The North West Company Case Analysis

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However there are multiple advantages that make the switch to a universal power supply acceptable. A difficulty HP is having is making accurate forecasts due to the complexity for their market demand. Through the universal power supply, HP can consolidate their market segments making demand forecasting less complex since only one sum product requirement would be calculated. In turn a more accurate forecast will allow for improved product availability for HP customers. It is believed that once a customer chooses to switch their product the cost of a lost customer is equivalent to multiple sales; hence it is very important to retain existing customers and not allow them to use a competitor’s product. An improved forecast will also allow for a reduction on total inventory. A reduced inventory will decrease holding costs, allowing for an increase in working capital to allow for an improvement in opportunity costs. A universal power supply will also decrease the lead time for availability of this component allowing HP to delay placing their order by two months, which not only effects forecast accuracy by allowing more time to analyze demand but will also allow for delayed spending of capital allowing for improvements in opportunity costs.

We can also observe that through the implementation of a universal power supply HP can significantly reduce its costs. Using the forecast for the total demand for the product of 450,000 units and taking a conservative approach we can obtain the values identified in table 3. Where it is assumed that at best, the universal power supply will reduce transshipment requirements by 10% and that during transshipment HP will be utilizing air transportation in order to meet delivery deadlines. See appendix for sample calculations.

Transshipment requirement before

Transshipment requirement after

Cost before

Cost after

Cost savings

% Change

20%

20%

$ 29,250,000

$ 20,250,000

$ 9,000,000

-

20%

10%

$ 29,250,000

$ 16,875,000

$ 12,375,000

27%

30%

20%

$ 43,875,000

$ 20,250,000

$ 23,625,000

48%

40%

30%

$ 58,500,000

$ 23,625,000

$ 34,875,000

32%

50%

40%

$ 73,125,000

$ 27,000,000

$ 46,125,000

24%

Table 3 - Quantitative analysis of transshipment costs (See Exhibit 3)

Even if the universal power supply does not improve on transshipment requirements, there will still be a cost savings of $9 million due to the fact that there will no longer be a reconfiguration costs, a cost of $250 per unit. Hence the $30 increase in cost will not directly impact the final price of the unit and will not affect the customer; in fact a reduction in costs can allow HP to reduce final unit price to become even more competitive.

The monopoly the Japanese supplier on the power supply must also be analyzed. Currently HP has a single sourced supplier supply chain model. Although the Japanese supplier has always met HPs demand and standards on quality, there is a high level of risk if an uncertain event was to arise to cause a disruption to supply. As the power supply unit is a critical aspect of the network laser printer it is very important to minimize risks that can cause a disruption to supply. To minimize this risk HP should look to source other suppliers that can provide similar power supply units to add a level of redundancy. Although supply chain managers attempt to reduce redundancy, some level of redundancy is important to act as an insurance policy. Having a second supplier in place may also create a sense of urgency with the Japanese supplier; this may cause the Japanese supplier to reduce its unit price as its monopoly may not seem so advantages anymore.

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Alternatives and Options

After reviewing the above issues and analyzing the industry environment and root cause factors, our team suggests the following options that can improve HP’s supply chain and overall company’s operations.

Even though HP is currently not ready to implement all of the offered solutions, with gradual approach and appropriate circumstantial modifications, implementing the options below will undoubtedly benefit the company’s future success.

Option

PROs

CONs

Switch to universal power supply

- Lead time will decrease from 14 to 4 weeks

- No need in the long time forecasting by region

- HP will be able to respond better to customer changing demand

- Will reduce inventory cost and obsolete product write offs

- Will improve order fulfillment rate

- Will increase competitiveness

- Cost increase by $30 per unit. Considering the new generation printer price point - $5,000 - $6,000 – the incremental cost is not significant comparing to losses HP incurs due to supply – demand mismatch that triggers transshipments and reconfiguration cost.