Toner for the World - Presentation of the case

CESCM TEACHING CASE 2014/01

SUPPLY CHAIN MANAGEMENT

Toner for the World Per AGRELL

2015-10-01

Toner for the World Per Agrell, UCLouvain/LSM/CESCM Introduction Inkjet computer printing is a dominating technology for low-end private and SOHO color printers, sold worldwide. In 2012, inkjets printers corresponded to 60% of the worldwide printer market in term of units, but the market share is falling as laser printers are falling in price. Four original equipment manufacturers (OEM) used to produce 80% of the overall production: HP, Lexmark, Epson and Canon. However, Lexmark pulled out of the segment in late 2012 due too falling margins. Two printing technologies are used in inkjet printers: continuous (CIJ) and dropon-demand (DOD). CIJ is used for professional printers (labels and packaging) whereas DOD is used in consumer printers. Most DOD printers are thermal printers, meaning that liquid ink based on water is vaporized in a printer head specifically designed to cater for the bubble.

Figure 1 IDC (2013) as reported by Thomsen (2013) HP Pioneers a New Path for Business Inkjets.

The business model for inkjet printers is normally to sell the initial unit below or at manufacturing cost, recovering margins by selling accessories and consumables in after-sales. The bulk of the revenue here comes from the sales of © 2015 L O U V A I N S C H O O L O F M A N A G E M E N T , C E N T E R F O R S U P P L Y C H A I N M A N A G E M E N T , U C L O U V A I N .

2(3) inkjet color cartridges using proprietary technologies for the printhead, making it part of the consumable cartridge. This strategy protects from competition in highIPR respecting markets such as North America and Europe, but is less enforceable e.g. in Asia. The corollary is then to make sequential and continuous changes to the printhead, delaying the introduction of non-OEM cartridges and exposing retailers to inventory risks when selling non-OEM goods. In 2015, Canon, HP and Lexmark all filed a large number of lawsuits against firms selling consumables that allegedly have infringed upon the IPR of the toner print heads (Brewer, ENX Magazine, Feb 23, 2015).

Figure 2 Value breakdown for printer consumables AP (Source: IDC, 2013).

Xaar Specialized in the high-volume production of inkjet color cartridges for the worldwide market, Xaar is a market leader in non-OEM printhead development. Basically, Xaar designs printheads that comply with the technical standards (dimensions) for printer functionality, while respecting the original licenses for the OEMs. In this way, Xaar can offer large retailers their distributors brand cartridges within 4-5 months after the OEM product launch of an inkjet printer series. Production The production is fully automatized at two large plants in China and Malaysia, orders are filled, packaged, labeled and shipped for retail clients by boat in planning cycles of one month. Delivery is by container in a single batch. Xaar has no distribution in their own name, nor branded products.

3(3) Retail client OfficeWarehouse A typical client for Xaar is OfficeWarehouse (OW), offering retail sales of office supplies and minor equipment for SOHO and private use. OW operates around 450 stores in four main markets (North America, Europe, South America, Middle East), normally located close to major cities in off-center locations. After forecasting the demand for an entire business cycle (6-8 months before printhead is changed), OW places a single order for all outlets within a market (NA, EU, SA, ME). Products are stocked only for the selling period, obsolete products are removed from the shelves and destroyed. In a specific document, data are provided for the costs related to a typical cartridge, ACR-2345.

Retail order planning The demand for the expected demand cycle (one delivery from Xaar) for ACR2345 is given in Table 2 below. For instance, the probability that Xaar sells 70,000 units or less is 70%, the probability of exactly 70,000 units is 20%. Note that the probability of selling less than 40,000 and more than 90,000 is zero. Table 1 Cost data for ACR-2345 cartridge, NA market. Demand Probability Cumulative probability

40.000

50.000

60.000

70.000

80.000

90.000

10%

20%

20%

20%

15%

15%

10%

30%

50%

70%

85%

100%

Demand The final clients for OW are normally consumers and micro-offices, buying the product cash-and-carry off the shelf. No backlogging is possible, substitution is immediate with either the OEM products (that are never stocked-out) or from competitors substitute products. However, clients tend to return to OW for new purchases even when facing stockouts or delisted products, as long as the pricing on non-OEM products is aggressive.