358 DESIGNING AND MANAGING THE SUPPLY CHAIN

Sarah Donohoe, manufacturing engineering managerof the network laser printer division at Hewlett-Packard Company (HP), listened intently to her col-leagues at the project review meeting for thedevelopment of their latest new product. With Sarahat the meeting were Jane Schushinski, marketingmanager; Leo Linbeck, head of product design; andDavid Hooper, the controller of the division.

The main topic for this meeting was the decisionof whether or not to use a universal power supplyfor the next generation of network laser printer,code-named Rainbow. Previously, printers in theNorth American and the European market have dis-tinct power supplies and the associated fusers in themain engine of the printer. For North American THE HEWLETT-PACKARD COMPANYprinters, a 110-volt power supply was installed. ForEuropean printers, a 220-volt power supply was Hewlett Packard was one of Silicon Valley's leg.added. This printer engine was built by HP's manu- Established by two Stanford University gradufacturing partner in Japan. Due to the long lead time William Hewlett and David Packard, in 1939for engine manufacturing, HP had to specify the company initially prided itself on supplying suprequirements of the two types of printers at least 14 engineering tools, designed for engineers by (weeks ahead. The time that it takes the Japanese . neers.' As "the company grew and diversifiedpartner to commit the printers for shipment, the strong belief in technological innovation as thetransportation times, and customs clearance totals to competitive advantage persisted. I

about four weeks. Hence, if a universal power sup- Innovation was the key to HP's strategy. In Iply is used, then HP would have the flexibility of Packard expressed his belief in the importancpostponing the specification of the printer engine by this capability:at least two months in the planning process.Consequently, the production team believed that auniversal power supply can enable HP to betterrespond to the changing demand in the individualmarkets and reduce its inventory costs.

Linbeck had begun the meeting by reviewing afax he had received from the Japanese partner. "Wehave been asking our partner for a universal powersupply and fuser for a long time, and now, when weare about to finalize our design of the next generationnetwork printer, they are telling us that designing thenew power supply is finally feasible and can be

Hewlett-PackardCompany: NetworkPrinter Design forUniversality

INTRODUCTION

completed within the time constraints we have:delivering the product to market on time. HO\we must make the decision within the next two'so our Japanese partner can line up its designneers to work on the project." Hooper summfinance's position as follows, "I do not knowother costs or benefits to the supply chain wderived from this new change, but what I do knthat our Japanese partner quoted that universal ;supply would increase costs by '$30per unit."

As the conversation progressed around the I

Hooper's words became more and more indicof the group's feelings as a whole. The onlynumber available for analyzing the costs and 1fits of the change was the $30 increase as quotthe Japanese partner. If the team was to implethe change, they would have to convince malment that the benefits outweighed the cUnfortunately, as the meeting went gn, quantithe advantages and disadvantages appearedand more difficult.

Improvement is accomplished by better methods, 1techniques, better machinery and equipment and by p

, continually finding better ways to do their jobs a:work together as a team. I will never see the day'

. .there is not yet room for improvement.

Source: Copyright 1996 by the Board of Trustees of the LelandStanford Junior University. All rights reserved. Used with permitfrom the Stanford University Graduate School of Business. Thiswas written by Professor Hau L. Lee, based on an original case ~ten by Steven Pious and Toni Cupal. It is intended as the basis faclass discussion rather than to illustrate either effective or ineffechandling of an administrative situation. The produdt and individunames have been disguised.

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CHAPTER 11: COORDINATED PRODUCT AND SUPPLY Ct{AIN DESIGN 359

Through time, HP's focus on innovation hadbrought the world products such as the hand-heldcalculator and the ink-jet printer. In 1992, the com-pany continued to invest heavily in technology,spending $1.6 billion, or 10 percent of revenue, onresearch and development. The high levels of invest-ment have paid off: For three straight years, over halfof HP's orders had been for products introducedwithin the last two years.

CHANGING MARKET CONDITIONS

In the early 1990s, while technological innovationcontinued to drive the company's success, many busi-ness units were being forced to compete on otherdimensions. In consumer product lines, low prices,broad availability, and ease of use had become com-petitive requirements. Lew Platt, HP's current presi-dent and chief executive officer, once acknowledgedthe importance of improving customer service andresponsiveness:

We're not doing as good ajob in order fulfillment as weneed to. In fact it's where we get our lowest marks fromcustomers. We have to be a lot easier to do business with.Improvement in order fulfillment will strengthen HP'scompetitiveness, increase customer satisfaction, andreduce expenses, so this is an area of great urgency. Alongwith improving profitability, it's our top priority.

In addition, product life cycles were continuallyshrinking, making time to market the differencebetween maximizing market opportunities and miss-ing them. Nowhere were these demands moreimportant than in the laser printer division. HP helda dominant 57 percent of the worldwide laser printermarket, but several formidable competitors, includ-ing Apple, Fuji-Xerox, Kyocera, Oki, and Compaq,had recently entered the market; life cycles hadfallen to under three years; and the quality of com-petitive products made consumers willing to switchbrands if HP's price was too far above the marketaverage or if the product was not easily available.

To meet these challenges, HP had aggressivelyworked to improve its product development process.Cross-functional teams that brought specialists from

'.'all functional areas together to create a new productwere becoming standard. The primary benefit ofsuch teams was their ability to identify and eliminatepotential problems early in the design cycle whilethe financial and time-to-market costs of changing

the product design were low. As intended, the differ-ent perspectives of the team members often gave riseto heated debates over design decisions.

THE NETWORK PRINTER DIVISIONSUPPLY CHAIN

The laser products as a group constitute a major andrapidly rising portion of HP's revenue. In 1992 therevenue of laser products was $3 billion, but was pro-jected to reach close to $8 billion by 1998. The net-work printer is a high-end laser printer that hasnetworking capabilities and special functionalities.Rainbow, the network printer under development, is aproduct with much more configurable options andfeatures for the printer, such as memory, stapling abil-ity, firmware, system software, fax modems, paperhandling, linkage to print server, scanner, and printerstand. It will be priced between $5,000 to $6,000.

The network printer division at HP currently out-sources the procurement and assembly of the prod-uct's main engine to a Japanese partner. Thecomponents, including the power supply and fuserunit, were fully integrated with a printed circuitboard from HP's Boise factory into the printerengine at the partner's factory. ,Monopoly control ofone of the key components allowed this partner torequire a 14-week lead time from HP.

The design team of Rainbow recognized that themultiple thousands of configurable options for the , 1

new product would be a nightmare for forecastingand production planning. Consequently, specialefforts were spent in the design of the products sothat most of the custornization of the products, likethe installation of paper input units, cabinet stands,fax modems, paper output units, stapler upgradepackage, memory, and print server linkage, can all becarried out at the distribution centers (DCs). Hence,all these options can be installed as accessories at theDCs. In addition, the localization of the productthrough the inclusion of driver software disks, manu-als, power cords, and front panels (with the correctmix oflanguages) are also done at the DCs.

Hence, the supply chain process involves the trans-portation of the base printer, almost exclusively byboat, ftom the partner's facility to HP's Des in eitherNorth America or Europe. The shipment processlasted one month. The demand for a network printer inAsia and Latin America was still minimal comparedwith the demand in North America or Europe.

The VIPER was an earlier-generation HPprinter. While the printer itself was very succesthe VIPER's story illustrates the difficultiesdemand uncertainties. The VIPER was developthe same manner as the new printer being coered. The main components of the VIPERsourced from Japan and resulted in the same t:and-a-half-month lead time to the factories.product required a dedicated power supply and j

llOV or 220V, and these were not interchangeSpecification of the dedicated power supply, (beginning of the three and a half months, comnthe product either to the North American aI think:changing to a universal power supply is a fantastic

idea if it does not add cost to the product. Customers will European market. .not pay for features that they don't need, and universal HP had not forecasted the correct mipower supply is irrelevant to them-the network printer is European and North American VIPER demandnot like a portable hair dryer that they would carry with printer was sold out in Europe while demand jthem to travel around the world. United States was less than anticipated-HP fi

The biggest difficulty we have in marketing is not will warehouse with unwanted North American pcthere be demand for our product, but how much and where. that could not be used to satisfy demands fcHP makes great printers.We have alwaysbeen the leader in European market without incurring heavy coinnovation, reliability, and service. Rainbow is just the first disassembling the printer and reconfigurin:of our series of new network printer line, and we expect to power supply and fuser in the engine. Eventsell 25,000 per month of the product worldwide,withNorth

heavy discounting, or "fire sales," was neededAmerica having about 60 percent of the market.What hurts us is our inability to accurately forecast the the excess inventory, incurring very high

mix of demands in geographical regions. We may think Buyers in the North American market now ex]:that Europe will need 10,000 units and North America HP to reduce printer prices over time. Inadven2,000 when the numbers may turn out to be 15 and 15,000 HP had undercut its ability to command pierespectively. The problem lies in market conditions where prices in the market.increased competition and constantly changing techni~~l- .---- ---~.innovations can drastically change the demand for a prod-uct in a few weeks. In addition, there are a lot of firms try-ing to compete on price. This too changes demand.Predicting these changes is quite difficult.

Finally, the long lead time from Japan causes my mar-keting staff to pull their hair out. We have to specify themarket for the printer four and a half months ahead ofdelivery.We estimate that the entire life cycle of the prod-uct is at most 18 months. Four-and-a-half-months leadtime in an l8-month market-it's ridiculous! The lastthing that we want is a repeat of the VIPER debacle. Thatepisode has my hair turning prematurely gray. We had somuch of that product laying around we started calling ourfactory the "snake pit!"

It is easy to see why we love the universal power sup-ply.With the universal power supply, we only need to esti-mate worldwide product demand four months ahead oftime instead of numbers for each market. We can make thedetermination of individual market demands much later,

360 DESIGNING AND MANAGING THE SUPPLY CHAIN

Similarly, all necessary accessories and localizationmaterials are also shipped to the Des from the respec-tive suppliers. Both the printers and other materialsare stocked at the Des. When customer orders fromresellers arrive, the printers are customized and local-ized, followed by 'appropriate labeling and packaging.Final transportation time, typically via truck, to theresellers in each region, the United States or Europe,ranges from a few days to approximately a week.

THE UNIVERSAL POWER SUPPLY DECISION

The Marketing Perspective

Jane Schushinski, marketing manager:

and this postponement will help us create more aceforecasts and help prevent expensive localization em

The Product Development Perspective

The product life cycle of printers can be dividethree stages: ramp-up, maturity, and end of liframp-up period is the time from the initial inntion of the product until HP's production volurrels off. During this stage the product is usualonly printer on the market providing its distifeatures. The maturity stage reflects a periincreasing competition. Comparable printers \introduced and price will become a more infhaspect of the product market. In the last stage,life, there is fierce competition on all fronts.profits at this' stage reach their lowest point agins are squeezed. It is here that HP aims toduce its next generation product. '

When there is an imbalance of demand inAmerica and Europe, the division can live w

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CHAPTER 11: COORDINATED PRODUCT AND SUPPLY CHAIN DESIGN 361

consequence of having excess inventory in one con-tinent and shortages in another, or ship the excessfrom one continent to another (an operation knownas "transshipment"), where the printer is reconfig-ured and sold.

In the end-of-life-stage, in addition to transship-ping the products across the continent to correct forsome of the imbalances, the division can also dis-count the product to create demand, dismantle theproduct and sell the parts to HP's service division inRoseville, or just write the product off.

Leo Linbeck's office was stacked high with whatmust have represented every available trade journalrelated to printing technology. From behind his HPworkstation, he explained his point of view regardingthe universal power supply:

While Jane gains "responsiveness," I'm staring at a $30-per-unit cost increase. With the pressure to lower materialcosts, the design team would find it hard to justify thisseemingly unnecessary increase in material cost. Althoughthe printer engine costs about $1,000 each, so that $30may not seem that much, every single dollar increase inmaterial cost is a decrease of a dollar in our profit. That iswhy our design group is getting so much heat to get thematerial cost down. My concern is that we have no way toreliably predict how much value the so-called benefits ofuniversal power supply truly represent.

Now, I'm the first to admit that I'm no marketingexpert, but it's pretty clear to me that if we could justlearn to forecast demand better, this universal supplywould literally be a worthless idea. Maybe pumping $30per unit into improving the forecasting process makesmore sense than sending it out the door in a cardboardbox. At least in the first case we have some hope of recov-ering it again.

I do agree with Jane's point regarding the benefits latein the product life cycle. Currently, reconfiguring the prod-uct with a different power supply is a real pain. We have topurchase new power supplies rated at the correct voltage,ship the printers across the Atlantic from the undersoldregion, swap the power supply, change the fuser electroniccircuit and the fuser bulb, and, finally, distribute the prod-uct to retailers. The old power supplies have to be dis-posed of. To make matters worse, there are all kinds ofregulatory issues that surface. A universal power supplyeliminates all rework that is now required, but whether thegains it provides outweigh the increase in materials costremains unclear.

Whichever way we end up going, one thing is certain.We cannot delay our development schedule in order tomake this decision. We need to decide on a strategyquickly and GO!

As early as 1991, in order to improve their costposition and speed up time to market, the printerdivisions in Boise had implemented two new productdevelopment metrics. First, they had instituted costreduction goals for each new generation of printer.The costs captured in this measure included labor,material, and manufacturing overhead. The secondmetric, called break-even time (BET), had been man-dated by upper management. It measured the timefrom project initiation to break even, defined as the,point where total discounted cash outflow equaledtotal discounted cash inflow.

The Finance Perspective

Neatly arranged on David Hooper's desk were the lat-est sets of pro-forma income statements and balancesheets for the new project. Pointing out the effect of theuniversal power supply on income, he noted,

If we incorporate the universai power supply and sell450,000 units of Rainbow, it will cost us approximately$13.5 million in additional material costs. If we are notable to pass this increase along to the customer, or at leastour retailers, that comes straight out of our bottom line,

I sure agree that there will be benefits from universalpower supply. May be we should take a hard look at thecosts of stockouts and inventory.

Demand fluctuates during each of the three life-cycleperiods and so do the costs of making or missing a sale.We typically estimate that for each lost sale we actuallyforgo multiple times our profit margin. The reason for thisis that if a customer buys a competitive brand due to ourinability to keep the resellers on stock, there is a chancethat he wili stay with that brandwhen he purchases aprinter in the future. This effect might cover three or fourgenerations of printers. Moreover, we may lose the profitsfrom the sales of consumables such as toner cartridges andperhaps even other HP peripheral products.

The cost of stockouts when the product is first intro-duced into the market is even higher, as the potentialword-of-mouth and publicity effects can damage thefuture sales and ultimate success of the product. On theother hand, the cost of stockouts at the end-of-life stage isprobably' considerably lower, as there is less fear ofadverse. effect on future sales, and the resellers might insome cases steer the customer to wait for the new, incom-ing, replacement product.

Although the cost of stockouts in the ramp-up stage isthe highest; it is also this stage when we know the leastabout the market response to our new product, and ourforecast errors are usually much greater. I understandthat Sara's material planning people had done some.homework and found that the standard deviation of our

362 DESIGNING AND MANAGING THE SUPPLY CHAIN

monthly forecast error (a new measure of forecast accu-racy that the group has started to measure) was close to40 percent of the average monthly demand in both mar-kets in the mature and end-of-life stages. Their percep-tion is that the corresponding percentage is 80-90percent in the ramp-up stage.

The other major cost that I have to monitor is inven-tory. My financial analysts have estimated that ourannual holding cost rate is approximately 30 percent,which covers warehousing, insurance, cost of capital,and shrinkage.

The Manufacturing Perspective

Sara Donohoe, manufacturing engineering manager,commented,

I think the universal power supply is a great idea. Thisinnovation will improve our flexibility to respond to ordersin two key ways. The first is the obvious gain of delayingthe regional allocation decision by two and a half months.I'm sure marketing has expounded on this ad infinitum.The second gain is more subtle. You see, while transship-ment has always been possible in theory, we have avoidedit whenever possible. Let me explain.

At the ramp-up stage, we always try to stockpile ourDC's with loads of printers so that we don't ever run outof stock, and, given the high cost of shortage at this stage,this seems reasonable. There is not much of a need fortransshipment. In the mature phase, if we keep doingwhat everyone at HP does and keep enough safety stockto meet the standard service target of around 98 percentthen again, the chance of our needing transshipment isstill small. However, I am not sure if we want to keep

- having 98 percent service goals-at the-end-of-life-stage,-and indeed that is when transshipments will be mosr+:needed.

The whole idea behind transshipment is to adjustinventories in response to market demand. To do thiseffectively, you need to move the product quickly.Unfortunately, to send a printer by air across the Atlanticcosts us $75. Sea shipment reduces costs significantly toapproximately $15/unit, but a month out on the ocean doesnot do much for responsiveness, which is exactly whatyou're trying to achieve! In addition to the transportationcost, we know how tedious and complex it is to reconfig-ure the power supply and fuser. I would put my conserva-tive estimate of the activity-based cost for reconfigurationto be at least $250 per printer.

As you might imagine, the quality people go nuts whenthey find out we're doing this. How can you establish acontrolled process if you only do something once a year?Even worse, since the rework involves electrical compo-nents, safety standards require the reconfiguration processto be certified by Underwriter's Laboratory. If you've ever

dealt with UL, you'll realize how much trouble you'd I

getting a process like this approved.The universal power supply would allow us to a'

this mess, making transshipment a distinct possibility.cost of reconfiguration is almost zero. It is at least a p<bility, although I'm not sure who would coordinatedecide when to ship ... our friends in distribution, I gt

My only real concern with developing the univesupply is the potential power play that could emerge atime of allocation of the production build to theregions. Again, I would like some visibility and corover how many units I can count on receiving.

The Distribution Perspective

Rob Seigel runs the North America distribution (ter. Rob worked in a variety of positions beforemoved to management and his present position.

Given a universal product, transshipment won't present <

problem for the DC; it's just another shipment to us antcan easily "localize" the product by adding manualsplug adapters at the DC. Personally, however, I feel like .great way to chew up company profits. I can just see us sing 1,000 units to Germany in February only to have tship another 1,000 back to me in March. Both actionsseem to make sense at the time the decision was made, bthe end the company's out hundreds of thousands of dol

Who is going to make the decision to shift invenfrom DC to DC? I can see a real firefight if one DC .\\more but the other is unwilling to give up its excess. Vvhave pressures for high customer service and even if I .some excesses now, that does not meari that I mayneed it next month. Sending the product.to Europe htheir performance, but what about mine? I hope-I de

-have to-do it! One thing I don'thave tirn6 foris spen :half of my day on the phone to Germany trying to negea transfer.

I guess, though, if we can avoid what happened witJVIPER we have got to be better off. That was an intere:time. See that warehouse, pretty big. It was so fulstopped leaving the aisles clear and just stacked priisolid, from floor to ceiling, all the way from front to bawould pay money to prevent that from happening agair

, other work grinds to a halt when a crisis like that emerg

THE DECISION

The team had decision-making authority, but 1would have to defend their decision to upper IT

agement. From past experience, they knew th:they decided to adopt the universal power supmanagement would want to ensure they had perfor:adequate analyses of all the costs and benefits of ~

CHAPTER 11: COORDINATED PRODUCT AND SUPPLY CHAIN DE5\G1'l Q~~

CASE DISCUSSION QUESTIONS

1. In what way is a universal power supply a post-ponement strategy?

2. What are the costs and benefits of a u.nivers.alpower supply (feel free to make assumptions)?

3. How would such costs and benefits be differentover the product life cycle?

4. Besides deciding on a universal power supply,what other operational improvements can yousuggest to HP Boise?

5. What would be your recommendations about theadoption of a universal power supply?

a decision, as well as some estimate of the risksinvolved. In addition, some consideration of how thedecision would impact future generations of productswill have to be made.

386 DESIGNING AND MANAGING THE SUPPLY CHAIN

Measuring customer value is at the heart of company goals and objectives, butidentifying the appropriate measure is not an easy task. Dell measures inventoryvelocity, the reciprocal of the average amount of time a product spends in inventory,and not the usual inventory turns.

The ability to provide sophisticated customer interactions (for example, relationshipsand experiences) is very different from the ability to manufacture and distribute products.Because a distinctive expertise is required for each function, companies will gain by spe-cializing. We observe this trend in consumer product industries, where firms such as Nikeand Sara Lee lend their name to products produced by many manufacturing companies.

There is no real customer value without a close relationship with customers. Today,this is possible not only through direct interaction, but also through information andcommunications technology. By allowing customers to state their preferences and learn-ing from them-a true two-way interaction-a firm can develop the means to achievegreater customer value and therefore loyalty. We have seen that successful companies allvalue this capability and build it into their business and supply chain model.

DISCUSSION QUESTIONS

1. Discuss the trade-off between product quality and price in traditional and onlineretailing.

2. Consider dynamic pricing strategies and their impact on profit. Explain whydynamic pricing provides significant profit benefit over (the best) fixed-pricestrategy asa. Available capacity decreases.h. Demand uncertainty increases.c. Seasonality in demand pattern increases.

3. Discuss how supply chain management decisions impact the ability to excel in cer-tain dimensions. Specifically, considera. Conformance to requirements.h. Product selection.c. Price and brand.d. Value-added services.e. Relationships and experiences.

4. What is the dominant customer value the following companies bring?a. Starbucksh. The Gapc. Expedia.com

5. What additional experience opportunities does the Internet enable?6. What measures would you use in a business like Amazon.com to evaluate the

company's performance? The supply chain?