Over the last months, I have shared with you a number of concepts HP has implemented in its Supply Chains to reduce costs, improve responsiveness and mitigate risks. In this blog, I'd like to share another one, called buy/sell, that focuses mainly on outsourced Supply Chains, and that HP is not only using for its own purpose, but also offers as a business process outsourcing to selected customers.

Buy/sell, also sometimes referred to as price masking, was initiated in the late 90's as a result of the trend to outsource manufacturing. Indeed, the company used to benefit from interesting price conditions resulting from the aggregation of its buying needs. Unfortunately, when HP started to outsource its manufacturing it could no longer take advantage of such prices as suppliers were reluctant in offering similar conditions to the contract manufacturers. Indeed, if the contract manufacturer would have special price conditions for components to include in HP products, it would try to negotiate similar conditions for other purchases, reducing the margins of the supplier. Obviously, this was something the supplier did not want; resulting in HP paying higher prices for commodities/materials going into the products whose manufacturing was outsourced. As HP had decided to increase manufacturing outsourcing, it required another approach to purchasing its key commodities to maintain its competitive advantage. The approach taken is called Buy/Sell and allows HP to save several percentage points on the purchasing of those key commodities.

In practice, how does it work?

In a nutshell, HP will order the commodities at the best price from the supplier and sell them immediately to the manufacturer at the marketprice. These would then be included in the final product, which is sold back to HP at an agreed upon price. As a result, the contract manufacturer has not view on the original price HP paid for the commodity.

In practice, there are a number of activities that gravitate around this. They cover three areas, Sourcing, transactional buy/sell and financial transactions. Let's look at each of these in a little more details.

From a sourcing perspective, the first step is to understand the spending for a particular commodity. One or multiple suppliers are identified and pricing is negotiated. In this process the use of price masking towards outsourcers is clearly stipulated, ensuring a price agreement, beneficial for both parties, can be reached. When the contract manufacturer is approached, it is clearly stated that he will order the parts from HP.

From a transactional perspective, HP shares its forecasts with its contract manufacturers (CM) and agrees with them the quantities they will manufacture by time period. Resulting from this the manufacturer can deduce the amount of components required and places an order with HP, order that is forwarded to the supplier, with request to ship directly to the CM.  In some situations, HP manages the logistics also.

The invoice will be sent by the supplier to HP, while HP will send a second invoice, at market price, to the CM and follows up the payments.

These functions are performed by a shared service that manages those business processes on behalf of the business units.

The buy/sell process has additional benefits. These include the management of parts allocations in times of shortage, as HP requests the supplier to perform the drop shipments, and the masking of price volatility. Indeed, for commodities with high price volatility, HP can take advantage of the best price, while maintaining a stable price to the CM. Combining this approach with other procurement approaches developed by HP, such as Procurement Risk Management, HP can take full advantage of its relation with the supplier.

Using inflated market prices limits the diversion of HP commodities to other channels, while it ensures the adherence to contractual engagements by CM's.

The approach described in this entry has been used for a number of years for a wide range of commodities and materials, resulting in important savings to the company. The use of the buy/sell process has increased by a factor 10 since 2002, and the University of St. Gallen in July 2003 commented that, "HP 3rd party Buy Sell process is almost unique in the industry and represents a huge competitive advantage, enabling vital controls in an outsourced manufacturing environment, controls such as price masking, better assurance of supply, central allocation management, bundled buying power, supplier share management, price volatility mgmt, contractual compliance, etc."