title: Inventory-driven costs.
abstract: In the 199os, 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.
authors.affiliation: Hewlett-Packard, Palo Alto, California, USA. gianpaolo_callioni@hp.com
authors.forename: Gianpaolo
authors.initials: G
authors.lastname: Callioni
authors.forename: Xavier
authors.initials: X
authors.lastname: de Montgros
authors.forename: Regine
authors.initials: R
authors.lastname: Slagmulder
authors.forename: Luk N
authors.initials: LN
authors.lastname: Van Wassenhove
authors.forename: Linda
authors.initials: L
authors.lastname: Wright
mesh_terms: D003132:Commerce; D003363:Cost Control; D004864:Equipment and Supplies / Q000191:economics*; D014481:United States