Purchasing synergies will create at least $800 million in savings in the Compaq-Hewlett Packard merger, which took effect earlier this year.

"Our analysis shows that with the combination of our volumes, we have an opportunity to become the lowest-cost producer of PCs and servers in the world," says Corey Billington, vice president of global procurement services in the new HP. Billington was the top purchasing officer at HP before the merger.

The new organization features separation of direct, indirect and services, with Dick Conrad, Compaq's former vice president of worldwide procurement, heading up direct procurement and indirect moving to supervision in the finance department. Leading the buying and logistics teams is Ed Pansel, senior vice president of worldwide operations supply chain.

"Essentially what we're trying to do is get a blend of the best of both worlds," Conrad told Purchasing in an interview last month. "We're in the process now of what we call merger value capture. As part of our premerger planning, we had a small group of procurement professionals who scoured more than 70% of the total company spend down to the part number and the supplier."

Those teams identified differences in prices paid. Immediately after the merger closed, buyers called suppliers to make sure the combined company was receiving the lower price in the situations where there were differentials. "We got the lower prices on day one, and that process continues through the supply base to ensure that we receive price collapse and price harmonization" Conrad says.

The initial target for savings from products used directly in manufacturing is $550 million.

The second phase of the strategy to collapse and harmonize prices is to requalify suppliers where an advantage may be gained. "There are situations where a specific product was qualified by Compaq or HP, but not the other company, and a price advantage was realized," says Conrad. "We are in the process of requalifying those suppliers so that the combined company can enjoy the same price advantage. That process has a very high return on investment when you look at the requalification costs."

The third phase is product redesign. "We've looked at similar products sold by both companies and we've looked at the attributes of the lower-cost solution," says Conrad. "In some cases we will redesign or respec a product to take advantage of those situations." In other situations, one of the companies had a clever design solution that the other could benefit from. In one example, one of the companies designed front fascias to the PC so that off-the-shelf drives could be more easily used. That enabled spot buys and rapid moves from one supplier to the other to take advantage of market conditions. That particular mechanical design scheme will be adopted for all PCs.

Commodity teams from Compaq and HP are now studying major buys for further opportunities for savings. The majority of the commodity team members are coming from Compaq, which had a larger centralized buy than HP did. There are about 200 people on the new central purchasing team. The teams are using various types of research to identify lowest prices paid in the world for a large market basket of products. "We want to know what is the lowest price heard of for a particular product," says Conrad. The new HP will use its broadened leverage to reduce prices as low as practical. Normal market movement does not count for or against new cost targets.

On the list to do quickly is a plan for supplier rationalization. No specific target number has been developed yet.

Billington is establishing systems for managing relationships with suppliers around the world based on a program developed at HP called GetSupply. It's an IT tool that tracks orders from suppliers to its facilities and to contract manufacturers. HP gets an early warning if there's a delivery problem. The system provides visibility even though several tiers of suppliers may be involved. Billington is also developing software tools to facilitate use of online auctions.

The new company will also combine purchasing for indirect costs with an initial savings target of $250 million.