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Inventory-driven costs
Gianpaolo Callioni1, Xavier de Montgros, Regine Slagmulder
1Hewlett-Packard, Palo Alto, California, USA. gianpaolo_callioni@hp.com
Harvard Business Review
|March 17, 2005
Summary
Hewlett-Packard identified hidden inventory costs beyond traditional holding expenses. By tracking these hidden costs, HP improved supply chain management and profitability in its PC division.
Area of Science:
- Business Management
- Supply Chain Optimization
- Operations Research
Background:
- Hewlett-Packard's PC business faced declining profitability due to short product cycles and price deflation.
- Traditional inventory cost metrics were insufficient to address the challenges in the PC industry.
- PC value depreciated rapidly, making inventory management critical.
Purpose of the Study:
- To identify and quantify hidden inventory costs in the PC industry.
- To develop metrics for tracking these hidden costs.
- To enhance supply chain management sophistication within Hewlett-Packard's PC division.
Main Methods:
- Conducted a thorough review of inventory-related problems in the PC business.
- Identified four key hidden inventory costs: component devaluation, price protection, product returns, and obsolescence.
- Developed new metrics to consistently track these hidden costs across the PC division.
Main Results:
- Standard "holding cost of inventory" represented only about 10% of total inventory costs.
- Four hidden costs stemming from demand-supply mismatches were identified as significant.
- Implementing new metrics allowed for more sophisticated supply chain management.
Conclusions:
- Companies must look beyond traditional holding costs to understand true inventory expenses.
- Accurate tracking of hidden costs enables tailored supply chain strategies.
- Hewlett-Packard's approach offers a model for other companies to improve inventory and supply chain management.