Packard mainly faced challenges at two stages: which introducing a new product to the market and once introduced, management of the huge variety of the products. The case highlights how M/s Hewlett Packard overcame its challenges to a large extend using the various techniques of Operations Research. Problems faced by Hewlett Packard: HP serves various sectors of customers across the entire industry. The customers’ base extends to all the six continents and involves consumers, small-to-medium businesses and large corporations.
It is a market share leader in PCs, printers, and servers. It offers over eight million possible combinations of its notebook and desktop product line. Such a huge variety of product portfolio created operational and performance challenges. a) Although revenues were increasing, operating costs were increasing too, which eroded the profits. The operating cost was high as the inventory cost was high for such a wide variety of products. b) As product variety increased, the accuracy with which forecasting accuracy decreased.
This resulted in excesses of some products and shortages in others. ) The cost of loosing order on account of stock out situation was high. d) Product variety complexity resulted in confusion and resulted sometimes in product returns due to wrong shipment, re-work and re-shipment e) The Order Cycle time was unpredictable and the average order cycle time was almost twice as compared to HP’s competitors. f) The challenge that HP faced is to fundamentally measure the cost and benefit of variety of products introduced. This was because many product line complexity cost was hidden and the same would not be captured in standard accounting system.
The Essay on Product Line Additions Products Variety Costs
Assis ng Product Line Additions: Managers must identify the situations in which variety is an important competitive variable, examine the relationship between variety and cost, understand the underlying determinants of cannibalization and complementary, and asses the consequences of not responding to competitive innovations. Conjoint analysis is useful for managers who evaluate new product line ...
Only aggregate cost impacts could be seen. The sophisticated statistics and stochastic modeling capabilities were not available with the Managers who managed the product portfolio. g) Decision making, as to whether a particular product is to be introduced, became very difficult without any data-driven approach. HP sometimes use to undermine the impact of a low-revenue product in fulfilling a high revenue product. h) HP’s Personal Systems Group (PSG) provided a situation where most of the orders do not ship until every component is available.
A stock out of a single component can delay the entire order. This led to customer dissatisfaction. Operations Research Methodology approach as a Solution: HP adopted an OR based solution to improve its performance. The first solution stressed on the screening of the new product proposals before introduction based on a data driven approach. Detailed analysis of cost structure and drivers in each business and product line was done(throughout the complete life cycle), which could not be captured in accounting systems.
A team of OR professionals would spend about one to three months studying the cost structure and coming up with a model of how business costs respond to product variety. Two types of cost structure were studied : a) Variable Complexity Cost which is volume driven in nature. This would include volume costs, storage cost, depreciation, expediting cost, cost of lost sales etc. b) Fixed Complexity Cost which is variety oriented in nature which would included R&D Cost, testing cost, outsourcing cost, manufacturing switching costs, returns cost etc. The complexity ROI was calculated using the above costs.
The Term Paper on Computer Age Products Revenue
Compaq Computer Corporation was founded in February 1982 by Rod Cani on, Jim Harris and Bill Mur to, three senior managers who left Texas Instruments and invested $1, 000 each to form their own company. Their first idea was a portable personal computer that was sketched on a paper placemat in a Houston pie shop. The founders presented their idea to Ben Rosen, president of Sev in Rosen Partners, a ...
The minimum complexity ROI ratio of 6:1 was justifiable for a product to be introduced. Once the cost structure is determined, a team of Supply Chain, Finance and Marketing managers would validate the model to see whether it actually depicts the relationship between business cost and product variety. This tool helped them to take decision about introduction of new products. The second solution that was adopted is the shift of focus from screening of products to maximizing value from the active portfolio. At that stage, transaction level sales data become available, enabling more sophisticated analysis.
A low-revenue product is important in fulfilling a high revenue product. The Revenue Coverage optimization tool was used by HP. It is a deterministic optimization tool that finds the smallest portfolio that covers any percentage of historical order revenue. Benefits to HP: a) PSG states that the Order Cycle time (OCT) is reduced by 4 days on notebook and 2 days on Core Desktop. Each day of OCT improvement saves $38 Million annually. b) The RCO enabled the elimination of 3300 products from a product portfolio of 10,000 of one of the units of HP, which resulted in $11 Million Cost savings. ) Company wide profits had improved by $500 Million for a period of three years.
