Supply Chain Management Blog : HP Supply Chain

HP Supply Chain: Buy/Sell and Manufacturing Outsourcing

christianverstraete — Mon, 08 Jun 2009 23:29:00 GMT

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...(read more)

HP Supply Chain - Dynamic Replenishment

christianverstraete — Mon, 16 Mar 2009 08:01:00 GMT

It's been a while since I last spoke about the HP Supply Chain and what we put in place to manage uncertainty and variance in the current economic conditions. Most of the best practices I have been discussing have actually been in place for a number...(read more)

HP Supply Chain - Inventory Driven Costs

christianverstraete — Mon, 24 Nov 2008 08:12:00 GMT

To continue on my series describing the HP Supply Chain, I'd like to introduce a concept called "Inventory Driven Costs", described for the first time in an Harvard Business Review article with the same name. This concept allowed us to completely change our Supply Chain approach in our PC business, ultimately resulting in increasing our margins drastically while growing our market share.

The development of IDC, as it is being called internally, came from a simple question: "when looking at inventory costs in a traditional way (capital + physical costs), do we obtain a correct view of the true cost of carrying this inventory?". And the question is intriguing. PC's are products with a short shelf life, so when looking deeper into this question, the team came to an astonishing discovery. There were a number of other costs they needed to take into account if they wanted to reflect correctly the holding costs of the inventory.

Material Devaluation, in the electronics industry, prices mostly go in the same direction, they are going down. Carrying inventory holds with it a risk, and that is that the value paid for the components, or the expected value from the end products can no longer be recovered. As the potential losses here are directly related to holding inventory, the costs associated should be included in the inventory costs.
Discounts, obviously there is a way to address the first risk, and this is by selling excess inventory in a fire sale. But this often implies deep discounts. In the electronics industry one often sells the remainder stock just before introducing the next product. Here again the magnitude of the cost is directly related to the amount of inventory available.
Price Protection, which is mainly related to working with a distribution channel. As the distributor acquires the stock with a specific sales price in mind, electronics companies will compensate price drops they initiate in the channel. These costs are directly related to the inventory in the channel. Another element of price protection is related to the cost of hedging currencies as they also have an impact on the valuation of the inventory.
Returns, it is traditional for the channel to send back unsold products in case of overstocks. There are costs related to taking the product back, refurbishing it etc.

By tracking these costs HP has gained a much better understanding of the true cost of carrying inventory in its supply chain. This has resulted in reviewing some of our networks and to make substantial changes resulting in millions US$ cost reductions. It has also highlighted the true cost of inventory, allowing us to take decisions regarding the safety buffers and rush mechanisms to be used to coop with varying demand.

HP Supply Chain - The concept of Supply Chain Pipes

christianverstraete — Mon, 03 Nov 2008 14:05:00 GMT

Commenting to my last post, Mutka asked the question on how HP handles predictability and reliability in its supply chain. I realized that to provide him with a thorough response, I should explain the HP Supply Chain in more details. I have taken the decision to do this in a number of posts, whose title will start with HP Supply Chain. So, look out for those.

Last year, the HP Supply Chain took care of more than 45 million PC's, 30 million printers and 2.5 million servers. This makes it one of the largest electronics supply chains in the world. Knowing that most of the production is outsourced, you can imagine the size of the task. To facilitate the process, HP implemented a couple simple concepts which I would like to highlight here:

The first concept, a Supply Chain Pipe is a specific set of standardized business processes, IT systems, physical and financial flows. Looking at it in a modular approach enables a flexible composition of various elements to meet a wide range of customer needs and the goals of our business.

The second concept, which is well known in the industry, is Postponement. This concept invented by HP in the 90's, consists in keeping a product as generic as possible as late as possible in the supply chain, and only perform the differentiation when an order or demand is available. If you are interested in more details, see "Case Studies of Postponement in the Supply Chain" by Susan M. Rietze.

The components of a Supply Chain Pipe typically include a factory, shipment (most often by boat), a postponement center, a distribution center, logistics (typically truck) and channel partners. Factories are typically off-shore. The positioning of the postponement and distribution centers change to provide the best customer service at the lowest cost. Our volume products typically use one of the following three pipes:

The Value Added Pipe, where both the postponement and distribution center are in the region, is used when the quantities of products are relatively small and the demand rather unpredictable. Often this occurs at the introduction of the product and during the end-of-life period.
The Low Touch Pipe, where the postponement is performed off-shore, is used when the demand predictability increases and when products are ordered per pallet for example.
The No Touch Pipe, where the product is directly shipped to the channel, is used for products that can be shipped in large quantities (e.g. Containers). Both postponement and distribution is performed off-shore.

During the lifecycle of the product, the pipe used may change as demand changes. At regular intervals, the situation is reviewed and a decision is taken which of the pipes will be used for the next period.

In doing so, and in combining this with the management of our channel's inventory levels (which I will discuss further in one of my next posts), we are managing to keep a good handle on inventory and service levels. At the same time this allows us to react rather quickly to opportunities or downturns. It is not the only element that plays, but it definitely helps scaling up and down effectively.