Hewlett-Packard wins for the 2nd time

When HP merged with Compaq in 2002, it tapped into the purchasing brainpower of both companies and implemented, refined or expanded a host of programs to cut supply chain costs. Its efforts have earned HP Purchasing magazine's 2004 Medal of Professional Excellence award.

By James Carbone -- Purchasing, 9/2/2004

When Hewlett-Packard and Compaq Computer Corp. announced that they would merge, Dick Conrad and Greg Shoemaker were given a big challenge.

The two had to merge the purchasing and supply chain operations of two large multinational high-tech companies with seemingly different strategies into a single cohesive world-class supply chain organization.

It was no easy task as the merger involved hundreds of supply chain and purchasing professionals in dozens of facilities around the world. The companies had different purchasing strategies and different processes that would have to be somehow integrated.

But Conrad, senior vice president, global operations supply chain and Shoemaker, vice president of procurement, said that while merging operations was challenging it also presented huge opportunities. By aggregating the purchases of the two companies and having a more centralized corporate purchasing structure, the new Hewlett-Packard would have unprecedented buying clout. Indeed, in 2004 HP's total spend with production suppliers will be $43 billion, and HP is now the number one buyer of many electronic components, production materials and manufacturing services.

Besides improving its purchasing leverage, the merger presented an opportunity to leverage the purchasing expertise that resided in both organizations.

One of Compaq's strengths was that its purchasing operation was centralized and the company was skilled at aggregating demand and leveraging purchases with suppliers. HP was more decentralized, but was more experienced at involving buyers in new product development to make sure cost never got designed into a product.

When the supply chain and purchasing organizations merged, HP used its combined resident purchasing brainpower to pursue a variety of leading edge supply chain programs. Among those include risk management, spend analysis, e-procurement and a process called "buy-sell" in which HP buys parts from suppliers and then sells them to its outsourcing partners.

In addition, HP adopted a leading-edge program in which HP assigns executive sponsors to key suppliers. The sponsors are a high-level point of contact for suppliers and oversee HP's relationships with suppliers.

Such initiatives have resulted in HP saving $1.2 billion in production materials cost in the merger. The initiatives have also helped HP reduce its supply chain cost as percent of revenue by 22%, cut inventory by 21%, and reduce HP's logistics cost per box by 11% over the last year at a time when logistics costs increased for most companies. The initiatives have resulted in more collaborative, less transactional relationships with suppliers.

HP's supply chain and purchasing strategies and practices are the reasons why HP is the 2004 winner of Purchasing Magazine's Medal of Professional Excellence award. HP becomes the first company to win the medal twice in the 21 years that Purchasing magazine has bestowed the coveted honor. It previously won in 1992.

Conrad says since the merger, the mission of his organization has been to reduce supply chain cost and improve asset efficiency while enhancing value to HP's customers. It has done so by simplifying its operations and processes and by consolidating its supply base and its own operations.

HP has reduced its number of direct material suppliers by 53% from 1,500 to 720. It has cut the number of logistics partners including 3PLs, freight forwarders and transportation carriers by 68%.

"We have also reduced the number of HP-owned sites by 49% over the last two calendar years and the number of outbound distribution centers by 38%," says Conrad.

HP did not make those decisions to consolidate operations and suppliers in a vacuum. It collaborated with suppliers.

"We meet with key suppliers once a quarter. We asked 'What can HP do to make our overall combined supply chain more effective?'," says Conrad. "They told us that HP had too many places in the world. They said, 'If you could simplify your physical network, it would be a big benefit.' So we worked with suppliers, pooled inventory and cut down on the number of inventory hubs around the world and we will continue to do that," he says.

While consolidating operations and suppliers was important, the top priority for HP after the merger was to leverage its new size and scale.

"We are now the largest buyer of virtually every category that we buy: memory, disk drives, contract manufacturing services, logistics and we leverage that procurement power," says Conrad.

However, before it got to the point where it could take advantage of its buying clout, HP had to get a handle on how much it was spending on which commodities and with which suppliers. HP undertook an extensive spend analysis program to aggregate its spend data so it could develop meaningful supply strategies.

"What we have done is put in a process by which we accumulate spend data in a central repository quarterly," says Shoemaker. The data is gathered using two home-grown software programs called Total Buy and Buy Power.

"We have an extensive database and the information can be sliced and diced by commodity, supplier, region and by business unit," he says. That information is available to HP buyers through a secure website.

Spend analysis data is critical to contract management at HP, according to Shoemaker. HP uses the information in its contract negotiations to show how much in total HP is spending with a supplier so it gets a better price or better terms and conditions on all commodities.

"Knowledge is power," says Shoemaker. "The more knowledge you have about your spend and relationships with suppliers, the better your result will be."

Prioritize this

A key part of HP's spend analysis strategy is setting priorities. "We pay more attention to hard drives than resistors," says Rob Terrill, manager procurement programs and processes. "Drives are a high-dollar spend so you focus your resources where you are spending the most amount of money." So, much of HP's spend analysis has been done on drives, memory ICs, microprocessors, printed circuit boards and connectors.

Terrill says spend analysis data is critical in managing multicommodity suppliers. For example, HP buys millions of dollars of semiconductors from Samsung that are used in a variety of HP equipment. "We want to make sure that we present one face to Samsung and have maximum negotiation power," he says. "If you have different groups at HP approaching suppliers on a piecemeal basis, then you are not going to get the leverage you would get as a single large customer," he says.

Spend analysis has been key to HP being able to aggregate its purchases and is one reason the company has been able to reduce materials costs by more than $1 billion since the merger. In addition, spend analysis will be useful when parts go on allocation. It enables HP to present data to suppliers that shows how much HP buys from them, making a case for why HP deserves preferential treatment because of the size of its buy.

Shoemaker says while spend analysis is a useful tool, just having the knowledge about spend does not produce results. The information has to be used to formulate a strategy or a business practice.

One way HP uses spend analysis data is with supplier executive sponsors. HP has about 45 executive sponsors who meet with suppliers at least twice a year to review business issues. Sponsors are part of HP's strategy to make its relationships with suppliers more synergistic and less transactional.

Executive sponsors give suppliers "a single point of contact within HP and enable suppliers to get preferred access to HP and to meet with product development and marketing teams up front to work together on programs," says Conrad. "We encourage them to be open. They have a place to go at a high level."

The sponsors are vice presidents or senior vice presidents at HP. "Their responsibility is to en-sure we are pursuing strategies that are synergistic and result in positive outcomes for both companies," says Conrad. "They serve as a mouthpiece for all of HP to the supplier."

Before the sponsor meets with a supplier, HP purchasers provide an extensive summary of its business with the supplier including analysis data. "We categorize spend and opportunities with the supplier in every commodity," says Shoemaker. "The executive sponsor sits down with the CEO or COO of the supplier and says 'Here are your opportunities with HP and here are our issues.'"

The sponsor and the supplier executive can decide jointly "who should address the opportunities and issues in an individual and holistic manner," according to Shoemaker. He says having executive sponsors shows suppliers that they are integral to HP's success and are valued by HP. "We share with suppliers what our overall corporate goals are."

It is easy to see why HP uses executive sponsors. "We may have a supplier that we are doing hundreds of millions or even a billion dollars of business with," says Shoemaker. Often a supplier is providing multiple commodities to multiple HP business groups.

"What we found is having those senior executive relationships results in HP addressing that entire spend with a supplier not just a portion of it. It causes us to be more focused." He adds that supplier executive sponsors have also gone a long way to help foster and nurture relationships with strategic suppliers. "We are dependent on suppliers. We cannot succeed without them. Our success is their success."

HP needs suppliers to develop new technologies. "We are spending a lot on research and development (R&D), but we are dependent on suppliers for R&D, too," Shoemaker says. "We are spending money to open up new marketplaces and suppliers will be able to participate in those if we have more holistic kind of relationships."

Of course, executive sponsors aren't the only ones working with suppliers at HP. Commodity teams manage supplier relationships and set supplier strategies.

Huddle up

The teams typically meet once a week and are lead by commodity managers. They include procurement engineers, product marketing people, and R&D members.

"Teams are primarily focused on new product introduction (NPI), says Shoemaker. "I would say 70% of their time is on NPI. A significant amount of time is focused on how products and suppliers are performing."

By way of example, Shoemaker says: "We may be launching a new product in a month, but a key supplier is having a yield issue with a part. The commodity teams would work with the supplier to resolve the issue." The teams would also work on quality, delivery or shortage issues involving the commodity.

With NPI, the commodity teams meet with product marketing teams to discuss plans for new products one to two years out.

It's the commodity team's job to determine what new HP products will mean in terms of supply and what needs to be sourced for them.

"Are we going to Sata (serial advanced technology attachment) drives or are we going to Pata (parallel) drives? Are we going to go to fiber channel? Are we going to 2.5-inch drives or 1-inch drives?" asks Shoemaker.

Commodity teams have to look at product roadmaps, share them with suppliers, determine who has the technology and products that will be needed and then formulate sourcing strategies.

Purchasing involvement in design focuses on what HP and other companies call "design for X."

"We collaborate on design for X. We want to design for transportation costs, lowest cost, reliability and postponement," says Conrad. Postponement is delaying the inclusion of certain product features until it is about to be shipped to a customer.

"One thing you can do to reduce transportation costs is to make your products smaller and use less packaging," says Conrad. HP has done that with some computers, reducing logistics cost for those products.

Another initiative involved designing for "variety control" says Conrad. "We did an analysis in our PC division and found that 90% of demand was constrained to a small number of stock keeping units (SKUs)." HP redesigned the PC platform, reduced the number of products by 52% and was able to cut its inventory by $25 million. At the same time the company still expanded market share for PCs.

Sometimes HP realized savings by looking at seemingly minor products. Example: power cords. HP buys about 100 million power cords per year. "We had different lengths. Sometimes the length varied by just an inch," says Conrad. HP reduced the variety of cords, cut its number of power cord suppliers by 62%, and reduced its power cord spend by 20%.

Role in design

Brian Cargille, product design for supply chain manager for global operations, says such savings are realized by having buyers on new product development teams.

Cargille says new product development teams have program design leads, who come from research and development and new product introduction managers, who are responsible for getting products manufactured. "About 40% of new product introduction managers have a procurement background. Often they come up through purchasing," he says.

Purchasing's role is to determine the material and labor costs for new products and to make sure preferred suppliers are used in new product designs.

Purchasing also determines if there is material commonality between the new product and other HP products. If there is commonality, HP may decide to reuse parts for the new design, meaning parts that were designed into other HP products would be used in the new product as well.

Component reuse often lowers cost and saves time because parts and suppliers have already been qualified. In addition, HP can improve leverage with suppliers because it is buying more parts from the supplier.

An example of reuse would be chassis. A new consumer PC may be designed with a new chassis. However, a chassis being used for a business computer may be suitable for the consumer PC as well. Rather than designing a new chassis, HP could use the older one and the same supplier. In fact, HP saved $4 million in material costs by going to a common chassis for servers, says Cargille. "It's not purchasing's job to beat the commonality drum, but to shine some light on the option of using a common chassis. We do a quantitative analysis based on the data that we have and make the decision that is in the best interest of HP."

Doing careful analysis has contributed to the $300 million savings in design for X efforts. Cargille offers several examples including one involving CD/RW drives.

Cargille says HP had been selling 20 CD/RW drives through its retail channel. Marketing had planned to increase the number to 80. After careful analysis, Purchasing determined that increasing the number of drives would boost inventory and services levels. HP would have to sell thousands more drives just to break even on the products.

Instead of producing more, the number of controls was reduced from 20 to nine and profit for drives went up 16% because inventory and materials costs were reduced.

In another example HP cut material costs by $33 million using fewer rail kits for its servers. Rail kits are use to mount servers to cabinets.

"We had 14 rail kits and reduced the number to five," says Cargille. "Not only did we cut inventory, but we actually were able to dramatically reduce materials costs," says Cargille.

Risky business

While much of purchasing's effort is dedicated to reducing the cost of HP products, HP buyers are also heavily involved in efforts to reduce risk. HP's procurement risk management (PRM) program is designed to guarantee supply and make sure HP doesn't buy parts it doesn't need.

HP has developed and patented home-grown software tools that use "sophisticated statistical techniques that look at demand patterns over time cyclically and industry capacity" and predict what demand and HP's material requirement will be, says Conrad.

"With high statistical confidence we are able to commit very stable demand profiles to certain suppliers," he says. HP uses the tools to forecast demand for memory, motherboards, optical drives, liquid crystal displays and batteries. Suppliers are given six months to a yearlong view into HP demand.

"This enables suppliers to get their material pipelines in place, to size their factories to mitigate some of the volatility in demand," says Conrad. "As a result we get a supply guarantee and sometimes price concessions."

Using PRM HP can commit, with confidence, to purchase a certain amount of material at a certain price.

HP's PRM tools help the company deal with uncertainty in the supply chain, says Patrick Scholler, director of procurement risk management. "There is uncertainty in the supply chain and we have to plan for surprises. For instance right now there is a lot of uncertainty with DRAM s and thin film transistor LCDs," he says.

While HP is a large buyer of many parts and gets world-class prices, it can still be affected by allocations. "HP is a huge company and we are number one in terms of purchasing volume for a lot of components, including microprocessors and memory," says Scholler. "At the same time, we are vulnerable when it comes to supply because we need such huge amounts of components."

Future pricing

Also important is forecasting pricing because with some customers such as the government, HP has to quote prices for its products six months to a year ahead of delivery time. Prices for many products such as memory and LCDs are volatile and could rise significantly in a six-month period. So, being able to accurately forecast materials costs is important in pricing products that won't be delivered immediately.

Venu Nagali, PRM consultant and account manager, says HP's PRM tools forecast materials prices up to two years in the future.

"We know what the cost of memory is today, but we want to forecast six to 24 months out. Clearly it is uncertain, but our tools tell us how low the prices can go from now and how high they can go," he says.

Forecasts are based on current prices, prices for the past month, historical prices and demand for semiconductor fab capacity. If fab capacity is in excess, prices will be low. If fabs are full, prices tend to be higher, says Nagali.

The tools also quantify demand uncertainty. Uncertain demand is quantified as low, base and high. Low uncertainty means low demand. "It's like saying we will definitely ship 1,000 PCs. Demand for that number is certain," he says. In that case HP can do long-term contracts with suppliers.

With base and high there is more uncertainty and HP would like suppliers to take more of the risk, which could mean it asks suppliers to build parts and then hold them in inventory.

If a supplier agrees to take on the risk, HP may award the supplier business for the part of the forecast in which demand is certain. "You can have a scenario where suppliers get compensated for taking a risk" through higher prices or a bigger commitment from HP to buy parts, according to Nagali.

Simply put, PRM provides HP with information it can use to structure contracts to guarantee availability and determine how much it should pay. "If you believe over the next three years that flat panels could be hot, then you can use that information to design contracts to protect the company for the next three years," says Scholler.

One reason reducing risk is important to HP is that the company outsources most of its manufacturing to electronics manufacturing services (EMS) providers and original design manufacturers (ODMs). While manufacturing is outsourced, sourcing of critical components such as hard drives, memory, and microprocessors is not. These parts are managed by HP and risk management is critical because it serves as the basis for long-term contracts with suppliers of the critical components.

The execution of these contracts is handled by HP's global procurement services group (GPS).

Buying and selling

GPS buys parts and sells them to the company's ODMs and EMS providers in what HP calls its "buy sell" process. Parts are sold to the EMS provider at a higher price than what HP pays the supplier.

HP masks prices from its EMS providers and ODMs. HP believes it gets preferential pricing from suppliers because of the huge volumes it buys. Because many EMS companies have multiple customers, HP does not want its competitors to get the same prices that it receives.

Wolfgang Zenger, vice president of GPS, says in the 1990s HP outsourced a lot of its strategic purchasing to EMS providers as well as its manufacturing. That proved to be a mistake.

"We had given too much control to contract manufacturers," he says. HP lost a lot of visibility in the supply chain because its relationships with suppliers weren't as tight as they should have been. "So we took some control back in house" through the buy sell process, he says.

Conrad says price masking isn't the only purpose of the buy sell.

Buy sell gives HP the ability to control allocation of materials. "If a part goes into short supply, we are able to control the purchases and can direct the material to ODMs or internal factories where we need it most," says Conrad. We can protect our customers and our margins."

During the "outsourcing craze," many OEMs outsourced supplier relationship management in addition to manufacturing, says Conrad. "That's wrong. Maintaining supplier relationships is a critical differentiator. The buy sell process allows us to control and enforce our share awards with suppliers," he says.

About $20 billion of HP's $43 billion production spend goes through the buy sell process managed by GPS.

But GPS has other duties than buy sell. GPS is kind of a super international procurement office (IPO). It has 300 people distributed around the world with about 60% of them in Asia. "We are close to where HP's outsourced manufacturing is taking place in China, Southeast Asia, Japan and Korea," says Zenger. "That is where we have people located to provide market intelligence and do factory audits so HP people in the U.S. or Europe don't have to travel into those regions."

HP's business units contract with GPS for services. "We provide commodity management services including supplier audits," says Zenger. GPS will also buy on behalf of the business units. "We are a service organization and operate like a business. We are self-funded. We provide services and business units pay us," he says.

GPS provides market information and looks to identify sourcing opportunities for corporate purchasing and for HP's business units.

GPS identifies new sourcing opportunities and transfers knowledge from the business units into the supply base so that HP and potential new suppliers can optimize designs.

"We are HP's eyes and ears in the markets where the action happens," says Zenger. "We own a lot of supplier relationships day to day because we place orders, we go out and do factory audits. We know what is going on. We have real-time and forward looking information in terms of technology roadmaps," he says.

More ODMs

GPS keeps a close eye on the ODM industry because HP is using ODMs more than in the past. HP has about five EMS providers and about 20 ODMs. More than 50% of HPs outsourcing business is now with ODMs. Five years ago most of it was with EMS providers.

Conrad says ODMs often offer a greater value proposition than EMS companies. "ODM partners have reference designs we can leverage. That reduces our time to market," he notes.

Mike Fawkes, senior vice president of operations for imaging and printing group, says typically business is placed with ODM for products that are standardized, such as printers and desktop and notebook computers.

"With PCs, the base technologies are commoditized. They lie with Microsoft and Intel, but they are industry standard," says Fawkes. HP uses ODMs for its desktops and notebooks.

"One thing we do for all products is look at total value chain costs from development to distribution and delivery to customers. Often having a single company handle everything from design to delivery to customer is a low cost total solution," he says.

EMS companies are aware of the trend and some are moving to an ODM model or offering ODM services. Case-in-point: Flextronics. "Flextronics is a design partner for us, a manufacturing partner, they provide distribution services and do some repair work for us," says Fawkes.

Fawkes adds that the use of EMS companies and ODMs by HP and other OEMs is a sign of how far the electronics outsourcing industry has come.

"Years ago we were much better manufacturers than EMS companies, but, over time, those guys got good at manufacturing. We had to look at our core competencies and determine if we had a competitive advantage by doing our own manufacturing," says Fawkes.

Do the right thing

While HP works closely with its EMS, ODM and component suppliers on technology and business issues, it also works with them on social and environmental responsibility issues, says Conrad.

"We are working closely with suppliers to meet the European lead-free requirement that goes into effect in 2006," he says. In addition, HP works with its outsourcing partners to recycle parts from old computers. "We will handle one billion tons of recycled computer equipment this year," says Conrad.

HP is also pushing its suppliers not to use child labor and to recognize the rights of workers to organize and receive fair pay.

With the buying clout that HP possesses, suppliers are taking HP's social and environmental concerns seriously. Fifty of HP's top suppliers have agreed to HP's code of conduct concerning child employment, fair compensation and right to organize.

"This year we will add another 100, so 95% of our direct material spend will be with suppliers who have adopted a standardized code of conduct," says Conrad.

The social code of conduct and key supply programs such as buy sell, design for X, procurement risk management and purchasing involvement in design will undoubtedly continue to be important in HP's future. Many of them have been challenging to implement, but have yielded cost savings and efficiencies and have been worth the effort.

HP's next procurement and supply chain challenge may not necessarily be developing entirely new innovative supply chain programs, but fine tuning the ones already in place.

"The key will be network simplification," says Conrad. We need to reduce the number of physical and informational flows in the company and cut down on IT costs. We want to make things simpler for our suppliers, making HP an easier company and a more cost effective company to do business with."

HP e-sources when it makes sense Reverse auctions are one tool that Hewlett-Packard uses to reduce material cost and to speed up procurement cycle time. However, HP is careful how it uses reverse auctions. It doesn't want to antagonize suppliers of strategic components. "This year we will do 408 events, source $6.4 billion of materials and services, and we will save more than 10%," says Dick Conrad, senior vice president global operations supply chain. Prior to the 2001 merger of HP with Compaq, HP had done 28 e-sourcing events and bought $360 million of parts and services. Conrad says there is an appropriate time to use e-sourcing. "You are not going to e-source microprocessors or operating system software," he says. "It is appropriate when there are a large number of suppliers." HP uses reverse auctions for indirect materials and for transportation services, packaging, plastic resins, power cords and batteries. He says e-sourcing events are merely one tool in HP's supply chain toolbox. "Depending on the market dynamics at any particular point in time, it may or may not be an appropriate tool to use. You have to be careful. Early on we used it in inappropriate ways and suppliers gave us feedback and we factored that into our forward plans," he says. Karim Mohara, manager of e-sourcing for HP, says doing reverse auctions depends on several factors. "One is complexity of the components. When you have a leading-edge product it is hard to find several suppliers." He says like most companies HP first started using e-sourcing as a tactical spot market buying tool. However, the company soon learned it could be used as a strategic tool as well. "We discovered the technology could be used as an enabler for the strategic sourcing process." He says some of HP's e-sourcing efforts are focused on new product introduction. "The emphasis is on collaboration with suppliers and the tool provides a good mechanism to collaborate with suppliers up front and to get their feedback," says Mohara. "It is interactive to make sure suppliers get all the information before going to quotation." HP uses Freemarkets to send out requests for proposals (RFPs) and requests for quotations (RFQs) to a broad base of suppliers or to a select few, says Mohara. The tool can help HP determine which suppliers are interested in its business and which ones are qualified to supply HP. The online RFQs and RFPs speed up the time it takes to do a deal and to structure reverse auctions. Mohara says e-sourcing can cut down on procurement cycle from six weeks to four to five weeks. While HP expects e-sourcing to cut material costs by 10%, it has done reverse auctions in which it saved 40% for cables and batteries. While reverse auctions have become popular in a buyers' market, they can also have a place in a sellers' market. "If there are numerous sellers that want to penetrate your business, it could still be advantageous," says Conrad. —James Carbone HP elevates indirect procurement role—and exceeds savings goals At HP, Larry Welch, vice president of indirect procurement, reports to Gilles Bouchard, executive vice president of global operations and IT. Such visibility makes a big difference in what the indirect procurement operation is able to accomplish. One of indirect procurement's goals is to slash spending by $1 billion in three years from an annual purchasing tab of nearly $14 billion. Indirect procurement at HP is responsible for setting sourcing strategy for areas: information technology (IT), human resources (HR), marketing, travel, real estate, finance and labor. Meeting this cost target is nothing new to HP's indirect procurement organization. In the past five years Welch and his team have twice surpassed savings goals. They exceeded a target of $250 million one year ahead of schedule after a corporate-wide move to take a more global approach to the indirect spend. Then, they readily met a savings objective of $350 million set at HP's merger with Compaq. Now, they are well on their way toward that $1 billion goal. Welch, a 28-year HP veteran, assumed his current post late in 1999 when HP was reorganizing itself along global rather than geographic lines, with indirect procurement taking a similar approach to spending activities falling under its purview. Such an approach would better leverage the company's spending and provide discipline around procurement practices. At the time, indirect procurement was fragmented; each of the the company's businesses, which have locations in more than 100 countries, was sourcing for IT, HR, and marketing on its own. There was no common procurement strategy, policy or platform. Consolidating purchasing of these services was challenging. Credibility and trust are key to an indirect procurement operation's success. With that in mind, Welch and his team worked closely with business leaders to evaluate each category of spending to determine whether it could be consolidated on a global or regional level. "By the time we announced the merger on Sept. 4, 2001, we had done a good job of defining ourselves and getting ourselves branded within the company and exceeded our cost savings goal by rationalizing the supply base and managing it differently," says Welch. "We had in place a basic platform in terms of policy, processes and tools. The kernel of what we would become was in place and ready to go at that time." Among the tools indirect procurement implemented in 1999 were an order fulfillment system based on an Ariba solution that provides a single buying channel for use by 40,000 employees worldwide and a spend analysis and management system developed internally. Since that time, the organization has also deployed sourcing, contracting and eRFx and e-auction tools. Today, 95% of HP's indirect spend flows through the Ariba system, says Chris Connors, manager, indirect procurement process engineering and esolutions. Further consolidation After the merger was announced, Welch entered a "clean room" in Houston for six months to work with his counterparts at Compaq to integrate the indirect procurement operations of the two companies. Indirect procurement at Compaq, "although two years or so behind HP was on the same road toward consolidation," he says. Welch and his team got to work consolidating the two organizations, procurement systems and supply bases. "We were able to declare victory one year early, exceeding a cost savings target of $350 million by $27 million," he says. To that end, indirect procurement reduced the supplier base from more than 100,000 suppliers to about 52,000. Now, 82% of the HP's indirect spend is with 265 suppliers. During that time, the organization also reduced its operating costs by 50%, with many tactical duties now being performed at offshore locations. "For some indirect buys, we were able to move very quickly with consolidation because aggregating the purchase did not disrupt operations or have a direct impact on business strategy," says Welch. "In other areas such as marketing, HP was changing the way it branded itself and the way it advertised its products and solutions. Indirect procurement really differentiated itself in this area by becoming fully engaged with the businesses to understand the strategy and translate that into our procurement strategy." To measure performance, supplier base and supplier relationship managers ensure that tier-one suppliers (the top 156) are performing to their agreements, says Becky Cornett, director of indirect procurement, global commodities. For tier-two and tier-three suppliers, the indirect procurement team uses an online tool to track technology, quality, responsiveness, delivery, environment and cost metrics. Looking ahead, Welch plans to continue executing purchasing fundamentals and develop global and regional sourcing strategies, including working to continue to optimize the supplier base. "On top of that, we will apply supply chain techniques to the buy and horizontally attack total cost of ownership, extracting significantly more cost while maintaining quality levels and making it easier for internal stakeholders to execute processes." —Susan Avery HP executive wants purchasing to "raise the bar" When Hewlett-Packard first won the Medal of Professional Excellence in 1992, purchasing was strategic to the company's success even though the company was much different than it is today. Back then, HP was smaller, more decentralized, had a less diversified customer base and product portfolio and was more vertically integrated. Since then, the company has grown to a $70 billion technology powerhouse with a broad product portfolio and a large customer base. It is the leading purchaser of a variety of electronic components and uses electronics manufacturing services (EMS) providers and original design manufacturers (ODMs) extensively. Because of its growth, product diversification, buying clout and outsourcing model, purchasing is more strategic than ever to HP, says Gilles Bouchard, chief information officer and executive vice president of global operations for HP. "This year we'll have a $43 billion direct material spend and a $10 billion indirect spend. Material costs represent 60%-70% of our revenue. Purchasing is huge for us because we do a lot of leading-edge work with suppliers," says Bouchard. Suppliers work with HP's new product development teams to bring new technology to HP products and purchasing plays a leading role on those teams. A purchasing role in managing suppliers is integral to HP, he says. Such programs as buy sell, procurement risk management and e-sourcing have been key to HP over the last several years. "Buy sell is important because so much of our product is outsourced," says Bouchard. "We have been doing this for awhile, but it is still a unique process. "With buy sell, HP purchases parts from suppliers and then resells them to its ODMs and EMS providers. (see main story) PRM will continue to be important because of the volatility of some commodities such as DRAMs and liquid crystal displays. While those programs have helped reduce cost and risk, there is still room for improvement, says Bouchard. "I see a lot more potential for PRM, e-sourcing and how we aggregate our spend. We need to continue on the path that we have set over the last two years. My view is we are only half way there," he says. "We will do even better. Keep raising the bar is the name of the game." Bouchard says he doesn't see any big changes that need to be made to HP's purchasing strategies and practices. However, working with suppliers to improve their overall performance and develop new technology will be important to HP's success. "We have always had a strategic approach to procurement and not a day to day view," he says. "We want to build relationships with suppliers who are with us for the long run." —James Carbone HP takes logistics procurement to the next level Hewlett-Packard's spend in materials and commodities is nearly staggering, but the company is also one of the world's largest buyers of logistics services, spending $1.7 billion annually for air freight, ground, ocean, rail and third-party services. To put its logistics operations in perspective, HP ships 10 inkjet and two laser jet cartridges every SECOND (or about 36 cartridges shipped while you read that sentence). But what is most impressive is the amount of control HP has gained over its logistics spend and operations since its mega-merger with Compaq. It was John Frasca, director of worldwide logistics procurement for HP, who was charged with selecting best-in-class processes and contracts between the two organizations and leveraging the massive volumes coming from the new company. Frasca's logistics procurement team has 19 people broken up by mode carrying a wide variety of experience and expertise. As the story in the June 17 logistics section of PURCHASING documented, HP used e-sourcing tools to dramatically reduce the number of carriers and contracts in place after the merger. "We had 28 contracts in place with one logistics provider between HP and Compaq," Frasca says. "We now have one contract with that provider. The new contracts are the most stringent many of these carriers have ever signed. But if you want to do business with HP, welcome to the big time." As an example, Frasca says HP's contracts now allow zero shrinkage allowance, which means if a logistics provider has HP inventory in its facility under its security and the inventory gets lost or damaged, Frasca expects that provider to "belly up" and pay for it. "Historically, OEMs would provide an allowance for that loss, but it's not on our dime anymore," he says. The idea of zero shrinkage may be the result of Frasca bringing a fresh perspective to logistics. An engineer by trade with an MBA, Frasca started his career designing nuclear fuel rods and jet fuel controls for the F-18 fighter jet. But his eye for process improvement led him to supply chain operations at Inacom, which was later bought by Compaq. "You need both industry experience and fresh perspective on a team like ours," he says. "I have some of the best logistics talent in the world on my team. I have those people that have 28 years of logistics experience. I also have someone with a refreshing outlook from other industries. I firmly believe if you always do the same thing you are going to get the same results," says Frasca. Logistics does not function in a vacuum within HP and, as such, Frasca also sits on teams for indirect procurement, service parts, and various other areas of the procurement operation under Greg Shoemaker, vice president of procurement. "There is a lot of cross-pollination across our organization," Frasca says. "That's where the e-sourcing strategy came from. I'm tied in closely to other areas of procurement and constantly twisting their strategies to fit logistics when possible. I cannot formulate a strategy from my office or even just with my team." It's that perspective that helped reduce HP's carrier base by 69% post-merger and bring 98.7% of logistics spend under contract. Frasca made it a top priority to educate internal logistics users and buyers about the advantages of controlling freight spend as opposed to letting material suppliers make freight decisions. "We do training via Webcasts to employees to educate them that it's not free to ship things on a charter airplane—in fact it's very expensive. The example I use so employees can relate is buying furniture. When you buy furniture, some stores will tell you they give you free shipping. But it's not free—it's included in the price of the furniture and then some." With strong contracts in place, RFQs are becoming a thing of the past in the logistics organization. Instead, HP evaluates carriers' performance closely based on 13 key performance indicators and categorizes performance in each as green, yellow or red. Examples of these indicators include: how easily a provider can plug in or out of the HP system; ease of doing business and reputation; turnaround time; number of claims; financial stability and how much they invest in technology. HP has yet to invest in transportation or warehouse management systems and prefers to partner with logistics providers that have those capabilities. With detailed performance tracking in place, Frasca can negotiate better deals with carriers face to face and award new business directly to top-performing providers instead of using RFQ processes to evaluate potential performance. —David Hannon HP's logistics procurement at a glance Total spend $1.7 billion Largest category Air freight Percent of spend under HP control 98.7% Employees 19 Percent reduction in logistics providers 2002 to 2003 69% Source: Hewlett-Packard

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