Transcript Procurement Risk Management at HP: Applying financial

Procurement Risk
Management (PRM) at
Hewlett-Packard Company
Venu Nagali, Ph.D.
Distinguished Technologist
Procurement Risk Management Group
Stanford Risk Management
Roundtable
November 13, 2006
© 2006 Hewlett-Packard Development Company, L.P.
The information contained herein is subject to change without
HP has the largest IT supply chain
HP Supply Chain actively
manages $51B of
company spend (80% of
total)
•
#1 in Material Spend -$43B
– Memory - #1
– Microprocessors (Intel & AMD) - #1
– Windows Software (Microsoft) - #1
– Hard Disk Drives - #1
– Laser Engines- #1
– Optical Disk Drives - #1
– Chipsets (Intel) - #1
$64B Total Spend
Material
Cost
(67%)
Non-SC
cost
(20%)
SC Cost
(13%)
– LCD Panels & many more - #1
•
#1 in CM/ODM Spend
•
#1 in Electronics Industry Logistics
Procurement - $1.7B
•
Provide spare parts for 1M Service
interactions per month
Venu Nagali – ESCA Sep 06
page 2
HP’s Supply Chain Strategy:
Adaptive Supply Chain
Customers demand more. Supply chains must be
agile enough to adapt to constant changes in their
markets.
•
Speed-up introduction of new
products and services to market
•
Design and provide anything
anywhere
•
Manage change and global
operations more easily
•
Enable profitable growth
improve
agility
managec
osts
mitigate
risk
increase
quality
Venu Nagali – ESCA Sep 06
page 3
Lack of risk mgmt processes has resulted
in billions of dollars in losses for OEMs …
Demand risk
Price risk
Dell Computer
Cisco Systems
May 14, 2004: Stock drops 3% as
earnings are held back by memory prices
Oct 18, 1999: Stock drops 13% as higher
memory prices result in a $470M earnings
shortfall
April 2001: $2.5B inventory write-off due to
rapidly weakening demand coupled with
locked-in supply agreements
Price risk
Ford Motor Company
December 2001: Ford posted $1B loss on
palladium & other precious metals
contracts. Shareholder files suit alleging
mistake in company’s hedging
Availability risk
Agilent Technologies
July 1999: Stock price drops 26% after an
inability to obtain key components cause
revenue shortfall
Venu Nagali – ESCA Sep 06
page 4
… and cause pain throughout the supply chain
March 19, 2001
Solectron
Announced 8,200 layoffs and a $400
million restructuring charge
to realign capacity to meet decreased
demand.
March 20, 2001
JDS Uniphase
Announced global realignment due to
reduced demand - includes a
20% staff reduction and a $425 million
restructuring charge.
Venu Nagali – ESCA Sep 06
page 5
Objectives of PRM @ HP:
Measure & Manage Procurement
Uncertainties
Supplier
Procurement
Planning
& Mfg
Uncertain
Component
Prices
Margin
Risk
Price-Cost
Matching
Problem
SupplyDemand
Matching
Problem Uncertain
Component
Supply
Sales
Customer
Uncertain
Product
Prices
Shortage &
Inventory Obs.
Costs
Hidden
Material
Costs
Uncertainty
Symptoms
Venu Nagali – ESCA Sep 06
Uncertain
Product
Demand
PRM Solutions
page 6
PRM at HP addresses risks due to high
probability events
high
supplier bankruptcy
earthquake
quality
availability risk
price risk
fire
Impact
Other
processe
s
demand risk
PRM
@
HP
hurricane
transit delays
shipping accident
customs delays
theft of parts or products
low
low
Probability of Adverse Event
Venu Nagali – ESCA Sep 06
high
page 7
Organizational challenges in implementing PRM
Strategy
• Currently, risk
management is not a
core part of the supply
chain strategy
Metrics & Processes
Skills & Toolsets
• Current supply chain
metrics do not address
risks
• Poor understanding of
techniques to measure
and manage of risks
• Current processes do
not support risk
management
• Current ERP and
supply chain mgmt
systems do not
address uncertainties
Venu Nagali – ESCA Sep 06
page 8
Components for PRM framework
1. Measure Risk:
• Forecast scenarios for product demand,
component cost and availability
2. Manage Risk:
• Use a portfolio of structured contracts for
different segments of demand
3. PRM Process:
• Cross-functional process
• Periodically reassess risks & manage them
Venu Nagali – ESCA Sep 06
page 9
PRM Approach: Manage risks using structured
contracts with suppliers
Demand forecast (units)
400
Hi scenario
Uncommitted
300
200
Base scenario
Flexible quantity
contract
Lo Scenario
Fixed quantity
contract
100
0
Time
Venu Nagali
HP Confidential
– ESCA Sep 06
page 10
Re-engineering business processes to implement
PRM
Strategy & Governance
Contract Origination
Contract Monitoring
Contract Evaluation
Contract Execution
1. New metrics put in place to track supply chain risks
2. Risk mgmt is now a core part of commodity strategy
3. Cross-functional process involving procurement, planning,
finance & marketing
Venu Nagali – ESCA Sep 06
page 11
HP PRM implementation methodology
Consulting
• Commodityspecific
• Business process
Consulting
Training
• Deal structuring
and valuation
• Change
management
Software
Venu Nagali – ESCA Sep 06
Training
• Core concepts
• Forecast scenario
generation
HPRisk Suite of PRM
software
• HPRisk contract valuation
• HPHorizon demand
forecast scenario software
• Price forecast software
• Inventory buffer calibration
software
page 12
PRM enables a combination of objectives
Cost
uncertainty
Demand
uncertainty
Earnings & Cost
Predictability
• Protect product margin
against volatile component
prices
Availability
uncertainty
Portfolio cost savings
• Lower material & inventory costs
Venu Nagali – ESCA Sep 06
Assurance of supply
• Protect against shortage risk
page 13
PRM implemented for a range of
commodities & across all HP businesses
Year1
Printing
Year2
Custom
Component
s
Year3+
Pers. Syst
ASICs &
custom
assembly
Enterprise
ASICs
Services
Spare parts
MPUs
Chipsets
Lenses
Optical drives
Network Asics
Scanner &
Camera Sensors
Direct
Packaging
TFT Panels
HDD
Plastics
Standard
Components
Indirect
Procurement
Memory
Energy
Memory
Ad Media
Relative size of annual impact
Venu Nagali – ESCA Sep 06
page 14
Commitments across the supply chain have
reduced the “bull-whip” effect
Buyer


Tier-1Supplier
Conventional
Approach
Demand forecasts
PRM
Approach
Quantity Commits
Tier-2 Supplier
Cost forecasts
Cost Commits
Conventional approach
 Non-binding nature of the forecasts significantly increases demand, cost &
availability uncertainty
PRM approach
 In certain cases at HP, demand and order volatility across 2 tiers in the supply
chain decreased by 50%
 Essentially, the PRM approach can substantially reduce the bull-whip effect
Venu Nagali – ESCA Sep 06
page 15
PRM Accomplishments: HP has obtained
significant financial benefits from implementing
PRM
HP Spend Impacted by PRM Process
Incremental Savings Enabled
140
Incremental savings enabled by the PRM
process ($M)
HP annual spend Impacted by PRM process ($ M)
8000
7000
6000
5000
4000
3000
2000
1000
120
100
80
60
40
20
0
0
FY'01
FY' 01
FY' 02
FY' 03
FY' 04
FY' 05
FY'02
FY'03
FY'04
FY'05
FY'06
FY' 06
Estd. Incremental savings from material, inventory & AoS costs

About $7 billion in HP spend using the PRM process in FY’06
 Significant AoS benefits to enable revenue & customer satisfaction
Over $300M in incremental savings enabled over the past 6 years

PRM considered a competitive advantage by HP senior management

Venu Nagali – ESCA Sep 06
page 16
Venu Nagali – ESCA Sep 06
page 17