HP's purchasing organization looks beyond price
It takes more than leverage to sustain competitive advantage for a company like HP. So global procurement is taking a new strategic approach to a $16.5 billion indirect and services spend that's winning big. It is focusing on cost, service and quality as well as price.
By Susan Avery -- Purchasing, 9/11/2008 2:00:00 AM
When Rob Falivene joined Hewlett-Packard 18 months ago as vice president of global procurement, he was tasked with creating a new worldwide function that combined the company's indirect spend with its services spend.
The leverage resulting from the combined $16.5 billion spend helped Palo Alto, Calif.-based HP to attain price discounts from suppliers. But Falivene, whose background consists of operations and supply chain management experience with consumer goods and energy companies, knew right away that would not be enough to sustain long-term competitive advantage for HP, especially in an uncertain economy. Those price discounts would soon erode and so would any benefit to the company.
"We don't just want to have the best price in the marketplace," he says. "We want everything else that goes with it that defines a unique competitive advantage for HP: Cost, service, quality, technology and supplier capability."
One way that HP achieves—and expects to sustain—competitive advantage is through global procurement's supplier development activities. These activities include working with suppliers to expand their capability globally.
And, so far, global procurement at the company that received Purchasing's Medal of Professional Excellence two times, with the most recent in 2004, is delivering. Falivene says that HP is realizing significant savings from global procurement and the business units working together.
It has not been easy.
How HP buys
The challenge lies in the inherent make up of the indirect and services buy, and the way procurement delivers to the company's business units.
HP's indirect and services spend consists of such categories as labor (agency, contractor, contingent), sales and marketing (print, broadcast, online), technology (hardware, software, telecom, R&D), travel and meetings and events and business services (i.e., finance and administration, legal, security, real estate).
What is different about services is that once global procurement develops a sourcing strategy, it needs to execute not globally or even regionally, but locally, where business decisions are made in the countries where the company's facilities are located, Falivene explains.
"We could have the best sourcing strategy in the world for, say, contingent labor," he says. "We could implement that strategy. We could develop the suppliers. But if the buying decisions made by HP's businesses are not in line with those recommendations, then the company doesn't really save the money."
It all comes down to collaboration.
Falivene and his team view their organization as the supply chain manager and procurement arm for HP's three businesses—the Personal Systems Group, Imaging and Printing Group and Technology Solutions Group.
The organization is global and has a center-led structure. Falivene's team is dispersed to and works closely with each of the businesses at their locations in the regions of the world where they have operations.
"We support the businesses in developing the supply side strategy, optimizing the spend, creating savings opportunity and implementing strategy to help provide improved operating margins," he says. The businesses then decide whether to take that to the bottom line or reinvest it in the business.
Working with the business, global procurement develops a sourcing strategy for categories of spending. It meets with stakeholders in the business to plan the spend and savings (based on demand and forecast) and they jointly commit to tactics necessary to realize the goals.
"The businesses rely upon corporate procurement to deliver the savings," he says.
Category managers develop a supply side plan by sub-category and item with the right mix of suppliers. They then negotiate agreements and commit to pricing and terms that will deliver the savings as well as value and competitive advantage.
To purchase goods or services, employees working in the businesses use an automated system called Smart Buy to create requisitions against the supply plans.
Global procurement is responsible for selecting and developing suppliers and managing the company's relationships with them. This includes measuring supplier performance, which it does in tandem with its stakeholders.
"It's as if we get a specification from the businesses," Falivene says of his organization's supply management strategy. "So there is a performance standard that we agree to and then we try to develop suppliers and services providers capable of delivering goods and services with a competitive advantage to the company. We work very closely with our internal stakeholders at the businesses to achieve the best results."
Global procurement holds forums through which it meets with suppliers, educates them on the company, and challenges them with a score card process that helps focus and develop their performance. HP uses several supply management tools and has named the score card process HP STAR for Supplier Tracking And Recognition.
"Equally as important, the score card tells suppliers what it takes to maintain and grow a relationship with us," he says. "They have to deliver a price advantage, but they also have to have capability, quality, scale and technology. And they have to be flexible. If you look at HP, there is one constant and that's that there is tremendous change year after year."
Growth is another challenge for global procurement at HP, which has acquired more than 20 companies in the past three years. Now, Falivene and his team are working on integrating indirect goods and services spending at HP with that of one of the company's most recent big acquisitions, EDS. (At press time, HP is still in the process of acquiring EDS.)
Supplier development
Two years ago, HP was doing little in the way of developing suppliers that provide the company with indirect goods and services. Now supplier development is a strategic imperative and priority for global procurement.
"What is required to attain competitive advantage is to develop key strategic suppliers that act as partners with us," Falivene says.
Supplier development is a collaborative process between HP and the supplier with the goal a total cost of ownership (TCO) that is better than what can be achieved today.
"Put another way, we challenge our suppliers to come up with something that today is not achievable," he says. "Then, we work with them to deliver it."
The approach is one that can almost be called supplier hosting and, Falivene says, it is one that will develop new value and help HP sustain a competitive advantage.
One way global procurement does this is by working with suppliers to expand their capabilities geographically.
While there are several instances of this occurring in the company, Falivene cites a supplier that provides HP with labor services in the Europe, the Middle East and Africa (EMEA) region that the company wants to work with in the Asia, Pacific, Japan (APJ) region. It had been purchasing labor services through smaller local companies in Japan, Australia, Singapore, China and India. HP wants to extend the supplier's reach.
This new way of thinking does not mean that HP no longer wants to do business with small local suppliers. That is far from the case.
For instance, through a new global agreement with facilities suppliers, HP is sourcing MRO (maintenance, repair and operations) goods and services such as catering, custodial, general maintenance and landscaping from small, local suppliers in several regions around the world.
One of these suppliers provides the company with carpeting that is 100% recycled, which brings additional benefits to HP such as helping to meet corporate environmental and social responsibility targets.
HP also is proud of its award-winning supplier diversity program. It has maintained a Corporate Supplier Diversity program Office for more than 30 years in the U.S., and Falivene adds that the company spends about $1 billion annually with diversity suppliers.
"I think when you put all that together you come up with shareholder value," he says, "whether it goes directly to the company's bottom line or indirectly through the businesses."
Also see:
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