Article: Inventory- Driven Costs Summary (Harvard Business Review)

 This article talks about how Hewlett-Packard (HP) provided best product

compared to other companies in the market. They planned, designed and study

market research before starting production plan and this changed their demand

and inventory. HP couldn’t see that how their operational decision didn’t work and

they were unable to make decisions for buffer inventory.

 To compete in the computer business, HP did planning and modeling so that they

can observe about demand and supply. But they mismatched their demand and

supply as a result left with inventory in hand which cost them heavily.

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 Company found out that the prices of the microprocessor and memory dropped

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and was unable to sell the inventory. They tried to sell and reduce the level of

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inventory by just in time basis, by giving at going price without having decent
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percentage of margin rate.
 HP markdown the prices so that they can sell all the inventory they have in hand
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by giving to sales people and offered them rewards. This help them to sell their
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products and was able to maintain price protection risk.

 Company develop SPAM model- Strategic Planning and help to see

miscalculation of the demand in the market, left firm with holding worthless goods
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to be written off and they discontinued the product so that they won’t lose money

and company had $120 million of devaluation money from the inventory. Return
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and price protection costs are both calculated in same way, but sum is calculated
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differently.
 Technology advancement made HP new product obsolete and supply chain was
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very flexible but unsustainable. They used different accounting metrics in order to

maintain their supply chain. Their main attention was to see the different cost

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 measurement and allow different individuals to help them in making decision for

overall understanding and to their dollars.

 Holding cost was nodded with capital cost of money and to the inventory in hand.

But the good thing was HP holding cost of inventory was less than 10% total

inventory driven costs and help to evaluate all the cost items and helped to

reduce devaluation cost.

 While making strategies related to demand supply the mobile computing division

took Inventory Driven Cost (IDC) and they realized that it’s not profitable unless

they combine together in order to produce at one place.

 The charts in the article shows that inventory cost went down from 18.7% to

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12.2%, which shows company strategies how worked in order to reduce their

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cost. All the departments work in order to achieve their goals and try to

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accomplish what their goals.
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 The payoff of each product group to fulfill their needs and allowed the supply

chain people to arrange as per their needs.

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 Reducing interest of total costs which are incurred by extra local cost and IDC
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metrics allow company to incorporate.

 They were able to reduce their inventory and costs by 50% and 70% which
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helped them in overall performance of the company and help to accelerate and
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create shareholder value with operational decisions.

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