Supply Chain Mastery: HP

Supply chain and purchasing strategies save HP $1 billion since 2001.


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Posted on Nov 03, 2006

Every day, HP delivers 1.3 million inkjet cartridges, 110,000 printers, 75,000 personal computer systems and 3,500 servers. Many of these products are produced by contract manufacturers or original design manufacturers. The company spends about $50 billion, or about 64% of its revenue, on supply chain activities. At this spending and complexity, supply chain mastery is an imperative discipline to control costs and foster collaborative relationships with suppliers. Supply chain optimization "has a direct impact on customer satisfaction, stock price and profitability," says Dick Conrad, senior vice president of supply chain, Global Operations, at HP (Palo Alto, CA). As a result, HP management assigns supply chain optimization a high priority. "We are continually focused on supply chain improvement," says Conrad. "The journey will never be done until we can do it for free or at a negative cost," he notes. "We have to be ... vigilant to ensure the supply chain is flexible and changing to meet ever increasing demands," he says. This approach, which has reaped the company many benefits (including saving HP over $1 billion since 2001), has earned HP the Managing Automation Progressive Manufacturer Supply Chain Mastery Award. HP is a major player in three highly competitive, price-sensitive businesses: printer and imaging solutions, personal computers and technical solutions. The latter includes services as well as enterprise systems for mission critical applications like stock exchanges. This broad product line positions it against a large number of competitors. Other pressures include a widely dispersed global operation that extends into 178 countries and a rapidly flowing new product pipeline, which launches hundreds of new products each year. HP's supply chain effort is overseen by its Supply Chain Council, which includes Conrad and the supply chain leader from each of the company's three business groups. Each year, the council updates its three-year plan and then translates it into a 12-month schedule. To monitor progress and ensure objectives are met, the Supply Chain Council meets monthly. HP serves four customer segments: consumer, small/medium business, public sector and enterprise. Just a few years ago, customers received product or services from HP via one of 35 different supply chains. Today, the company has consolidated its business into five supply chains -- no touch, low touch, configure-to-order, high volume and solutions and services. "One size does not fit all," says Conrad. In fact, relying on a single supply chain "limits the company's ability to grow and effectively serve different customer requirements and different market needs," he explains. "Right now five is the right number," but it's possible one or two more channels could be added. With an increasing number of orders received directly from consumers using the HP Web site or working through an enterprise business partner, there's been considerable growth in the customer-centric, demand-driven configure-to-order supply chain. "We do more and more configure-to-order, especially on our mid-to-lower range of offerings," says Randy Burdick, vice president and group information officer, adaptive infrastructure and supply chain IT at HP. Combining SKUs and options just before shipping eliminates the need for custom builds and reduces inventory requirements. However, this direct-to-consumer business also necessitates different support such as call centers for customer service and Web site design for ease of use. On the supply side, a spend analysis program aggregates data according to various criteria (including by supplier, part number, quality and reliability). Two internal software programs, Total Buy and Buy Power, support this effort and help to consolidate orders, negotiate better prices, terms and conditions and optimize supply strategies. Another program, a supplier management process, has reduced the number of direct material suppliers 53% from 1,500 to 720. The indirect supplier base has shrunk a similar amount from 100,000 to about 52,000, and the logistics supplier pool has declined 68%. As a result, HP's top 40 suppliers now account for roughly 90% of its total spend. To formalize communication with these partners, HP has organized an executive sponsor program, which assigns a HP executive to each supplier. This executive meets with the supplier twice a year to resolve any issues. "Of course a significant amount of communication occurs ... on a daily basis," notes Conrad. The more synergistic supplier relationships helped HP reduce inventory 21% and cut its logistics cost per box 11% during fiscal 2004. To manage risk in the demand forecast, HP has developed a homegrown system called HPRISK. The HPRISK statistical software models and structures variability and can be used to analyze the supply, demand and price volatility of materials and services the company buys. Modeling uncertainty allows the company to identify volume levels that are certain, less certain and unlikely, but possible. This allows procurement personnel to negotiate contracts that ensure adequate supplies of critical materials and components and maximize price stability. Suppliers also benefit. Not only do they know they will receive a certain minimum level of business, but they also understand the likelihood of additional orders and their size. Since mid-2003, HP procurement personnel have used this technique to buy $3 billion worth of standard components like memory chips, hard disks and displays. During this period, procurement risk management (PRM) has saved HP $78 million and protected 15 million systems against commodity volatility. The PRM software is the subject of four patents and is used throughout the company. To date, approximately 350 of the company's 150,000 employees have been trained in its use. PRM also has generated interest outside HP and is offered by its consulting services. Another supply chain technique HP has developed is what it calls the buy/sell process. It relies on software from Baan, which is now part of Invensys plc (London). HP procures components for its contract manufacturers and original design manufacturers rather than having these vendors do the buying. This not only insulates the company from shortages but also allows it to reduce costs by consolidating orders and eliminating markups. Pricing also remains confidential since this information is not divulged to the third-party manufacturers. The buy/sell process now accounts for about $20 billion in purchases and represents nearly half the company's supply chain spending. HP also relies heavily on third-party providers for warehousing and shipping. To eliminate the multiple legacy B2B messaging systems used worldwide and streamline HP's communications and interaction with third-party partners, the company is transitioning to what it calls LEGO (which isn't an acronym for anything, but is named after the children's building block toys), a message infrastructure based on an order management module from SAP America (Walldorf, Germany). HP selected SAP for LEGO because it provides the right functionality and is the dominant application in the company. In fact, SAP currently serves as the engine for order management, demand planning, forecasting and other functions, and HP is striving to replace legacy systems with SAP enterprise resource planning (ERP) tools wherever it is practical to do so. LEGO provides a single place and process to "plug in" to HP globally and reduces the time and expense involved with making connections to third-party providers. It also has reduced the number of message types, formats and communiqués containing product and customer specification information. The phased, three-year LEGO project has been completed in Asia and is currently rolling out in North America. It will conclude in 2006 when it's implemented at the company's European operations. Transitioning to new applications is not always a hurdle-free process. A bumpy conversion to an order fulfillment system for Industry Standard Server products in May 2004 caused by a lack of team integration and an unexpected spike in orders disrupted shipments and negatively impacted third quarter 2004 results. Although the order fulfillment system is now up and running, and HP has improved its reengineering process, "supply chain inefficiencies" were one of the reasons cited by analysts at Morgan Stanley (New York) in its downgrading of HP's stock from equal-weight to underweight this past January. Overarching the company's supply chain efforts is its GO+IT integration, which unifies global operations and IT to create an adaptive enterprise. GO+IT is based on the premise that "every business event triggers an IT event and merges the two together," explains Conrad. "We've integrated IT into everything we do." This strategy is helping the company simplify and standardize its IT infrastructure. The company uses about 3,500 applications, down from 7,000, and plans to further reduce this number to 1,500. IT costs, which currently represent 3.7% of revenue, are down from 4.5% and are expected to fall to 3.0% in the coming fiscal year. In addition, the percentage of IT spend devoted to maintenance of existing systems is declining and now stands at about 70%. This percentage is expected to fall to about 50%, freeing 50% for investing in the IT innovation needed to develop new business capabilities. In support of these goals, the company's ERP road map to 2010 calls for increased standardization on SAP, reduced customization and a higher degree of global commonality. However, Burdick notes, "we are not tracking toward one code base." Some flexibility is needed to accommodate local variations such as differences in tax strategies. Nevertheless, Burdick anticipates that 80% of the company's code base will be consistent globally by 2010. Future efforts also focus on shipment visibility and production planning. "Integrating information about the supply chain and production capability is key to having a smooth supply chain," concludes Burdick.

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