Logistics

“Inventory Driven Costs” by Gianpaolo Callioni explores supply chain management challenges that Hewlett Packard faced in the late 1990’s. By 1999 Hewlett Packard had bumped IBM to become the third largest computer producer in the world in terms of revenue. Even though they had proven to be a force in the market, they were having a hard time turning a profit.

The article delves into the accounting and cost structures that HP had in place, and where they failed to recognize certain costs associated with carrying inventory. It was determined that these “hidden” costs were eating away at HP’s profits. HP’s Strategic Planning and Modeling group was able to identify that discrepancies between supply and demand, leading to excess inventory, were the main drivers of PC costs. The Strategic Planning and Modeling Group were able to identify four major costs affecting profitability: component devaluation costs, price protection costs, product return costs, and obsolescence costs.

Once these costs had been identified, HP was able to see that each product had different levels of cost in each category, and managers were able to use different supply chain management techniques to create solutions for each. Another important factor is that once they could account for these costs, Hewlett Packard was able to establish a clear line of sight to the bottom line for managers. Now managers could see that the decisions they made to cut costs in their region may not decrease the total cost to the company as a whole.

The author concludes that the greatest benefit of the inventory driven costs metrics is that it is now possible to link operational decisions to corporate goals and increase shareholder value. This conclusion is very important because for companies like HP, their advantage derives less from market share than from how efficiently a company can manage their assets.