HP Supply Chain Best Practices HP

Brian Cargille APJ Manager, SPaM SPaM

2007 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice
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Agenda
Beer Game HP supply chain today HP HP Supply Chain Innovations HP
Forecasting Supply Chain Network Design Inventory and Capacity Optimization Warranty Product Design for Supply Chain
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HP Supply Chain Today

HPs Supply Chain leadership continuously evaluates and supports the requirements of our customers while simultaneously executing in the most efficient and cost effective way possible HP

HPs Supply Chain operates on the principle that one Supply Chain model does not serve the needs of all customers. HPs Supply Chain strategy is based on a flexible, modular set of Supply Chain pathways that enables HP to deliver on customer requirements while supporting their buying preferences. HPs Supply Chain enables both direct and indirect routes to market to reach customers in over 148 countries around the world HP HP HP HP 148
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HP Supply Chain Today

HPs Supply Chain enables HP to respond to a variety of complex market conditions while ensuring we can out perform our competition. It is the engine behind HPs continuous effort to grow market share in the highly competitive and dynamic personal computing and enterprise storage and server markets. HP recently captured leadership positions in both. At the same time HPs Supply Chain continuously sustains our established leadership positions in the imaging and printing markets. HP HP HP HP HP HP HP Proof of HPs operations excellence can be seen in HP consistently strong growth and financial performance. HP HP
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Four Key Activities 4

What we focus on in HP Supply Chain HP
Supply Chain Balancing Act Enabling the HP business Model HP Products Supply Chain Operations Operating Principles
True collaboration with partners for mutual success

Customer Requirements

Minimize Costs

SKU variety SKU NPI window management Market dynamics Customer segment/s match

Modular Supply Chain: Flexible & cost effective &

Plan
RTM

Price Performance Quality Availability Value Support

Continuously managing Supply Chain operations to minimize cost

IP investment Volumes Source Routes to Market Direct Indirect Channel indirect Global Delivery Regional requirements 148 countries 148 Localization Global trade regulations
Full turn key Guided turn Key Buy/sell

Operate responsibility: SER

EICC, code of conduct DfSC

Make

Deliver
No touch Low touch High value CTO

HP owned CM ODM

Deliver value:
Customers: TCE : Shareholders Profit Market share
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Cost minimizing vectors

Manufacturing Procurement [shared service] Logistics [shared service]

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Horizontal leverage points

Creates efficiencies, minimizes costs, drives alignment
PSG IPG TSG

Plan

Plan

Plan

Procurement

Quality Assurance of supply Risk mgmt Access to new technology

Source

Source

Source

Logistics Services
Manufacture Manufacture Manufacture

3PL partners International Direct Ship Factory Express Lego Code of Conduct Take back Compliance Design for SC

Leverag e Simplify Align

Fulfill

Social and Environmental Programs Fulfill Fulfill

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Strategic Planning and Modeling (SPaM)

a

team of world-class experts in decision support with extensive consulting experience and advanced analytical and technical skills

SPaM
Purpose drive competitive advantage through the application of analytics to HPs critical operations and business problems HP

 an

innovation lab to develop leading-edge business processes and methodologies knowledge broker across the HP businesses HP BU

a

a

15+ year track record on a wide variety of complex, mission-critical problems

15

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SPaM partnership model SPaM

Executive sponsors: HP Supply Chain Board HP Hosted by IPG, serves all HP businesses IPG BU Projects co-led and funded directly businesses BU BU SPaM
Typically 3 months long with 2 SPaMsters @ 50% time 3

Account managers as contact points for scoping a project or drive-by consulting (<10 hrs) <10
IPG, PSG/TSG, EMEA, APJ

Key metric: satisfied clients

Client decides what success looks like SPaM screening: in our sweet spot, with $5M+ business impact or VP-level priority SPaM sweet spot: 5 VP
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SPaM value proposition: driving competitive advantage through analytics SPaM

Client check-ins

Analytics Consulting

Drive-by consulting Workshops

Data analysis / predictive modeling / Financial / spreadsheet modeling / Optimal decision-making under uncertainty

Client Business Challenges

SPaM Expertise SPaM

Projects Better DataDriven Decision or Process Innovation (Methods, Tools, IP) IP

Neutral facilitation with end-to-end profitability view Problem-framing Strategy synthesis or Excel/Access tool development Excel/Access

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Pan-HP Tools, Methods, Programs HP Knowledge brokering across BUs, regions SPaM BU
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The SPaM sweet spot: analytics and consulting skills matched to complex business problems SPaM sweet spot: Analytics Consulting
Knowledge Brokering Across Businesses Neutral Facilitation with End-to-End View Stochastic Inventory Theory Risk Analysis and Simulation Deterministic Optimization Problem-Framing and Synthesis Decision-Making Under Uncertainty Spreadsheet and Financial Modeling / Data Analysis and Predictive Modeling

Business Problems Ops XFunctional

SC Network Design Inventory & Capacity Setting Planning (Ops, Orders, Projects) Forecasting Complexity Management / DfSC / Customer & Marketing Analytics* & Other Business Decision Support** * Customer & Marketing Analytics examples: channel replenishment strategy; pricing as an inventory balancing lever; risk analysis of big deal pricing; statistical benchmarking of margin and attach rates across accounts ** Other Business Support examples: warranty decision support; statistical benchmarking applied to returns or logistics rates; SPaM portfolio decision model for IP licensing
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Application of problem-solving skills across a typical project Phases of engagement Relationship management

The SPaM problem-solving process for projects SPAM

Project setup Project delivery Closure

Framing and Structuring the Problem

Developing Hypotheses

Designing the Analysis

Gathering and Analyzing Information Synthesizing

Clarify problem Use ingoing knowledge of context and problem and business appropriateness context as start (i.e., is this the right problem to be working on?) Refine with initial datagathering interviews Employ rough-cut / pareto analysis to identify key drivers

Structure the analysis and work plan to test/prove the hypotheses

Draw conclusions from the Gather information collected information to test the hypotheses Focus on insights and sowhats Interviews Business data External information Identify what can be learned beyond the specific problem

Structure the problem by breaking it down into components

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Prune the work plan where possible

Learn as you go along

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SPaM as an innovation lab

SPaM


Develop new business processes and methodologies to solve critical business problems faced by the hp businesses while maintaining a world class reputation for the company and the group HP HP


more than 12 patent applications filed between 00 and 06 covering innovation in inventory and capacity algorithms, forecasting methodologies and metrics, financial flows, modeling tools, and new business models 2000 2006 12

articles in a variety of business and operation research journals and magazines including Harvard Business Review, Sloan Review, Supply Chain Management Review, Operations Research/Management Science and others Sloan Review Operations Research/Management Science white papers on a wide variety of topics for internal HP audiences HP

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Roles and responsibilities

Client
co-leads the project with SPaM SPaM provides necessary resources data collection model development scenario definition model specifications, data requirements validation of data and model analysis and recommendation
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SPaM
co-leads the project with customer full-fledged member of the project team technical experts

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Keys to a successful project working together

open

communication and understanding data logic (avoid the black box)

gathering

discussing model validating good quick

assumptions and results

data, quickly turnaround on requests information (critical to project success!)

accurate joint we

problem solving

have complementary skills and knowledge--lets use them! SPaM

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Examples of HP-SPaM efforts in forecasting SPaM

Topic Deliverables Example Past Projects SPaM Publications SPaM Forecast process assessment guide

1. Forecast Process Improvement

 Assessment: governance

&

  

alignment, metrics, methodology, tools &

 Process

IPG EMEA Commercial (Jun02) IPG EMEA Consumer (Jun02) HP Home and Home Office (May 06)

recommendations:
whats it used

 objectives (why:

for)
 outputs  roles

(what, when)

& responsibilities (who)

 ROI

analysis: whats it worth?

 Basic

recommendations on metrics & methodology

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Examples of HP-SPaM efforts in forecasting SPaM

Topic 2. Forecast Metrics Deliverables SKU-level and portfolio-level metrics for forecast accuracy SKU Control limits for monitoring forecast error and bias Excel/Access tool with manual data loads Excel/Access 3. Forecast Methodology Data-driven, causal-factor approach to forecasting (e.g., short life cycle products)
statistical analysis of predictive factors estimated improvement and ROI

Example Past Projects BCS (Oct03) NSS Americas (Jun03) ISS Americas (Apr03)

SPaM Publications SPaM Measure, Then Manage, APICS (Assoc. for Ops. Mgmt.), Oct02

Cameras PLC Tool (Nov04) PSGA Emerging Tech PLC Tool (Apr03) NA Inkjet HW PLC Tool (Oct02) Inkjet Hardware Long-Term Forecasting Tool (Dec03)

Forecasting for Short-Lived Products: Hewlett Packard's Journey, J. of Business Forecasting, Dec02

Excel/Access tool with manual data loads Excel/Access

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Four Elements of Good Forecasting 4

Process (Understand) Metrics (Measure) Methodology (Improve) Tools (Automate) Impact

Hypotheses or lists of frequent problems

How we currently measure and reward

Select best way to forecast Specific technical steps or issues

The last step. New tools often not required for impact. Goals are: - Save labor

List of good practices Template for process Interviews with decision makers

Generating alternative metric schemes

- Seasonality - Connect rates - Other drivers - Better accuracy

Governance

IT requirements IT - Robustness (beyond prototypes) - Links to SAP / other systems SAP/

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HP Home & Home Office Ops Forecasting H&H Cross-functional team

Business need No forecast metrics across store IT

with clear R&R to align key monthly marketing and ops forecasts

Metrics dashboard tool to review key metrics and allow scenario analysis for alignment

Process (understand)

Metrics (measure)

SPaM Assessed gaps between current process and best practice, and designed store-wide forecast alignment process Developed statistical forecasting tools and metrics dashboard tool

Forecasting Excellence
Statistical forecasting tools: daily calls daily orders quarterly sales

Tools (automate)

Methods
Statistical (improve) analysis of key predictive factors

Recommendations Adopt proposed process and newly developed tools Value delivered Operations planning aligned with revenue forecast and Aspire planning Aspire Improved ops forecast accuracy to reduce costs of excess and shortage (multi-$M/yr) Improve quality of inputs to Aspire planning process Aspire 2012 2 18

Our forecasts are more accurate, the operational team is more aligned and we spend less time in meetings. Going forward, we will use what we learned on this project to make improvements in other areas of the store where we need to forecast.

-Cindi Zelanis, Manager Store Operations Project Completion: May 2006 -HP Home & Home Office

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The NA IPG HW Forecasting Story NA IPG HW

PL5M m-4 forecast accuracy (A-F)/F by sub platform, Oct 2000 June 2004 PL5M m-4
100%

(A-F)/F 2000

10

2004

Range of error before is lower than typical APJ supplies error

50%

0%

-50%

-100%
1 17 33 49 65 81 97 113 129 145 161 177 193 209 225 241 257 273 289 305 321 337 353 369 385 401 417

Before
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9/02

After
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Outline

Historical Context Business Conditions & Requirements Tool Capabilities Challenges Faced Keys to Success Next Steps Closure
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Historical Context

Forecasting with ad-hoc Excel spreadsheets Excel Many key elements were being factored into the forecasts (life cycle profile, seasonality, price drops, etc.) No robust mechanism for handling key forecast elements Limited ability to track the impact of changes or events (e.g., price reductions, high channel inventory, big deals) No mechanism for rigorous analysis of forecast metrics (accuracy, bias, etc.) Little consistency or sharing of best practices among analysts No aggregate analysis & reporting capability or process
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Business Conditions & Requirements

Forecast accuracy critical to platform profitability Long lead times (Asian sourcing) Short product life cycle (PLC) Run-rate actuals not available until late in build cycle Existing spreadsheet methodology was lacking in robustness and statistical rigor Investigation showed time-series methods to be ineffective for short PLC products Tool & process requirements: & a uniform forecast-generating process ability to rigorously represent PLC profiles, seasonality, & events capture of best practices better documentation of forecast assumptions forecast accuracy feedback loop aggregate analysis capability (due to product line convergence)
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Tool Capabilities

Generates a demand profile for new products based on life-cycle, runrate and seasonality parameters run-rate Enables powerful adjustment of demand profile by overlaying a suite of event templates Easy to reflect changes in timing of product launches Self-documenting by maintaining underlying forecast context in a central database Auto-update feature allows time-series checking once actuals are available Enables rapid forecast iterations through roll-up and drill-down capability XXXX Enables simple and effective forecast accuracy analysis
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Start with a generic PLC Product Life Cycle Runrate assumption, 12 month life, heavy stock-in period runrate 12

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Layer on seasonality profile, statistically derived from history

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Layer on events such as price drops e.g., this product had price drops in Mar03 and Jun03 3 6 3

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Layer on additional events; Capture explanatory comments using the Event View Event View

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Aggregate forecast is plotted below, And can be compared to actuals and short-term demand signal

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John Solomon .

Was VP Consumer Imaging & Printing, IPG North America now promoted IPG Executive Sponsor Forecast accuracy, a critical metric for business management, improved through the use of the PLC tool. The implementation of PLC tool has increased analyst productivity: PLC It allowed the analysts to spend more time on understanding business trends and developing insights. The PLC tool raised the quality of the aggregate views and insight provided to management. PLC Analysts are more easily able to share best practices and learnings after standardizing on the PLC tool. PLC
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Results: Improved Forecast Accuracy

PL5M m-4 forecast accuracy (A-F)/F by sub platform, Oct 2000 June 2004
100%

50%

0%

-50%

-100%
1 1 7 33 49 65 81 97 13 1 1 29 1 45 1 61 1 77 1 209 225 241 257 273 289 305 321 337 353 369 385 401 41 93 7

Before PLC tool

9/02

After PLC tool

More accurate forecasts Aggregated views of the business Improved analyst productivity:
Leveraging of last months forecast Sharing of best practices Leveraging of one anothers forecasts Ability to cross-train and back-fill
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Capabilities that allow in-depth analysis

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Challenges Faced

Forecast stakeholders believed time-series methods produced better results The merits of a PLC-approach werent immediately apparent Risk that the tool would have to be abandoned due to standardization on APO demand planner APO Obtaining IT support to migrate from a prototype to an operational tool IT
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Keys to Success
1. 2.

Low risk / low investment required A close-knit team comprising a strong theoretician, a flexible and user-oriented developer, and a solid set of seasoned forecast practitioners xxx Management support throughout the project Superior conceptual approach & mathematics as demonstrated through higher forecasting accuracy Exceptional usability of the tool Flexible / powerful event templates (enabling simple capture and documentation of forecast drivers) / Ease of iteration and aggregation (through roll-up and drill-down capability) xxxx
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3. 4. 5. 6. 7.

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Examples of SPaM support in supply chain network analysis SPaM

Topic Deliverables Example Past Projects

SPaM Publications SPaM The ReEngineering of HewlettPackard's CDRW Supply Chain, SC Mgmt. International Journal, 02

1. Supply chain network strategy

Understanding of current state

mapping of SC length and locations cost analysis: TE, IDC, MOH, tax TE, IDC, MOH,

NA consumer desktops (Oct05) NA commercial desktops & notebooks (Oct05) NA inkjet low touch strategy (Oct04)

Development of alternative SC strategies linked to business strategy

customer value propositions, fulfillment models, hub & mfg. locations by product type hub/

Key findings on cost and turn-around time opportunities, tradeoffs, & risks

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Examples of SPaM support in supply chain network analysis SPaM

Topic 2. Network optimization Deliverables

Example Past Projects

SPaM Publications SPaM HP Combined OR and Expert Knowledge to Design Its Supply Chains, Interfaces, Jun05

Optimization of number and location of nodes in the network from hundreds of possible combinations of inbound hub, mfg. site & outbound hub hub hub optimization = minimize cost structure, while meeting turn-around-time specification =

ESS EMEA SC (Nov04) IPG E.Europe SC (Oct04) PSG EMEA SC (Jul04)

3. Supply chain complexity analysis

Analysis to understand key hidden cost drivers masked by average TE, IDC, MOH cost metrics TE,IDC,MOH Examples: expediting costs between multiple hubs, material costs driven by inbound hub complexity, true cost-toserve major customers, cost-risk tradeoff of one vs many ODM partners. hub hub / ODM

NA inkjet low touch strategy [partial] (Oct04)

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What are these?

Hint: What do I do for a living?

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ESS EMEA SC network optimization

Problem Statement:

The current ESS EMEA Supply Chain is complex; having numerous nodes and diverse product routings from source through to the customer delivery point

Confidential Data Removed

Objective

Define the optimum ESS EMEA Supply Chain network structure i.e. determine the number and location of all the nodes in the network ESS EMEA

Customer Feedback

SPaM helped us to clearly identify the cost implications of the various network node scenarios and in particular the cost drivers. Based on the results we have started the implementation of a merge centre at what was determined as the optimum location, from the available alternatives and we are now re-scoping the product being considered for a potential future distribution centre. SPaM

Recommendation : Number & location of inbound (VMI) HUBs feeding the 2 HP manufacturing sites (VMI)hub HP Number & location of finished goods (SOI) HUBs & distribution points shipping finished product to either the customer or the consolidation points hub Number & location of consolidation points merging product & shipping to the customer

Findings and approach :

2 DCs looks to provide no advantage but has adverse cost 2 DC Little or nothing to choose between having and not having a DC with (provider) having the slight edge but deltas are within noise level of the analysis Exception - Merged orders entirely sourced from DC up to X days TAT X TAT SC network optimization through MIP modeling SPaM MIP SPaM
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Thank you Douglas Reid EMEA SC PMO 2012 2 18

Project Completion: Nov 2004

IPG Eastern Europe Supply Chain Network Analysis IPG

Project Objective:
Identify optimal Printer Completion Center network in Eastern Europe (EE) for IPG EMEA Hardware IPG/EMEA Determine which products & how much volume should be postponed and distributed via an EE PCC Quantify savings possible via an EE node Define preferred location among 4 representative EE choices 4
Katowice Timisoara

Kladno Sarvar

Project Findings & Recommendations:

6M annual savings possible in EE with loosened outbound transit time and splitting some products on two PCCs 600 For IPG product completion operations, EE labor savings are mostly offset by freight increases. IPG Total costs vary greatly between different locations and for different product lines. For IPG EMEA Hardware X is the preferred representative location IPG EMEA X
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IPG Eastern Europe Supply Chain Network Analysis IPG

Customer Feedback:
SPaMs professional approach and use of an optimization model helped IPG EMEA Management understand the key drivers for and against putting PCC content in EE. This provides an excellent basis for our decision making process. SPaM helped us identify a 6M cost saving opportunity by using an EE PCC location. We appreciate SPaMs dedication & involvement during, but also after the project when building consensus in the management team and developing a path forward.

SPaM

IPG EMEA 600 SPaM

Reinhard Winkler, Vice President, IPG Supply Chain IPG Operations EMEA
EMEA

Relative Importance of Drivers

The single largest sensitivity impact on the EE MOH content and therefore saving potential comes from removing the X constraint. This is true as an isolated change and in combination with other sensitivity drivers. MOH X

Y%

Z%

X%

Decrease Outbound Frt

S%

No Transit Time constraint

A%

C%
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B%
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Example: Serving the US from Guadalajara vs. Singapore Guadalajara

How the supply chain impacts company competitiveness from a high level metrics perspective Frame the problem:
The major supply chain cost categories Product attributes that drive these costs

Do some analysis together:

Insights that can be drawn about Guadalajaras inherent strengths vs. other region Guadalajara Areas that Guadalajara needs to work on to improve relative competitive advantage Guadalajara
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How Does the Supply Chain Impact Business Performance?

Customer Service
Time lag

Material and Manufacturing

Freight, Tax and Duties

Inventory-driven Costs -

EVA = (Net Revenues

Supply chain efficiency

- Costs) - Net * cost of capital) ( Assets

PP&E
Inventory days Receivable days Payable days

Cash-to-Cash Cycle

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The Major Supply Chain Cost Categories

Asia North America Market Europe Ireland

Singapore

Jalisco, MX Categories Manufacturing : : - equipment costs - labor rates - efficiency

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Freight : - transit costs - transit times - reliability

Inventory : - Financing - devaluation - speed & reliability

Tax : - profit margin

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Comparing Guadalajara to the other regions Guadalajara

Advantages:
Labor
Guadalajara rates are 15% to 25% of the rates in other regions Guadalajara 15 25

Freight vs. Inventory trade-off

If air: lower freight costs into the market for similar inventory levels If surface: lower system inventory costs for similar freight costs

Disadvantages:
Tax
Lack of tax rebate

Inventory
Poor relative transportation infrastructure and delays from customs clearance

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Product Attributes That Drive Supply Chain Selection

Products at a high level can be represented as a set of attributes that drive each of the identified cost categories The important attributes:
Labor content Weight Inventory holding costs
Component devaluation, short product life-cycles, etc..

Profit margin
drives tax savings benefit
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How High-Tech Products Compare Along These Attributes

HP Products HP
Camera InkJet Printer Desktop PC

Labor Content

Weight Inventory

Product Cost Rate Margin

Very L M L

L M M

H M H

L M L to M

Large Format Inkjet Printer

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Comparing the Supply Chains for a mid-range Desktop PC

Product Characteristics:
70

Scenario Supply Chain Cost Comparison ($ / unit)

Average Price = $1000 =1000 1 man-hour labor 1 12.5 kg 12.5 Devalues at 50% / year 50 Profit Margin ~ 5% 5

60
$19.7

50 40 30 20 10 $6.3 0 -10 GDL Surface Totals: $29 Sing Air $60 Freight MOH Sing Surf $66 Tax savings Inventory $1.8 $7.6 $(4.8)
$20.6 $56.6 $19.7

$37.5 $6.3 $7.6 $(4.8)

$25.0

$11.0 $(2.4) Ireland Air $52

Demand:
250k / month 25 / 40% uncertainty 40
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NOTE: This simple example is meant for illustrative purposes only

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Comparing the Supply Chains for a large format printer

Product Characteristics :
Average Price = $5000 =5000 8 man-hours labor 8 150 kg 150 Devalues at 15% / year 15 Profit Margin ~ 25% 25

Scenario Supply Chain Cost Comparison ($ / unit) 600 500 400 300 200
$33 $450 $300 $81 $61 $(121) $75 $61 $(121) $88 $(86) $33 $33

100
$75

0 -100 -200

$14

Demand:
50k / month 5 / 75% uncertainty 75
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GDL Surface Totals: $123

Sing Air $423

Sing Surf $96 Tax savings Inventory

Ireland Air $335

Freight MOH

NOTE: This simple example is meant for illustrative purposes only

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When do we source from Guadalajara? Guadalajara

For certain products:

When they play to Mexicos strengths: low margin, relatively heavy products which devalue fast:
PCs, desktop printers, VCRs, DVDs, etc.. VCR/DVD

Avoid products where competitive advantage is low: high margin, low devaluation rate products
high end servers, high end printers, etc..

When structure improves:

Improve infrastructure to increases proximity advantages: ports, roads, custom clearance processes. Work to gain a tax break for local product introduction to offset Asian & Irish advantage
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Examples of SPaM support in inventory management SPaM

Topic 1. Systemsview of Inventory & Supply Chain Performance Deliverables

Example Past Projects

SPaM Publications

Analysis & recommendations on joint levers for improving inventory & responsiveness
inventory targets, capacity targets, planning process, forecasting process & metrics,

EIP Windows Planning (05) BCS Demo Inventory (05) PSGA Material Wait Time (05) BPC Order Allocation Logic (03) Cameras Value of Responsiveness (03)

Value of Time in Supply Chains, Inside SC Mgmt, Feb & Apr04 White Paper on DI application, Effective Use of Demand Uncertainty in Strategic Decision Making, May04

Excel tool supporting operational decisions EXCEL Opportunity assessment and ROI analysis

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Examples of SPaM support in inventory management SPaM

Topic 2. Channel Inventory Management Deliverables

Example Past Projects

SPaM Publications

Modeling and recommendations to improve channel partner inventory management

IPG Office Max (06)

IPG NA 2-way commit (02) Wal*Mart (99) Office Depot (99)

Effective Collaboration, ORMS (Operations Research/Managem ent Science Today), Oct. 01

Ordering rules and allocation logic to align supply chain incentives

3. Inventory WOS targets (FGI, parts) WOS

Metrics and targets for part inventory management Tools (e.g., Excel and/or Access) EXCEL / ACCESS)

Notebooks Inventory Target Setting (05) NACC Monitors (05) BCS Components (04) LJ Supplies Planning (04) GSO EMEA (03)

Part Tool, Part Process, ORMS (Operations Research/Managem ent Science Today) , Oct 99

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Measure customer service and the investment required

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%001

ecivre S

%08

01 ylppuS fo skee W
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Why do we carry safety stock?

Inventory

safety stock level

t+L

R+t R+t+L

2R+t 2R+t+L

R = Review Period L = Supplier Lead time

stock out

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What drives inventory levels?

DC as a storage depot DC no value add
DC Supplier (factory ) Customer

instant order fulfill

Supplier
Mean Replenishment Time Replenishment time variability (std dev)

Customer
Mean Demand or Consumption Demand variability (std dev)

Operating Policies
Service Level Review Period

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Supply chain for a test instrument business

SC segments #5 FGI

MTA

SC segments #2 & #3 FGI

SC segments #1 FGI

MID Micro

Procurement
SC segment #4 Vendor Inventory

Customer
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Tech Center

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Results: backorders and shipments

250

Unconstrained Inventory maintained at a constant level Shipments!

450 400

200 Backorders (units)

350 300 Shipments (units)

150 250 200 100

Backorders Shipments

Backorder Vanishes!
50

150 100 50

PIT Goes Live

No v

No v

M ay

M ay

Se p

Se p

Ju l

M ar

M ar

Ju l

'9

Ja n

'9

Ja n

Ja n

'9

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We have applied this in retail, light mfg, even IC fabrication! IC

...by employing the PIT, our planners cut FGI levels by 12%. The reduction in finished goods inventory was $1.6 million, while on-time delivery performance improved from 93% to 97%! PIT 12 1600 93 97 Ray Ernenwein Lead Supply Chain Engineer Integrated Circuit Fabrication Division

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From Insight to Action

Inventory Optimization with Wal*Mart
Very large and profitable retailer, yet had been unprofitable in their electronic goods category; losing millions of dollars per year due to mark downs.

HP

Goal: Improve HP product availability, sales, & inventory turns!

HP warehouses
HP

In stores the inventory setting rule for HP hardware was one to show and two to go; each stores inventory stocking goal was the same. HP

Wal*Mart warehouses

Wal*Mart stores

2
Inventory

24

2400

Sales force recognized they could work with Wal*Mart to optimize inventory, cutting losses from mark downs and increasing sales.
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HP and Wal*Mart Inventory Optimization

SPaM worked with Wal*Mart to get weekly POS (point of sale) data for each store and delivery performance data from HP to their warehouses for hundreds of orders. SPaM POS HP

WOS targets
Low

Product Demand at a Store

Low/Med Medium Med/High High

Deskjet 400L Deskjet 694 Officejet 500 51626A 51641A t-shirt transfer

4.2 5.7 4.7 2.9 3.1 4.5

2.4 2.7 NA 1.5 1.9 2.6

1.8 1.8 2.9 1.1 1.5 2.1

1.5 1.5 1.9 0.8 1.1 1.7

1.3 1.2 1.5 0.7 1.0 1.3

Together these inputs were used to calculate how much inventory should be held at each of their 24 warehouses and 2400 stores. The table is typical of the output that we produced. 24 2400
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SPaM Retail Summary SPaM

Project Outcomes: 1. Tripled sales in <12 months. 12 3 2. Dramatic write down reduction. 3. Improved product availability to customers and inventory turns.
95.0 Stock 90.0 % In85.0

Program Launch 100.0

product rollover Christmas

$10.1 $8.3 $6.5 $5.7 $6.2 $4.7

10 8 Inventory 6 Turns 4 2 0

$4.6

$4.7 $3.6

80.0

$3.4

75.0 May June July Aug Sept Oct Nov Dec Jan Feb In-stock % Sell-thru Turns

Customer Feedback: HP Named Supplier of the Year by Worlds Largest Retailer: Hewlett-Packard Company is the Supplier of the Year for electronic goods by WalMart Stores, Inc. WalMarts Supplier of the Year awards recognize business partners who consistently demonstrate excellence in product performance, pricing, marketing, shipping and customer service. HPs innovative supply-chain-management models help WalMart reduce inventory-related stock costs. In addition to the Supplier of the Year award for electronic goods, HP won WalMarts Supplier of the Quarter award. HP HP HP source: HP Press Release
2012 2 18
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Capacity and service level

Make-to-order (no FGI)

2012 2 18

%001

ecivre S

%08

ylppuS fo skee W

Shifts per Day

01
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Queuing quiz

How long is the waiting time for a printer if the daily demand is always 100, and the line can build 100 perfect printers every day? 100 100 How long is the waiting time if either the daily demand or build capacity are not exact, but only averages?

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The sweet spot

M$ per year

$16.0 $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0.0 0% 10%
Today

With current demand and line configuration, 20% idle capacity and 15 DOS minimize the total cost for the Zebra line 20 15

Total cost Capacity cost

Inventory cost

20%

30%

40%

50%

60%

Excess capacity (%)

Numbers are illustrative only

2012 2 18

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How expensive is 1 day TAT? 1

M$ per year

MFG TAT (days)

$16.0 $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0.0 0% 10% 20%
Excess capacity (%) Mfg TAT Today

12.0

$12M

10.0 8.0

Total cost

6.0 4.0 2.0 0.0 30% 40% 50% 60%

Numbers are illustrative only

2012 2 18

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Examples of SPaM support in warranty SPaM

Topic Deliverables Example Past Projects SPaM Publications/patent applications 1. Warranty strategy

Repair strategy Support network analysis (Call center, Delivery model + Spares)

Is Offshoring Really IPG EMEA Support Cheaper?, Call Center Strategy (04) Magazine, Jan 2004 IPG AP Support Strategy (Mar05) IPG/PSG Cons. Prod. N.Am Call Center Transition Cost Analysis (Jun03) IPG Inkjet System (Feb03) Laser Hardware Support Supply Chain Improvement (03) Setting Warranty Policy for Products that generate Annuity Streams, Wty Week, 2004. Reinventing Warranty at HP: an Engineering Approach to Warranty., Qual. and Reliability Eng. Intl, 2003.

2. Warranty policy decisions

Warranty prediction model

Framing of analysis Simulation of installed base Sensitivity analysis

Recommended customer warranty policy

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Examples of SPaM support in warranty

Topic Deliverables Example Past Projects SPaM Publications/patent applications Data-driven Warranty Management, Warranty Chain Mgt Conf. 2005

3. Warranty planning

Conceptual mapping of key cost drivers Cost savings for given plan of record Planning model development Cost driver mapping Data-driven root cause identification

ESS SPAR Warranty Planning Model (Jun04) BCS Warranty Opportunity Model (Aug05)

4. Detailed warranty deep dive

ESG - HP9000 Warranty Deep Dive (Dec03) ESG Warranty cost pareto analysis (Mar03)

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BCS Warranty Opportunity Model BCS

Business need BCS needed to better understand the drivers of warranty costs to accelerate improvement BCS BCS lacked tools to implement better data-driven warranty management BCS SPaM contribution SPaM Developed cost driver map Built the Warranty Opportunity Model Provided training and documentation

Findings and recommendations The sensitivity model is very effective to ensure proper focus of resources Providing accurate data into the SPAR process helps to set realistic targets SPaM The BCS Warranty Opportunity Model is a giant step forward in our ability to plan our warranty activities. BCS [The model] will ensure our warranty reduction efforts are focused on the right drivers
SPaM SPaM

Value delivered The model has been fully implemented and is being used by the BCS warranty team BCS It has been used to re-set SPAR targets in a data-driven way SPAR The model enables the valuation of warranty initiatives in a matter of hours instead of weekscritical to development of the POR POR 2012 2 18

Lorne Miller, BCS Warranty Program Manager

65

Significant Warranty Cost Savings

Better predictions allow improved policies
Current 12 month warranty policy is cost effective for Nozomi 12 Nozomi Time + usage policy for Indra doubles the warranty period while saving $84/unit! 2
$800 $700 $600 $500 $400 $300 $200 $100 $0 Cost/Unit Shipped Nozomi Cost/Unit Shipped Indra Weighted Average Time Nozomi Weighted Average Time Indra

84
18 16 14 12 10 8 6 4 2 0 Weighted average of warranty policy length in months

A usage and time dependent warranty event model allows the design of warranty policies. In some cases we can increase customer service while simultaneously reducing HPs warranty expense!

Warranty $ per unit shipped

HP

alternative warranty policies

This translates to a cost reduction of > than $5M over product life. We developed a repeatable process for predicting warranty costs and accruals more accurately. SPaM was a great catalyst, we anticipate great benefits to SPO from this work. Thank you! 500 SPaM SPO Kevin Deats, Customer Experience Manager SPO Marcos Esterman, Quality Process Development Engineer SPO
2012 2 18
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IPG / PSG - NA Call Center Transition Cost Analysis IPG/PSG NA

An integrated cost-benefit analysis of ramps
We are moving call centers to India to take advantage of lower cost per call minute. These moves result in reduced CSAT while the new centers are ramping as well as HP training + transition costs. CAST Tell us: Are the moves to India in HPs best interest? HP Develop a model that allows us to run alternative call center scenarios to determine the cost and benefit associated with our transition plans. Sample Expected Values and ranges for NPV ($K) $

SGL, PL 83 vCustomer, PL 83 SGL, PL 6J vCustomer, PL 6J $-

$402 $711 $1,281 $1,661

$500 $1,000 $1,500 $2,000 $2,500 $3,000

> 50:1 ROI

Project innovation: Integrated cost model includes quantification of repurchase rate changes due to customer satisfaction increase or decrease.

Customer Feedback: This project exceeded all my expectations; the financial modeling was exceptional. The team provided us a good model to run different call center ramp scenarios, and highlighted the importance of changing partner contracts to focus on pooled call volumes. We expect to save >$4M per year as a result of the transition of our business to offshore locations. This tool will allow us to plan the type of partner ramps we can afford and effectively predict breakeven and savings over time. Thank you!

NPV includes: - CSAT delta costs (using system profits) CAST - Operating costs - Startup costs, including training All India ramps positive NPV within first year!
SPaM

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Maria Martinez Contracts Services,

2012 2 18

Director, IPG Voice and US Consumer Support

67

Examples of SPaM support in DfSC SPaM

Topic 1. Variety control (customerfacing variety: SKUs, platforms, features) Deliverables

Example Past Projects

SPaM Publications Managing Product Line Complexity, OR/MS Today, Jun05

End-to-end cost of complexity analysis (variable + opex costs)

Notebook features (Oct05) ISS EMEA SKUs, platforms (Oct05) NA consumer desktop SKUs (Oct04) IPG EMEA and APJ consumer SKUs (Jan06) IPG APJ commercial SKUs (July 07)

SKUs

Guidelines: minimum efficient scale SKU or platform volume, target efficient scale feature volume, or cost/unit premiums on low volume features SKU

ROI calculators (Excel) for cost-benefit screening EXCEL) Governance process & metrics
SPaM

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Examples of SPaM support in DfSC SPaM

Topic Deliverables Example Past Projects SPaM Publications
How Rough Cut Smoothes HPs Design for Supply Chain, SCMR, Sep05

2. Commonality and Re-use (back-end variety: parts and platforms)

End-to-end benefit and cost predictions for alternative degrees of part commonality; products, product families, and product categories.

LaserJet Univ.Power (05) ISS Rough Cut (05)

3. Postponement

Simulation of alternative product build strategies Recommendations on where products should be configured (i.e. in or out of region). Calculators that support packaging design choices and shipment methods

PSG Displays (04, 06)

Mass BPD Design for Direct (05) Customization at Hewlett-Packard, BPC Common Chassis Harvard Business (03) Review, 97

4. Logistics Enhancement

ROSe (05) Plastic Pallets (05) Freight vs. IDC calculator (03)
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Design for Supply Chain (DfSC)

DfSC
Systematically trade off responsiveness, material, and supply chain costs to maximize profitability Variety Control Logistics Enhancement Commonality and Re-Use /

Trade off supply chain costs against sales impacts to determine feature set / Example: all DVD-R, no CD-Readers. 1.2 and 1.4 processors, no 1.3

Redesign product and or packaging to improve density factor, size and/or optimize # per pallet/load / / Example: 10 PCs in bulk pack for corporate customers replaces 10 packed separately

Make components, modules, interfaces, platforms common now and in future

Examples: 15 rack versions become 7, same printer architecture for large format, business, and home photo printers

Tax and Duty Reduction Postponement Take Back Facilitation

Variety of HPs Service Providers HP

Modify product to allow process resequencing and postponed differentiation Example: generic printer engine from Asia becomes localized DeskJet in Europe.

Change build location and transfer price Example: make storage hardware feature soft, give software business unit high transfer price, burn disks in tax haven, air ship to final configuration in region.

Product and packaging changes to reduce reverse supply chain costs

Example: socket instead of solder high value components, chassis snaps together and apart without special tools.

SPaM

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DfSC Success Examples DfSC

Variety control Logistics enhancement
2. 0

Commonality and Re-Use /

45% reduction
1. 1

Move from ~12 rail kits to 5 at ESS

107 modules 107 95 options 95

55 modules 55 49 options 49

200 2

200 3

42% less inventory and better availability for bPC; $25M BPC 42 2500

Postponement

Reducing physical size saves >$1/unit in IPG PCC costs IPG PCC 1 Tax and Duty Reduction

$32M material cost reduction over product life 3200

Take Back Facilitation

> 98% fill rate with ~2 WOS FGI at EMEA LaserJet

> $48M savings in 2004 from

98
2004

ESS Storage
4800

InkJet Supplies recycling increased 25% 25

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How does DfSC happen? DfSC

Investigation and analysis to help make decisions that take the supply chain into account This happens in different functions and at different levels. Some examples:
Individual HP and ODM engineers make everyday engineering decisions and choices HP ODM Development teams make decisions about individual products Managers with responsibility for a suite of products look across GBUs for opportunities GBU Councils make policy decisions that affect multiple GBUs GBU
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DfSC resources DfSC

What support is available to support HP DfSC efforts? HP DfSC?

Help in using key techniques
Training & experience stories & Guidance, consulting & analysis support (people) &

Calculators
Calculators on web pages Downloadable spreadsheets

Databases
What power cords are best to select Point to point transit time and cost information for analysis support

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SPaM

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SPaM

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Sample Product for Analysis

CD Read-Writers CD

Make a series of design Goal for supply chain decisions : DfSC

Mean demand: Q = 5,000/week Q=5000/ # SKUs: n = 20 SKU n=20 Demand uncertainty: fe ~60% (CoV) fe 60%( ) Std. dev. demand: W = Q * fe W= Q * fe Product cost: c ~ $200/unit c $200/ Product price: p = $220/unit p $220/ IDC percent: h = 40% per year IDC h =40% Mean lead time: L = 8 weeks L=8 Std. dev. lead time: s = 0.8 weeks s = 0.8 Review period: R = 1 week R=1 Delivery frequency: f = 1/week f = 1/ Service level target: SL = 95% : SL = 95%

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Whats at stake?
Calculate current CD-RW inventory costs CD-RW

How much are we currently spending per WOS? WOS

Inventory cost in $/unit/WOS $/ hc ! 52 /WOS

Derivation of equation I $ / year / WOS ! Q c h I $ / unit / WOS ! I $ / year /WOS Q 52 ! hc 52

I $ / unit /WOS

How many WOS do we expect? WOS

Derivation of equations
* SS units ! k

Safety stock in WOS WOS SSWOS ! k fe L  R Cycle stock in WOS WOS CSWOS 1 ! 2 f

L  R W 2

SS units W ! k L  R ! k fe L  R Q Q 1 CSWOS ! 2 f IWOS ! CSWOS  SSWOS SSWOS ! * Assumes deterministic lead time. This calculation has 10% error if : s2 e .21 L  R fe 2
Analysis Approach Page 2 of 6
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SKU Reduction SKU

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%
5%

25% 20% 15% 10% 5%

Spread Volume

Universal SKU

0% 1 2 3 4 5 6 7 8 9 10 Product Number

25% 20% 15% 10%

Consolidate Volume

0% 1 2 3 4 5 6 7 8 9 10 Product Number

0% 1 2 3 4 5 6 7 8 9 10 Product Number

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Whats it worth to have one universal SKU? SKU

Calculate the benefit of going from 20 SKUs to One 20SKU 1
How much is safety stock reduced by pooling uncertainty to 1 SKU? SKU
Derivation of equations Q individual ! Q total nSKUs

For SKUs numbered i ! 1 to n W i ! fe Q i

n

Safety stock savings in $/unit $/ 1 RRnp1 ! 1  n SS$savings ! I $ / unit / WOS SSWOS RRnp1 / unit

W t ! fe Q t ! 1W i ! n W i ! n fe Assuming all W i are equal

2 W pooled ! 1W i2 ! n W i2 n

Qt n

W p ! n W i2 ! n W i SSt ! k W t L  R ! k n W i L  R SS p ! k W p L  R ! k n W i L  R RRnp1 ! SSt  SS p SSt ! 1 n n n ! 1 ! 1 n n n

SS$savings ! I $ / unit / WOS SSWOS RRnp1 / unit

Analysis Approach Page 4 of 6
2012 2 18
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Cutthroat Product Fan-out

PPMD ABA: ABC: ABM: AKZ: ABD: ABE: ABF: ABH: ABS: ABU: ABZ: 105: ABA: ABC: ABM: ABB: ABD: ABE: ABF: ABP: ABQ: ABU: ABZ: ABH: ACE: ABS: ACQ: 105: US English Canadian French Spanish Portugese German/Eng Spanish/Eng French/Eng Dutch/Eng Swedish/Eng Intnl English Italian/Eng APDO Single Pack US English Canadian French Spanish German/Eng German/Eng Spanish/Eng French/Eng German/Eng French/Eng Intnl English Italian/Eng Dutch/Eng Swedish/Eng Swedish/Eng Spanish/Eng APDO Single Pack 25% 5% 3% 0% 9% 4% 5% 2% 1% 9% 2% APDO 13% 1% 2% 2% 3% 2% 1% 0% 0% 3% 1% 1% 0% 1% 0% APDO

CUTTHROAT INTERNAL (C4380A)

PDE

AB0: Trad. Chinese AB2: Simp. Chinese ARS: International Eng.

0% 0% 1%

BASE PHILIPS DRIVE

PPMD

CUTTHROAT EXTERNAL (C4381A)

PDE

Note: Percentage of total FY98 volume

2012 2 18

AB0: AB2: ABG: ACJ: ARR: ARS:

Eng./Trad. Chinese Eng./Simp. Chinese International Eng. International Eng. Eng./Simp. Chinese International Eng.

0% 1% 0% 0% 0% 1%
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Actual vs. Rough-Cut Technique

$4.00 Change in IDC savings ($/unit) $3.00 $2.00 $1.00 $0.00 0 -$1.00 -$2.00 -$3.00

Upperbound on savings using rough-cut technique

FY'99 SKU Count

Actual cost using dem and share by SKU

10
Actual savings using dem and share by SKU

20

30

40

Upperbound on cost using roughcut technique

Total number of SKUs

Upper bound always occurs when demand variance is identical for all SKUs
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Design for localization and the HP DeskJet HP

our historical printer supply chain HP

Americas

Dealers

Supplier

Printers

Europe

Italy France Germany Spain etc. Australia Japan Korea Taiwan etc.

Asia

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The Localization Decision

Differentiating at the factory

Differentiating at distribution centers

Americas Supplier Dealers

Americas Supplier

Dealers

Printers

Europe

Italy France Germany Spain etc.

Printers

Europe

Italy France Germany Spain etc.

Asia

Dealers

Asia

Dealers

SPaM

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How does localization shift our curve?

Weeks of Supply
At the Factory At Distribution Centers

Product Availability

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Risk Pooling Reduces Stocking Requirements

Monthly Orders
35000 30000 25000 20000 15000 10000 5000 0 10000 15000 20000 25000

Necessary Safety Stock

M ar

Ju l

5000

M ay

N ov

Se p

Ja n

A AQ generic

AA AU

AB AY

0 Factory Distribution Center

SPaM

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Bulk Shipment vs. Retail Packaging &

A pleasant surprise

Today

The Past

Greater density of printers Better shock protection

Half of interior space is empty

Could not withstand a drop of several inches

Bulk Pack
2012 2 18

FGI on pallet
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