Hp Case How to Calculate a Pipeline Inventory

1. For the first and second questions in the HP case, you need to understand the calculation explained in the case instruction and then replicate it for other items listed in the case. Please allow me to explain the defintion of the terms involved in this calculation. First of all, average inventory means the average inventory level at the Europe DC. For example, for item AB, its average inventory is 17,233 units throughout the year; in other words, on the average the Europen DC holds 17,233 units of AB throughout the year. Next, the average inventory investment means how much the average inventory is worth in terms of dollars. Third, as long as item AB stays in the Europe DC and not ordered by the customer, it costs a fortune for HP to hold it in the Europe DC, which is reflected through the inventory holding cost. In this case, the inventory holding cost is about 25% of average inventory investment, which is a COST afforded by HP to hold and take care of the item AB in stock. More appropriately, we shall call it "Yearly inventory expense". For example, on a yearly basis HP needs to pay $1,077,063 in total for maintaining and monitoring the item AB in the Europe DC warehouse.

2. For Q3, you need to demonstrate the impact of "postponement" on HP's yearly inventory expense in a quantitative manner, which shall naturally lead to your answer to Q4. Postponing the customization to the Europe DC means that HP is to manufacture and deliver generic product without any customization as necessary. The postponement is like pooling demand across items since only one produt needs to be produced and sent to the Europe DC. We need to compute the yearly inventory expense under the postponement arrangement by following the P model and the existing policy, respectively. Then compare and idenfity which policy yields the less inventory expense.