“Is HP’s focus on minimizing inventory costs is feasible for a company operating in a market where delivery speed is an order-winning factor?” My response to this question is based upon the fact that, after reading the HBR article, HP is NOT operating in a market where delivery speed is an order-winning factor. With HP, obsolescence costs and devaluation of inventory is the most important factor, even if it means shipping slower. Drastic process improvement and re-engineering along with tight control over supply chain allow HP to approach a just-in-time model, but cost management is the superior requirement to HP, not speed to deliver. As long as they can deliver fast enough to satisfy customers, they will be fine.
In companies where delivery speed is an order-winning factor, fanaticism about minimizing inventory costs is usually hurtful to the company. Without inventory, there is no finished product to ship to the customer. This means that it needs to be built just-in-time for the customer’s order. When a customer orders a product, since no product is available to ship, the product must be built. This adds time between order and delivery, slowing delivery speed. When the customer orders a product, if there are no raw materials to build the product, then the supplier needs to ship the materials before the product can be built, slowing delivery speed. With variations and unpredictability of demand, it can be hard to plan materials and production for perfect inventory: where there are exactly as many materials and finished products as there are orders. There is a risk of running out of stock in materials or in finished goods inventory (Berman, n.d.).
Reality is that manufacturers need to keep some buffer of finished goods inventory as well as buffer of materials inventory. A large order will consume all of the small inventory buffer. If the company goes to great length to tune and optimize the supply chain, then suppliers may have a very short guarantees on delivery or assembly of product. If supply chain is tight and is able to drop-ship finished product shortly after an order, then the fanaticism about minimizing inventory costs have reached a point where it does not hurt the company. Relationships with suppliers who can rapidly restock and meet demand when there is a surge in demand is crucial in order to maintain delivery speed (Gartenstein, 2019).
The hazard of too much inventory, though, is that it increases lead times and increases cost in inventory handling and storing inventory (Gartenstein, 2019), as well as depreciation and devaluation of inventory (Calloni et al., 2005). Work in process (WIP) is another form of inventory. This is inventory that is partly finished within the system (Callarman, 2020). WIP is inventory that is tied up in the production process. Little’s Law indicates that Lead Time = WIP/Throughput, so lead time is negatively impacted by more inventory in the system. In other words, when you have excessive inventory, your delivery speed suffers (Boiser, 2020).
Thus, focus on minimizing inventory and inventory costs would hurt a company that is rewarded by delivery time because focusing on minimizing inventory increases the likelihood of being out of stock and out of materials to produce. Likewise, excessive inventory would hurt a company’s delivery time due to WIP, per Little’s Law. Therefore, the optimal condition is as close to just-in-time as possible, with close reins over supply chain so that materials can be delivered rapidly to meet bursts in demand. Companies like HP or other computer companies that must manage inventory costs tightly due to rapid depreciation must place a greater emphasis on cost control than delivery speed. It is ok to be later on delivery in order to be closer to a just-in-time model.
Berman, C. (n.d.). The Disadvantages of Inventory Decline. Retrieved from https://smallbusiness.chron.com/disadvantages-inventory-decline-81032.html
Boiser, L. (2020, July 1). Embracing Little’s Law to Improve Lead Time. Retrieved from https://kanbanzone.com/2020/embracing-littles-law-to-improve-lead-time/
Callarman, S. (2020, September 14). Work in Process inventory (WIP): Definition, Formulas, Examples. Retrieved from https://www.shipbob.com/blog/work-in-process-inventory/
Calloni, G., de Montgros, X., Slagmulder, R., Van Wassenhove, L., Wright, L. (2005). Inventory-Driven Costs. Harvard Business Review. Retrieved from https://hbr.org/2005/03/inventory-driven-costs
Gartenstein, D. (2019, January 28). The Main Function of Inventory. Retrieved from https://smallbusiness.chron.com/main-function-inventory-16156.html