The 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 –
• The power specification for the printer is different in North American (110 volt) and European (220 volt). This differences brings a big challenge in HP’s market forecasting and the subsequent stockout and transshipment between regrions;
• HP needs to ...view middle of the document...
5 million in additional material costs (an extra cost of $30 for each printer).
• If the $30 extra cost is eventually passed through to customer, the increase in price by may also reduce revenue (sale).
• 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.
• 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 = 450,000
If 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) = $29,250,000
With 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 = $16,875,000
The extra cost of with universal power supply is SMALLER than without it.
• 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.
• Allow HP to better forecast demand as a whole, which is more accurate. Consequently, it reduces inventory buildup issue.
• 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.
• 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...