It is interesting that world big company like HP ever had a problem that seems not really important (even me will neglect this culprit) but it has big impact on the company’s operation. We call it Inventory Driven Cost (IDC). It is a hidden cost that most of us did not aware of it. Including in this cost are
- Component devaluation cost – discount cost due to unsold product for long term
- Price protection cost – discount cost due to distributor return for the unsold item
- Product return cost – discount cost from customer product return
- Obsolescence cost – discount cost before discontinue product
- Taxes for product standby?
- Space rent?
HP’s strategy to minimizing inventory cost is feasible and it has proven successfully maximize their profit during their first PC production. They manufacture the product in a single factory instead of manufacture it in several regional factories. It speeds up the manufacturing process while reducing the IDC.
Following that, they cut the distribution step by directly send the product to the customer through air freight. The strategy, which is based on how lowering the IDC successfully made HP broke even in 1998 and start gaining profit in 1999 (Calloni, et al., 2005).
Every company that has a short life cycle product, thin profit margin, and unpredicted demand should incorporate IDC on their strategy to get better profit and win the market.