Trade-offs between Supply and Demand

christianverstraete — Thu, 18 Jun 2009 12:45:00 GMT

A lot is written about S&OP, Sales & Operations Planning , and I will not resume it here, but S&OP only goes as far. Fundamentally what COE's are confronted with is balancing supply and demand to maximize revenues while delighting customers...(read more)

The role of IT in Manufacturing Outsourcing

christianverstraete — Wed, 13 May 2009 06:11:00 GMT

A couple weeks ago a question was raised about what the implications were for IT when a company was transforming from a manufacturer to a brand owner. This is actually a very interesting question and I will try to share with you my response at the time...(read more)

HP Supply Chain - Inventory Driven Costs

christianverstraete — Mon, 24 Nov 2008 08:12:00 GMT

To continue on my series describing the HP Supply Chain, I'd like to introduce a concept called "Inventory Driven Costs", described for the first time in an Harvard Business Review article with the same name. This concept allowed us to completely change our Supply Chain approach in our PC business, ultimately resulting in increasing our margins drastically while growing our market share.

The development of IDC, as it is being called internally, came from a simple question: "when looking at inventory costs in a traditional way (capital + physical costs), do we obtain a correct view of the true cost of carrying this inventory?". And the question is intriguing. PC's are products with a short shelf life, so when looking deeper into this question, the team came to an astonishing discovery. There were a number of other costs they needed to take into account if they wanted to reflect correctly the holding costs of the inventory.

Material Devaluation, in the electronics industry, prices mostly go in the same direction, they are going down. Carrying inventory holds with it a risk, and that is that the value paid for the components, or the expected value from the end products can no longer be recovered. As the potential losses here are directly related to holding inventory, the costs associated should be included in the inventory costs.
Discounts, obviously there is a way to address the first risk, and this is by selling excess inventory in a fire sale. But this often implies deep discounts. In the electronics industry one often sells the remainder stock just before introducing the next product. Here again the magnitude of the cost is directly related to the amount of inventory available.
Price Protection, which is mainly related to working with a distribution channel. As the distributor acquires the stock with a specific sales price in mind, electronics companies will compensate price drops they initiate in the channel. These costs are directly related to the inventory in the channel. Another element of price protection is related to the cost of hedging currencies as they also have an impact on the valuation of the inventory.
Returns, it is traditional for the channel to send back unsold products in case of overstocks. There are costs related to taking the product back, refurbishing it etc.

By tracking these costs HP has gained a much better understanding of the true cost of carrying inventory in its supply chain. This has resulted in reviewing some of our networks and to make substantial changes resulting in millions US$ cost reductions. It has also highlighted the true cost of inventory, allowing us to take decisions regarding the safety buffers and rush mechanisms to be used to coop with varying demand.

Supply Chain Management Blog : Demand

Trade-offs between Supply and Demand

The role of IT in Manufacturing Outsourcing

HP Supply Chain - Inventory Driven Costs