HP, Supply Chain, Strategy, European

HP reveals its own supply chain strategy at European convention

17 Oct 2006 | (Case Study)

By Steve Gold, PCB007

Keynote speaker Patrick Scholler of Hewlett-Packard led off the European Supply Chain Convention with an informative keynote address that offered the OEM giant’s view of its supply chain.  Scholler shared how his company manages its supply chain.

Scholler explained HP employs several modes of purchasing. One is a “Buy/Sell model where HP buys a part from a supplier and immediately sells it to a customer. “Buy/Sell is a pretty effective model that we invented it in the early 1990s. It’s a financial model where we buy and sell in a matter of seconds. HP doesn’t own the inventory.”

HP is also relying on a custom BOM analysis program. Scholler said, “We’ve developed a database that can calculate the cost of a bill of materials. He also suggested HP can quantify the cost difference between using a contract electronics manufacturer and an original design manufacturer. “When we look at what we get from the CEMs and what we get from the ODMs, we can compare.” This comparison, Scholler observed, saved HP a great deal of money last year.

The keynote presentation soon moved to a survey of “best practices” that HP is deploying, including e-sourcing. HP is, according to Scholler, “committed to deploying e-sourcing everywhere in every transaction.” But along with online RFQs and RFPs, HP uses auctions to procure some items on its bill of materials. “We are using reverse auctions. I know it’s not very popular, but we must recognize it’s very effective.”

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HP also uses metrics called “Absolute Best Cost,” a framework to predict and optimize total cost of a complete product using what Scholler termed a “bottom-up approach.” This is where HP finds the lowest cost supplier of a certain part and builds up the cost from there by asking for—and paying for—more functionality.

Scholler’s favorite supply chain metric, one his group helped develop, is called Procurement Risk Management. This helps a commodity manager cope with uncertainty factors in demand, supply and market price. “These are three big uncertainties that hamper the commodity managers in making the best decisions,” he said. HP now uses “financial techniques adapted to risk management in procurement.”

According to Scholler, Procurement Risk Management helps suppliers by having OEM make a volume commitment based on a lowest use scenario, and it helps HP by getting better deals through guaranteed minimum volumes. Procurement Risk Management works by having three contracts with suppliers: a minimum purchase order, a “flexible part” in the middle and a “what if this product takes off” higher volume contract.

All this supply chain insight came from a company that spends $450 million annually in PCB procurement. Of note is the fact that HP controls 43% of this spend.  Of that 43%, 60% is purchased in Asia. Unfortunately for Europe, only 8% is procured here. And what about the EMS-purchased PCBs? “On the non-controlled volume, this is bought in Asia,” admitted Scholler.

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