The problems of change

In 1997, Compaq Computer Corporation announced that the company was adopting a new strategy, the Optimized Distribution Model (ODM), which was designed to focus the business on the customer.

by INSEAD Case Study
Last Updated: 23 Jul 2013

The first phase was to introduce build-to-order, a set of business processes intended to extend from suppliers to customers and to provide a range of customer benefits that included greater product variety, faster customer response times and lower costs. Build-to-order would bring a radical change to the company's computer production processes and rely on efficient just-in-time (JIT) production to be successful.

Michael Pich, Affiliate Professor of Operations Management and Entrepreneurship and Family Enterprise, Ludo Van der Heyden, the Solvay Chaired Professor of Technology Innovation, and Stephen Chick, Associate Professor of Technology and Operations Management, all at INSEAD, have written a case study based on Compaq's decision that explores the importance of manufacturing strategies and inventory management in the value creation process of a business.

They take the CEO's proposal to implement JIT using Kanban inventory squares as the starting point and examine the options available to Compaq, leading the reader through the advantages and disadvantages of the various possibilities and challenging him or her to decide the best process control strategy for Compaq.

The two main types of inventory discussed are operational inventory, or work-in-process (WIP), and tactical inventory, which includes finished goods inventory (FGI). These topics open up issues on WIP control strategies and the trade-offs between WIP levels and production efficiency, as well as issues related to FGI management as a tactic to improve customer response times, such as build-to-order (BTO) and build-to-forecast (BTF) decisions. Trade-offs imply multiple measures of performance, and that no one process control strategy dominates, and the authors describe the main process performance measures as they relate to this case study.

The authors discuss push and pull manufacturing strategies and their implications for inventory levels, using a non-standard definition for push and pull that focuses on WIP control. Pull manufacturing strategies are thus defined as those that limit the amount of WIP. The choice of push or pull WIP inventory management is disambiguated from a firm's tactics regarding the role of FGI, which can be considered to be a buffer between the manufacturer and the clients. The issues around any production strategy, including product availability, obsolescence costs, inventory holding costs, customer focus, customer response time and product quality, are examined.

Citing a simple, stylised example of computer assembly, the authors investigate process efficiency qualitatively in the light of the different control options discussed. By then bringing in the customer, and comparing the differences between Compaq's existing push build-to-forecast strategy and the new pull BTO strategy, the authors pinpoint the major challenges and potential pitfalls of shifting to the new pull BTO model, and provide a set of questions for the student.

A worked computer simulation based on the Compaq (A) case is also available as a Compaq (B) case. The Compaq (B) case demonstrates the benefits of simulations in giving both a quantitative understanding of the interactions and trade-offs between the production strategies that are described in the case study, and reinforcing the qualitative analysis of the (A) case. The Compaq (B) case requires ProModel, which is purchased separately, and provides a step-by-step guide to running the computer simulation model.

The Compaq case study has been used successfully in the MBA core class on Process and Operations Management, as part of an inventory management module. The case can also be used to illustrate the benefits and limitations of discrete-event simulation as a business process analysis tool. The accompanying teaching note outlines a sample discussion of the case, highlights the major learning points, and provides sample solutions. 

Process Control at Compaq Computer Corp.
Stephen Chick , Michael Pich , Ludo Van der Heyden 
INSEAD Case Study

Reviewed by Deborah Bonello

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