Gianpaolo Callioni

Xavier de Montgros

Regine Slagmulder

Luk N. Van Wassenhove

Linda Wright

The 1990s were hard for the PC business. Although demand grew fivefold between 1990 and 1997, the products had become household staples, and it was difficult for companies to differentiate their offerings.

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Reprint: R0503J 

In the 1990s, Hewlett-Packard&#8217;s PC business was struggling to turn a dollar, despite the company&#8217;s success in winning market share. By 1997, margins on its PCs were as thin as a silicon wafer, and some product lines hadn&#8217;t turned a profit since 1993.
The problem had everything to do with the PC industry&#8217;s notoriously short product cycles and brutal product and component price deflation. A common rule of thumb was that the value of a fully assembled PC decreased 1% a week. In such an environment, inventory costs become critical. But not just the inventory costs companies traditionally track, HP found, after a thorough review of the problem. The standard &#8220;holding cost of inventory&#8221;&#8212;the capital and physical costs of inventory&#8212;accounted for only about 10% of HP&#8217;s inventory costs. The greater risks, it turned out, resided in four other, essentially hidden costs, which stemmed from mismatches between demand and supply:
Component devaluation costs for components still held in production;
Price protection costs incurred when product prices drop on the goods distributors still have on their shelves;
Product return costs that have to be absorbed when distributors return and receive refunds on overstock items, and;
Obsolescence costs for products still unsold when new models are introduced.
By developing metrics to track those costs in a consistent way throughout the PC division, HP has found it can manage its supply chains with much more sophistication. Gone are the days of across-the-board measures such as, &#8220;Everyone must cut inventories by 20% by the end of the year,&#8221; which usually resulted in a flurry of cookie-cutter lean production and just-in-time initiatives. Now, each product group is free to choose the supply chain configuration that best suits its needs. Other companies can follow HP&#8217;s example.

Inventory-Driven Costs

Reprint: R0503J In the 1990s, Hewlett-Packard’s PC business was struggling to turn a dollar, despite the company’s success in winning market share. By 1997, margins on its PCs were as thin as a silicon wafer, and some product lines hadn’t turned a profit since 1993. The problem had everything to do with the PC industry’s notoriously short product cycles and brutal product and component price deflation. A common rule of thumb was that the value of a fully assembled PC decreased 1% a week. In such an environment, inventory costs become critical. But not just the inventory costs companies traditionally track, HP found, after a thorough review of the problem. The standard “holding cost of inventory”—the capital and physical costs of inventory—accounted for only about 10% of HP’s inventory costs. The greater risks, it turned out, resided in four other, essentially hidden costs, which stemmed from mismatches between demand and supply: Component devaluation costs for components still held in production; Price protection costs incurred when product prices drop on the goods distributors still have on their shelves; Product return costs that have to be absorbed when distributors return and receive refunds on overstock items, and; Obsolescence costs for products still unsold when new models are introduced. By developing metrics to track those costs in a consistent way throughout the PC division, HP has found it can manage its supply chains with much more sophistication. Gone are the days of across-the-board measures such as, “Everyone must cut inventories by 20% by the end of the year,” which usually resulted in a flurry of cookie-cutter lean production and just-in-time initiatives. Now, each product group is free to choose the supply chain configuration that best suits its needs. Other companies can follow HP’s example.

Inventory-Driven Costs

Summary.

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