Accounting

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