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Case 2 - HP

Part 1:
European Factory: The pros for building a European factory are that it will provide a higher
service level meaning you have the proximity to end-users in Europe and can get to them within
days giving them the product they need in the time they need it. A second pro would be that it
would reduce shipping costs because now if it is produced in Europe, there will be lower
shipping costs as well as reduced customs complexity. Furthermore, being located in Europe can
help with localized forecasting and inventory management because there is a discrepancy
between high-demand months for Europe and for North America; inventory management will be
localized and reflect European demand patterns and minimize product overstock. The cons for
the European factory are: it is a huge initial investment that will take a while to launch, and if
legal procedures and rules and regulations differ, it might be a heavy cost to change processes.
Better Forecasting: The pros for better forecasting is that it minimizes bias (take assumptions
that managers make on what an appropriate level is and back it up with mathematical models to
prove or disprove their current inventory level forecasting assumptions) and the better your
business anticipates regional demand, the lower the inventory-holding costs. They will not sit on
excess demand. It will also make the process more efficient because they would make the right
amount of inventory and not waste resources and time making excess if they don't need to they
will produce at the capacity needed and not excess, so they can devote that time to something
else. The cons of better forecasting are that the new methodology could be expensive to
implement, and it could have a lot of push back from existing managers: it might mean a shift in
culture which is very slow to happen. Managers might get angry and resist because it’s a change
of how they have always done things; it might question the validity of their job.
More Inventory: The pro for more inventory is not a straightforward increase in all products in
all regions: it has to be the right product, in the right quantity, in the right location, at the right
time, so that it can hedge against inflation or price increases. It can also lead to more sales,
minimize stockouts, and smoothens production requirements. The cons for more inventory are it
increase holding costs and have excess inventory that may become obsolete or is needed
elsewhere and it’s not available where it's needed.
Air Shipments: The pros for air shipments are to keep high levels of service and appropriate
inventory levels in the right places until they forecasting and European distribution center is
improved; this is all a process to get to efficiency and optimization. Also, air shipments are faster
than the current method of shipping by ships because there are more frequent flights compared to
sea cargo logistics. There will be better volume control and shipping control because of the
frequency of the flights: the cargo volume can be tailored to maximize the cost efficiency of the
flight. Instead of many products in the cargo volume, the shipments can be packaged according
to type. The cons for air shipments are cost: it is more expensive. There is limited space on
planes. International customs and tariffs are expensive, and customs takes long to verify
everything delaying the process.
Part 2: In comparison to shipping via sea, air shipments reduce the total inventory and costs of
HP (see Appendix) by larger amounts, quantitatively. HP’s current total inventory is $48,681. If
they decide to proceed with air shipments, it would decrease to $15,186; occurring primarily
because of the reduction in the pipeline inventory. The decrease in lead time means less
inventory waiting in the system, and more accessible inventory for customers. From a cost
perspective, air shipments decrease total costs by over $120 million dollars, stemming from a
decrease in annual inventory holding costs. HP requires less inventory to hold, as more efficient
transportation means less inventory waiting in the system. The air shipments are deemed more
expensive when viewed solely from annual shipping costs, but they become insignificant when
viewed from an overall cost perspective. HP should hereby implement air shipments as they will
reduce the amount of inventory in the system and their associated costs by greater amounts than
if they had used shipping via sea.