2006 CSCMP Supply Chain Innovation Award HP Submission:
Buy Sell process
INDEX Page 2: Executive Summary
Page 5: 1. Manufacturing Outsourcing and Supply Management
Page 6: 2. The 3 Party Buy Sell Process, an innovative approach
Page 9: 3.1 Buy Sell Contributions to Procurement Effectiveness
Page 12: 3.2 Buy Sell Contributions to Business Excellence
Page 14: 3.3 Buy Sell Contributions to Annual Savings
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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Executive Summary:
When HP started to outsource manufacturing, first for electronic subassemblies and later on for
products as well, HP was faced with a sudden challenge of how to effectively manage supplier
relationships and the supply chain for strategic components/raw material, which is now used by
contract manufacturers to build sub assemblies and products for HP. HP key objectives were to
maintain and protect its purchase price leadership and to effectively control the actual flow of
material between its strategic component/raw material suppliers and its contract manufacturers.
HP Buy Sell Process 2006 CSCMP v2.ppt 4
The Manufacturing Outsourcing Inbound Supply Mgmt Challenge
Source: PWC/ HPC, Collaborative Supply Chain
Business UnitInhouse
Manufa cturingComponent
Suppliers
Business owns SCM including Procurement
Before Mfg Outsourcing
Business UnitSupply Cha inMana gem ent
ComponentSuppliers
Buy Sell managing price masking, pricevolatility, allocations, biz shares, inventory rebalancing
Post Outsourcing
ODM / CMMa nufa cturing
After reviewing different process alternatives with various levels of controls, HP evaluation
concluded in a Buy-Sell process, which is managed by a shared service organization that
supports all HP business units today. This team is responsible for sourcing and purchasing
components/raw material from HP suppliers and effectively manages the inbound supply chains
to contract manufacturers.
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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HP Buy Sell Process 2006 CSCMP v2.ppt 7
Inbound Supply Management Alternatives in Multi Tier Supply Chain
Financia l Flow Administra tion
Purchase Order & Forecast Admin
M ateria ls Planning & Inventory M gmt
Contract T&Csnegotia tion
Supplier Qualification
Supplier Selection
Part Specification
Buy SellConsign-ment / Ba ilment
Supplier Direct Rebate
Guided Turnkey
Turnkey
OEM owned
CM Owned
Co owned
Typically no “one size fits all” solution but commodity specific decision, based onReturn on Investment
• Price Advantage• Assurance of Supply• Contract Compliance• Improved Life Cycle Mgmt
• Process Complexity • Resource requirements• Infrastructure Investment
With the buy sell process HP is hiding its contractual prices from leaking out to the competition,
by doing so HP protects a triple digit M$ price advantage per year as a competitive advantage in
today’s extremely competitive environment directly contributing to both, the top as well as to the
bottom line. The total cost for the buy sell process in terms of cost per order dollar is far below
0.1 cent per purchased $ due to ongoing process reengineering efforts.
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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HP Buy Sell Process 2006 CSCMP v2.ppt 31
Buy Sell ProcessSavings Delivered in 2005
• Price masked component materia l purchases in 2005 delivered 2-4% price advantage for strategic commodities
• Enabled volume based supplier rebates of 2% over and above price masking benefits
• Forw ard (Spot M arket) Dea ls in connection with HP Procurement Risk Management (PRM) program enabled materia l price savings of 30M$ over contract price
• Assurance of Supply through inventory reba lancing activities between HP manufacturing partners helped max imize revenue and avoided ex cess materia l w rite offs and resulted in more than $100M cost avoidance
more than 7% material spend related savings in 2005maximized HP product shipments & reduced inventory risks
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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1. Manufacturing Outsourcing and Supply Management: Manufacturing outsourcing has created a multi-tier supply chain with complex supplier
relationships and a variety of challenges for supply management, some of those challenges
include:
HP Buy Sell Process 2006 CSCMP v2.ppt 6
Manufacturing Outsourcing: Challenges to be managed
• Risk of artificially inflated component pricing by CM
• Reduced demand/ supply visibility of strategic components and products creates assurance of supply risks
• Diminished bundling opportunities erode volume leverage and buying power of HP
• Reduced enforcement of contractual agreements, approved vendor lists and business shares for HP
• Increased risk of non-compliant quality of lower level components due to CM using non approved channels
HP collaborates with suppliers and meets with key suppliers once a quarter to discuss any issues.
Also, to make it easier for suppliers and increase efficiencies, HP simplified its physical network
and cut down on the number of inventory hubs around the world.
HP also undertook an extensive spend analysis program to aggregate spend data and to develop
meaningful supply strategies.
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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Through the program the team consistently works on:
HP Buy Sell Process 2006 CSCMP v2.ppt 10
Inbound Supply ManagementBuy Sell Process Alternative Enables:• Cost savings by maximizing scale effects (full bundling)• Optimizing time to market by eliminating material compliance
issues (e.g. ensure quality)• Effective price masking to protect competitive price advantages• Assuring supply in all market conditions• Ensuring that higher tier suppliers buy from approved raw
material suppliers• Turning price volatility into an advantage for HP• Utilization of Procurement Risk Mgmt (PRM), E-Sourcing, and
“Absolute Best Cost Benchmark Process” techniques
2. The 3 Party Buy Sell Process, an innovative approach: The Buy-Sell team identified innovative initiatives to overcome sourcing issues, such as:
a) Price Masking for strategic components
HP can only maintain favorable component pricing when demonstrating control over the
ordering process. As some key suppliers refuse to sell directly to contract manufacturers,
HPs Buy-Sell process allows, through its customized and integrated ERP infrastructure
and financial backbone system, to effectively perform price masking, which hides
component prices from contract manufacturers. The Buy-Sell process does this efficiently
through a highly automated flow using electronic data interchange (EDI) and web based
communication tools
b) Adherence to contractual agreements
Contract manufacturers tend to not adhere to contractual agreements when buying direct
from HPs suppliers, therefore HP:
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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• Negotiated business shares with different suppliers for same parts can not be controlled
• Negotiated payment terms are often violated
In turn, HPs Buy-Sell process provides various options to manage contract business share
awards and provides visibility to the actual material flow. HP ensures adherence to
negotiated payment terms and manages the collection process from contract
manufacturers.
c) Allocation management in market shortages
During market shortages it is important that HP ensures appropriate and fair share of
material allocation from component suppliers. Having the contract manufacturer buy
directly from the component supplier creates dependency for HP with the contract
manufacturer managing the allocation. HPs Buy Sell process proves to be innovative by
creating a single channel from the supplier to the various contract manufacturers and
therefore allowing effective allocation management and reconciliation of material flow
and product volumes. In addition, keeping the sell price at an inflated market price level
eliminates incentive to the contract manufacturer to divert HP volumes into other
channels.
d) Managing price volatility
Certain commodities (e.g. Memories) show high price volatility and have a high
frequency of price renegotiations. In turn, HP needs to ensure that new price points are
implemented appropriately after negotiations. Also, Procurement Risk Management
techniques, such as forward buys, may lead to split or capped pricing which needs to be
effectively executed. HPs Buy-Sell Process is innovative because it can ensure that it
takes full benefit of price reductions by instant adjustments of the purchase price with the
supplier. This is accomplished while keeping the sell price to the contract manufacturer
stable over a longer period
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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3 Party Buy Sell Process Capabilities overview
HP Buy Sell Process 2006 CSCMP v2.ppt 16
The 3 Party Buy Sell Process: Innovative Approach and Capabilities
W hat it stands forCapabilities
ValueSolution that enables OEM to maintain
control of component purchasing in an outsourced mfg
environment
• Enables lower material spend/ cost
• Improves HP cash flow advantage
• Enables inventory pooling in 3rd party hubs
HP Procurement
Component Suppliers
CMs & ODMs
Buy/ Sell
• Price masking for strategic commodities• Adherence to contractual agreements• Allocation mgmt/ assurance of supply • Price volatility management• Procurement spend aggregation & visibility• Procurement risk mgmt support• Effective supply management• HP capturing windfall profits from spot
market deals
Simplified Buy Sell Process Briefing and Process Flow Explanation
HP Buy Sell Process 2006 CSCMP v2.ppt 18
Buy Sell Process Service Briefing
• Buy Sell Process manages transactions between OEM, CM, and Suppliers
• Process reengineered 2005-2006
• FY06: manages $23B direct material spend and 6 million shipped line items
ComponentSupplier
HPBuy SellServices
ContractM anufacturer
OEM
Protectedterms & conditions
Order
Buy SellPrice Advantage
Del
iver
y
Product Order,Delivery, Invoicing
Order
Invoice
Invoice
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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HP Buy Sell Process 2006 CSCMP v2.ppt 19
BusinessSponsor
Contract Manufacturer
Notify HP Buy and Sell Price
Component Supplier
4
HP Buy-Sell Operation
Drop Ship Parts
3
Billfor shipment
and receive payment
$17.00
1
Allocate difference between buy and sell
Send Orderat Sell Price
$20.00
Send Orderat Buy Price
$17.00
$3.00
2
4
Bill and Collectfor shipment
$20.00
5
HP Buy Sell Service Process Transaction Flow Example
6
7
P.O. for FG(including
B/ S component)@ $103.00
Notify CM/ ODM of Demand Forecast &
Sell Price - $20.00
Ship FG, invoiceto OEM factory @
$103.00 (StandardCost set at $100)resulting $3 PPV(offset against
step 6)
8
Reconcile Billing and make payment
1 Collections transferred to BU
3. Buy Sell Contributions to
• Procurement Effectiveness • Business Excellence • Annual Savings
3.1 Buy Sell Contributions to Procurement Effectiveness The creation of the Buy-Sell team has helped HP achieve significant commodity spend reduction
being able to effectively control prices, negotiate price reductions and manage price drops.
University St. Gallen in July 2003 commented that, “HP 3rd party Buy Sell process is almost
unique in the industry and represents a huge competitive advantage, enabling vital controls in an
outsourced manufacturing environment, controls such as price masking, better assurance of
supply, central allocation management, bundled buying power, supplier share management, price
volatility mgmt, contractual compliance, etc.”
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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When presenting the “Purchasing Medal of Excellence” award, the publication explicitly referred
to the Buy Sell process as a key innovation and enabler for some breakthrough achievement in
HPs procurement practice, such as:
• Effective leverage of HPs scale and scope
o Through better bundling opportunities
o Increased use of global sourcing
• Utilization of “Absolute Best Cost Benchmark Processes”, which entails locating the best
components for the best cost
• Realizing the benefits of E-sourcing techniques
• Utilization of Procurement Risk Management (PRM) techniques
• Improved Quality management
Buy-Sell gives HP the ability to control allocation of materials. If a part goes into short supply,
HP is able to control the purchases and can direct the material to ODM or internal factories
where we need it most. HP can protect our customers and our margins. During the "outsourcing
craze," many OEMs outsourced supplier relationship management in addition to manufacturing,
which HP believes is wrong. Maintaining supplier relationships is a critical differentiator. The
Buy Sell process allows HP to control and enforce its share awards with suppliers. About $20
billion of HP $43 billion production spend in 2005 went through the Buy-Sell process.
Worldwide Business Research (WBR) selected HP Buy Sell team as the outstanding Sourcing &
Purchasing team and recognized the process with the ProcureCon2005 Award as an industry
leading process, which is delivering, “significant annual cost savings, effective supplier
management, and overall value to business excellence.”
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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HP Buy Sell Process 2006 CSCMP v2.ppt 23
HP Buy Sell Service Recent Awards
Tectem Benchmark Award2003
2005
„HP 3 party Buy Sell Process is a lmost unique in the industry and represents a huge competitive advantage, enabling vital controls in an outsourced manufacturing environment, controls such as price mask ing, better assurance of supply, centra l a lloca tion management, bundled buying pow er,supplier share and contractual compliance management.“
„As an industry leading process,the HP Buy Sell Services are delivering- significant annua l cost
savings- effective supplier
management- overall value to business
excellence“
Supplier feedback from the benchmark results in a survey concludes that:
HP Buy Sell Process 2006 CSCMP v2.ppt 26
Buy Sell Business Excellence Supplier Feedback Oct 2004 survey
• HP Buy Sell process is an outstanding process and ranks in the top of the pack (Major Hard Disk Drive Supplier)
• HP ranked #1 for Buy Sell management and price masking initiatives (Major Memory Supplier)
• HP Buy Sell process is very effective (Major Memory Supplier)
• HP Buy Sell process provides demand clarity and supply chain control (Major Memory Supplier)
• Buy Sell provides easy ODM mgmt (Major Disk Drive Manufacturer)
• HP Buy Sell process is simple, easy, and well communicated (Major Memory Supplier)
• The process eliminates credit issues often experienced with ODMs(Major Hard Drive Manufacturer)
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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3.2 Buy Sell Contribution to business excellence:
The team has initiated best practices in outstanding purchasing, sourcing and supplier
relationships.
In working with suppliers, it helps create business excellence through:
• Allowing clients to Fully receive the benefits of the Buy-Sell model (price masking,
inventory rebalancing, effective allocation management, company wide T’s and C’s,
single order channel for suppliers, etc.) in an accelerated manner while minimizing
typically required up-front investments to build this capability internally
• It’s global presence of HP Buy Sell organization, which allows flexible execution with
client’s global EMS provider base and continuous assurance of supply – This includes a
strong presence in China, Taiwan, Singapore, Europe, US, Latin and South America.
• Leveraging embedded financial services (Procure-to-Pay, Credit & Collection)
• Leveraging HPs well established and proven Buy-Sell transactional service organization
and infrastructure
• Scalability of the process and technology (time and volume)
• Flexible cost structure (varies with material flow volume)
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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The performance of the Buy-Sell process, which is spanning more than 700 suppliers and about
400 contract manufacturing sites worldwide, is tracked and managed through a set of key
performance indicators, such as:
HP Buy Sell Process 2006 CSCMP v2.ppt 26
Buy Sell Process Controlwith Key Performance Indicators
Description GOAL LIMIT MAY JUN JUL
Supplier On time Delivery (3 days early, 0 days late)Order Turn around time SO to PO within 24hPOs Ack. within 5 days PO ack’d <= 5 daysReturns- RMA # TAT Time to issue RMA # back to CustomerReturns- RMA Closure Time to complete entire RMA cycle
Accounts Receivable Control Current + 1-15 days past due receivablesAccounts Receivable Control Receivables not collected by 60 days past dueBuy Sell rebate issuance Control Buy/Sell rebates greater than 30 daysDirect rebate issuance Control Direct rebates greater than 30 daysIn Transit Inventory Control % Aged line items not cleared within 60 daysIn Transit Inventory Control Aged line items not cleared within 60 days
Operational Metrics for Business _____ Period 3Q__
Logistics
98% 95%94.61 93.86 94.06
99.8299% 95%
99.64 99.57 96.07
99% 95%99.67 99.9
1.7820 days 25 days
16.68 17.72 15.99
3 days 5 days2.15 1.98
Finance96% 91%
76.34 81.37 99.93
-0.011% 3%
0 0 0
0% 0.50%17.98 15.96
00% 1%
0 0 0
1% 3%0 0
00 Lines 0 Lines
0 0
• On-time delivery to contract manufacturers
• Speed of order acknowledgements
• Turnaround time of orders
• Response time on change orders
• Accounts Payables and Accounts Receivables compliance with contract
This is complemented by a semi-annual customer scorecard review with the key users of the
process. The last five cycles of this review process yielded a more than 80% “exceed
expectations” rating.
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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HP Buy Sell Process 2006 CSCMP v2.ppt 28
Buy Sell America Region sample of Client Scorecard 1H FY06
MMEMMCO
EEN/ AEERD
SN/ ASN/ AN/ ARD Eng - PSG
MEN/ AMMIPG-A
MN/ AN/ AN/ AMPHS
EEEMEMmO
MMN/ AIN/ ADirect Ship
Results 1H06
E
E
E
Tota l score
N/ AMN/ AMSER
EEMMRFID
EN/ AEEIPG NA
Results 2H05
Supply Chain Services
Professional Services
Business Support
Program M anagement
Client
In addition more and more internal organizations approached the Buy Sell team to add buy-sell
even for non strategic but critical commodities to hide HP contract price and/or to manage
allocations in a tight market.
Whatever organizational changes happened since 2000 the amount of business units starting to
use the buy-sell process permanently grew due to the fact that the process has been advertised by
the very satisfied organizations using the process for a while, the buy sell $-volume roughly
doubled within just 3 years.
3.3 Buy Sell Contributions to Annual Savings:
HPs almost industry unique Buy-Sell process represents a huge competitive advantage in today’s
competitive environment where margins tend to get smaller and smaller, masked prices in the
highly outsourced manufacturing environment are hiding HPs competitive advantage to leak out
to contenders or to CMs/ODMs, the advantage adding up to a triple digit million $ advantage
every year. Also during tight supply periods /allocation times the established buy-sell process
completely controls the management of HPs fair share of allocations to flow to the appropriate
HP contract manufacturers.
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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Buy Sell directly supports HP strategy with major contributions in 3 areas:
HP Buy Sell Process 2006 CSCMP v2.ppt 30
CapitalstrategyEfficiency
Establish HP as the world’s leading information technology company
Targeted growth
Buy Sell contributions to business excellence (supporting HP Strategy)
Relentless focus on day-to-day execution
Best-in-class cost targets
Enable profitable growth• Ma sk ing Price
Adva nta ge• CM Inventory
Site Ba la ncing
• Reengineering a ctivities to ma na ge IT a nd Buy Sell Cost < Ta rget %
• Low Cost Country Hea dcount > 80 %
• Metric Driven Ex ecution Performa nce:e.g. Ontim e,AR Aging,Client Feedba ck ..
Furthermore, the Buy-Sell process has helped HP realize significant savings. Today, HP runs
more than twenty billion dollars of material through this process and manages about five million
order transactions per year.
The savings that have been delivered through the Buy-Sell organization can be categorized as
follows:
• Price Masking for strategic commodities
o Leanings from the merger with Compaq indicated a competitive advantage for HP
through the price masking process that was enabled by the Buy-Sell process
• Adherence to contractual agreements, business awards etc.
• Improved enforcement of contractual agreements between HP and the component/raw
material suppliers
• Improved allocation management during market shortages
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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• Improved visibility and process to effectively manage inventory re-balancing between
different contract manufacturers in different regions
• Better ability to manage and take advantage of price volatility of components by utilizing
the Buy-Sell process to ensure that price drops get effectively implemented to provide
full benefit for HP
These qualitative benefits yielded measurable results for HP:
• A sustained 5-10 % favorable difference to prices that would have been charged by
contract manufacturers
• Supply chain inventory levels have been reduced in the range of 10-15%
HP Buy Sell Process 2006 CSCMP v2.ppt 31
Buy Sell ProcessSavings Delivered in 2005
• Price masked component materia l purchases in 2005 delivered 2-4% price advantage for strategic commodities
• Enabled volume based supplier rebates of 2% over and above price masking benefits
• Forw ard (Spot M arket) Dea ls in connection with HP Procurement Risk Management (PRM) program enabled materia l price savings of 30M$ over contract price
• Assurance of Supply through inventory reba lancing activities between HP manufacturing partners helped max imize revenue and avoided ex cess materia l w rite offs and resulted in more than $100M cost avoidance
more than 7% material spend related savings in 2005maximized HP product shipments & reduced inventory risks
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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HP Buy Sell Process 2006 CSCMP v2.ppt 1
Buy Sell Process$ Volume Managed
0 ,00
5 ,00
10 ,00
15 ,00
20 ,00
25 ,00
FY02 FY03 FY04 FY05 FY06
$ billion
240% increase over 4 years
HP Buy Sell Process 2006 CSCMP v2.ppt 33
Buy Sell Process Shipped Line Item Volume
0
1
2
3
4
5
6
7
FY0 2 FY03 FY04 FY05 FY06
line items(millions)
10X increase over 4 years
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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HP Buy Sell Process 2006 CSCMP v2.ppt 34
Buy Sell Process EfficiencyCent per Order Dollar (CPOD) Trend
Formula : Fully Loaded Cost (including IT costs) / Materia l Purchases
66% efficiency improvement over 4 yearsthru major process reengineering efforts
0 ,00
0 ,05
0 ,10
0 ,15
0 ,20
0 ,25
0 ,30
FY02 FY03 FY04 FY05 FY06
CPOD
conf
iden
tial
HP Buy Sell Process 2006 CSCMP v2.ppt 35
Buy Sell Process Efficiency$ Cost per shipped Line Item Trend
Shipped Line Item transactions include a ll from Sa les Order in thru AP and AR financia l transactions being closed
0,00
5 ,00
10 ,00
15 ,00
20 ,00
25 ,00
30 ,00
35 ,00
FY02 FY03 FY04 FY05 FY06
$ / shipment
89% efficiency improvement over 4 yearsthrough major process reengineering efforts
2006 CSCMP Supply Chain Innovation Award/Case Study: HPs Buy-Sell process
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HP Buy Sell Process 2006 CSCMP v2.ppt 36
Buy Sell ProcessEDI/ RosettaNet/ Workflow Automation
Measured globa lly and per office using automation fea tures
70
75
80
85
90
95
FY03 FY0 4 FY0 5 FY06
Automated Buy-Sell Tra nsactions
% automated
HP Buy Sell Process 2006 CSCMP v2.ppt 37
1. EDI/ RosettaNet messages live:
Purchase Order IN & OUT
Acknowledgement IN & OUT
Change Order IN & OUT
Change Order Ack IN & OUT
Invoice OUT, Forecast OUT
Advance Ship Notification IN
2. Buy Sell Web Portal
allowing collaboration and access to forecast and order information
3. W orkflow automation
3.1 Sales Order to Purchase Order Translation automation
3.2 Purchase Order to Sales Order Acknowledge Automation
3.3 Purchase Order and Purchase Order Change automated email to supplier
3.4 Auto reminders to suppliers
3.6 Other workflow automation features for efficiency gains (e.g. web reporting, upload tools, etc)
Buy Sell Process Available Automation Features