximately $13.5 million in additional material costs (an extra cost of $30 for each printer).l If the $30 extra cost is eventually passed through to customer, the increase in price by may also reduce revenue (sale).l Since all the printers assembly will heavily depend on one single power supply accessory which is supplied by only one supplier, any design defect (or even global recall) may need to a sales and reputation disaster.Benefitsl Avoid cost of stock out due to the switching to another brand of customers. Switching to another brand means that HP might lose its customers for over three or four generation of printer as well as the revenue from selling ink cartridges.Assume that without universal power supply -Product life cycle: 18 months; Monthly sales: 25,000 units. Total sales = 450,000If there are 20% of goods needed to be transshipped and then reconfigured between DCs due to incorrect market forecast. The extra cost will be:450,000 * 20% * ($75 shipping cost + $250 reconfiguration cost) = $29,250,000With universal power supply The forecasting improved so that only 10% of goods needed to be transshipped and then reconfigured between DCs, the extra cost will be$450,000 * $30 + $450,000 * 10% * $75 = $16,875,000The extra cost of with universal power supply is SMALLER than without it.l With universal power supply, ideally HP no longer needs to develop demand forecast for each market. It only needs to generate estimated worldwide product demand four months ahead.l Allow HP to better forecast demand as a whole, which is more accurate. Consequently, it reduces inventory buildup issue.l Flexible to respond to customer order so that HP can increase service level.3. How would such costs and benefits be different over the product life cycle?Over the product life cycle, both cost and benefit are different. l At the beginning life cycle (ramp-up) of product, the cost of stock out would be high because for every order lost would not only result in lost in revenue but also future revenue. The theory is the customers tend to buy similar product and/or brand to keep consistency. In addition, it takes over four life cycle of product before that customer returns to HP. l At the maturity stage, the extra cost, although very small, can be a real disadvantage because during this period, the market becomes very competitive and many players enter the same field causing price to drop. Customers also become more price-sensitive. However, the benefit of better forecasting demands significantly helps lower the level of inventory.l At the ending life cycle, cost of stockouts is lower than compared to at beginning because there is less fear of losing future sale.4. Besides deciding on a universal power supply, what other operational improvements can you suggest to HP Boise?One of the suggestions HP should consider is improving forecasting ability to ensure appropriate demand is met in all sector while optimizing inventory level. In addition, HP should also look in to creating similar standardization of power supply in other product offering such as workstations and servers. It is also possible that HP can consolidate all power supply (for servers, workstations and printers) to its manufacturing partner in low cost country. The idea is to consolidate and standardize which in theory creates efficiency, and optimize all level of cost including inventory.5. What would be your recommendations about the adoption of a