HP vs. Dell Inventory Management: Strategies Compared

Overview of Inventory Types at HP and Dell

Hewlett-Packard, Inc. and Dell, Inc. are two U.S.-based manufacturing corporations that deal in electronics. Both companies manage inventories of purchased parts, fabricated assemblies, and finished goods. However, Hewlett-Packard maintains a far greater inventory of finished goods due to its particular business model (Stock Analysis on Net, 2016). Understanding the nature and scope of each company's inventory is essential to evaluating their broader operational strategies.

Goods and Service Design: Postponement vs. Just In Time

Hewlett-Packard, Inc. follows a Postponement strategy, which delays the time and place of production diversity (Davila & Wouters, 2007, p. 2246). For example, rather than configuring computers for various European countries at an earlier stage — which could bloat inventory with specifically configured machines — Hewlett-Packard ships finished-product computers to Europe, where they are configured at the distribution center by keyboard layout, manuals, or software settings for particular countries. Due to this postponement practice, which is intimately connected to inventory management, several key business experts have deemed Hewlett-Packard a leader in the field (Miles, 2011).

Dell, on the other hand, employs a Just In Time approach to inventory, in which a very high percentage of its computers are immediately tailored and shipped to specific customers who "build" their own computers online (Fields, 2006, p. 128). This allows Dell to carry the minimum amount of inventory necessary to keep its business systems operating effectively, as the precise amount of goods is created at the moment they are needed.

Inventory's Role in Performance and Customer Satisfaction

Hewlett-Packard's inventory management is intimately connected with its Postponement strategy. In segmenting its production and focusing on both the demand division and the product division, Hewlett-Packard employs the concepts of "No Touch," in which some aspects are totally outsourced; "Low Touch," in which sub-assembly is outsourced; and "High Touch," in which most assembly is insourced — with outsourcing decisions strongly tied to intellectual property and core capabilities (Miles, 2011). In addition, Hewlett-Packard has a long-term arrangement with FedEx for speedy delivery of finished products to customers and swift return of problematic products (Atikomtrirat, 2007, Slide 25). However, according to the American Customer Satisfaction Index (ACSI), Hewlett-Packard's strategy, coupled with the decline of the PC market, left it with a satisfaction score of 73 out of a possible 100 — four points below the industry average of 77 (American Customer Satisfaction Index, 2015).

Dell's Just In Time strategy of inventory management — whereby goods are tailored, manufactured, and shipped just in time for sale — focuses on having the exact accessories, the exact quantities, and the exact production lead time to distribute its tailored products (Fields, 2006, pp. 128–130). Its rapid, lean response, coupled with a series of delivery options, has proven a highly effective strategy. Despite a general downturn in overall customer satisfaction across the industry, Dell was the only PC maker to rise in the American Customer Satisfaction Index, rated at 78 out of 100. This placed Dell second — alongside Amazon and Samsung — though considerably below the most popular brand, Apple, at 84 (American Customer Satisfaction Index, 2015).

Plant Layout Types and Their Importance to Manufacturing

In order to be most effective, manufacturers must work effectively with their "Capacity Management" — the limits of their company resources, such as labor, space, inventory, technology, and equipment — and processes (Investopedia, n.d.). Mindful of those possibilities and limits, manufacturers have established four main types of layouts: Product/Line; Process/Functional; Fixed Position; and Combination (Chand, 2015).

In a Product/Line layout, processing tools and apparatuses are sequentially arranged according to the order of manufacturing processes. A single product or product type is manufactured repetitively in uniform, large numbers. This layout allows swift movement from one task to the next with minimal labor in processing, storage, and material handling (Chand, 2015). The advantages of the Product/Line layout include: elimination of impediments through unobstructed, uninterrupted production with minimal work slowdowns or stoppages; economical material handling via uninterrupted networks for constant material flow with little or no reversal; shorter manufacturing time; a lower amount of work-in-progress and partially finished products; efficient floor space usage due to little work accumulation or material overstock; efficient inspection, often at only critical points with quick defect identification; lower manufacturing costs due to less material handling, more efficient inspections, and better use of space; lower labor costs due to specialized, simplified tasks using routine work by unskilled or lesser-skilled workers; and effective planning of simple, uniform production processes.

The disadvantages of the Product/Line layout include: relative inflexibility, as changes to a fixed sequential process can be difficult and expensive; high investment in equipment, as similar machines must sometimes be duplicated and placed along the planned sequence; high overhead due to the necessity of significant capital investment; costly disruptions when even one piece of equipment in the sequence breaks down, or materials are not regularly supplied, or scheduling is poorly planned, or employee absenteeism is high; limitations on production expansion within a fixed, uniform system; unspecialized supervision, as a supervisor must know all equipment and all processes in the sequence; and idle or underused equipment due to machine duplication (Chand, 2015).

A Process/Functional layout arranges equipment according to the type of operations performed — for example, placing all welding machinery in one area — and is used for relatively low-volume production of non-standardized products (Chand, 2015). Materials may move through various departments, each applying its own process, transforming materials into finished products. The advantages of the Process/Functional layout include: optimal and economical machine usage; relative flexibility, as sequential changes can be easily made; relatively easy expansion by adding machines in designated production areas; specialization of equipment; effective labor usage, as workers are in specialized departments using their distinct abilities; effective supervision because each area's supervisor has specialized knowledge; and fewer production slowdowns or stoppages, because if one machine breaks down, another machine in the same specialized area can continue the work.

The disadvantages of the Process/Functional layout include: greater space usage, as separating machines and workers by production process consumes more floor space; relatively expensive material handling as materials move from one specialized department to the next; high labor costs because workers are relatively specialized and skilled; longer production time with greater accumulation of partially produced products; greater and costlier complexity in manufacturing planning and control, as all process areas must be coordinated; and higher inspection costs, requiring more supervisors and inspection of every operation (Chand, 2015).

A Fixed Position layout involves the static location of a chief element of production, while equipment, materials, parts, tools, machinery, and manpower are brought to that location (Chand, 2015). Shipbuilding is a classic example: a large portion of the ship remains stationary while other means of production are brought to its location to create the finished product. The advantages of the Fixed Position layout include: economical production as all materials are transported to one place; the ability to undertake several tasks simultaneously; the flexibility to tailor the finished product to customer specifications; and considerable flexibility in adapting product design and process as desired. The disadvantages include: complexities in moving equipment, workers, and materials to the production site; a costlier and more time-consuming production process; and unsuitability for producing smaller products in large quantities (Chand, 2015).

A Combination layout is the thoughtful application of two or more of the other three layout types in order to capture the advantages of each. Because each individual layout type carries significant disadvantages, a pure form of any single layout is rare in practice. Today's manufacturers tend to combine two or more layouts to maximize flexibility and efficiency (Chand, 2015).

Conclusion

Both Hewlett-Packard, Inc. and Dell, Inc. deal in electronics, managing inventories of purchased parts, fabricated assemblies, and finished goods. HP follows a Postponement strategy, which reduces inventory by deferring certain aspects of manufacturing until the distribution stage. Dell employs a Just In Time strategy, which allows it to ideally carry the precise amount of inventory needed to create the exact amount of goods as they are required.

At HP, inventory varies according to "No Touch" (fully outsourced), "Low Touch" (sub-assembly outsourced), and "High Touch" (most assembly insourced) approaches, with outsourcing decisions strongly tied to intellectual property and core capabilities. HP also maintains a long-term arrangement with FedEx for speedy delivery and product returns; however, HP scores only 73 on the ACSI index, four points lower than the industry average of 77. Meanwhile, Dell's Just In Time strategy produces a lean, rapid response that made it the only PC maker to rise in the American Customer Satisfaction Index, with a score of 78 out of 100.

Manufacturers must work effectively with their Capacity Management — essentially the limits of their resources and processes. In doing so, manufacturers have developed four main plant layout types: Product/Line; Process/Functional; Fixed Position; and Combination. A review of all four layouts shows that many modern manufacturers adopt a Combination layout, merging one or more of the others to maximize the benefits of each.

Supply chains are also measured by key metrics. Two important ones are Inventory Turnover and Cycle Time. Inventory turnover is the number of times inventory cycles in a year — the higher, the better. Hewlett-Packard reports 3.94 turns per year while Dell achieves 32.28 turns per year. Cycle Time is the total time required to fulfill a customer order from a point of zero inventory. The shorter the cycle time, the better, and the most direct improvement strategy is to reduce the longest lead time at each stage of the manufacturing cycle.

While Dell currently outperforms Hewlett-Packard in inventory management, there is room for improvement at both companies. The eight expert-recommended guidelines — using optimization tools, leveraging real-time analytics, treating each product individually, monitoring suppliers closely, tracking product traceability, using mobile data capture, controlling SLOB inventory, and practicing strategic slotting — can all be employed to improve inventory management without negatively affecting operations or the customer benefit package.