Procurement Risk Management (PRM) at Hewlett-Packard Company

Vikram Falor DM 14157

2006 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without

HPs 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

improve agility

Design and provide anything anywhere

Manage change and global operations more easily
mitigate risk
managec osts

Enable profitable growth

increase quality

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Lack of risk mgmt processes has resulted in billions of dollars in losses for OEMs
Price risk Demand risk

Dell Computer 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

Cisco Systems April 2001: $2.5B inventory write-off due to rapidly weakening demand coupled with locked-in supply agreements

Price risk

Availability risk

Ford Motor Company December 2001: Ford posted $1B loss on palladium & other precious metals contracts. Shareholder files suit alleging mistake in companys hedging

Agilent Technologies July 1999: Stock price drops 26% after an inability to obtain key components cause revenue shortfall

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PRM at HP addresses risks due to high probability events

high Other processe s
supplier bankruptcy earthquake fire quality availability risk price risk

demand risk

PRM @ HP

Impact

hurricane
transit delays shipping accident customs delays theft of parts or products

low low
Probability of Adverse Event

high
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PRM Approach: Manage risks using structured contracts with suppliers

Demand forecast (units) Hi scenario Uncommitted 300 Flexible quantity contract Fixed quantity contract

400

200
100

Base scenario

Lo Scenario
0 Time

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Organizational challenges in implementing PRM

Strategy
Currently, risk management is not a core part of the supply chain strategy

Metrics & Processes

Current supply chain metrics do not address risks Current processes do not support risk management

Skills & Toolsets

Poor understanding of techniques to measure and manage of risks Current ERP and supply chain mgmt systems do not address uncertainties

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PRM enables a combination of objectives

Earnings & Cost Predictability Protect product margin against volatile component prices

Cost uncertainty

Demand uncertainty

Availability uncertainty

Portfolio cost savings Lower material & inventory costs

Assurance of supply Protect against shortage risk

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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 8

Objectives of PRM @ HP: Measure & Manage Procurement Uncertainties

Supplier Uncertain Component Prices Procurement

Planning & Mfg

Sales

Customer

Price-Cost Matching Problem

Margin Risk Shortage & Inventory Obs. Costs Hidden Material Costs

Uncertain Product Prices

SupplyDemand Matching Problem Uncertain

Component Supply

Uncertain Product Demand

Uncertainty

Symptoms

PRM Solutions
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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

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HP has the largest IT supply chain

HP Supply Chain actively manages $51B of company spend (80% of total)

Benefits of PRM :
Material Cost saving Assurance of Supply Cost Predictability

Inventory Reduction

$64B Total Spend

Material Cost (67%) Non-SC cost (20%) SC Cost (13%)

Supplier Benefits Reduction in Bullwhip Effect New Business Process and PRM

Function
HP work Force Development

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HP PRM implementation methodology

Consulting Commodityspecific Business process Consulting Training Deal structuring and valuation Change management Software 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
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PRM Accomplishments: HP has obtained significant financial benefits from implementing PRM
HP Spend Impacted by PRM Process
8000

Incremental Savings Enabled

140

HP annual spend Impacted by PRM process ($ M)

7000 6000 5000 4000 3000 2000 1000 0 FY' 01 FY' 02 FY' 03 FY' 04 FY' 05 FY' 06

Incremental savings enabled by the PRM process ($M)

120 100 80 60 40 20 0 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06

Estd. Incremental savings from material, inventory & AoS costs

About $7 billion in HP spend using the PRM process in FY06 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

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Venu Nagali ESCA Sep 06

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