HEWLETT-PACKARD:

CREATING A VIRTUAL SUPPLY CHAIN (A)

CASE NO. IMD161

MGMT 280-5

Daniel Kinchla

Daniella Mangakis

Ryan Welsh

Shirish Singh

I. Key Facts

A. Players

1. Main characters or companies

Derek Gray Supply Chain manager

Carly Fiorina CEO

Danny Berry Supply Chain manager (OEM)

Davey Maclachlan Procurement Manager

2. Competitors

Sony

Seagate

Quantum (Market Leader in Tape Drive Business)

IBM

3. Partners

Sony

CM A, CM B, CM C

Sun Microsystems

Mitsumi (Outsourcing Partner for the DDS4 model)

IBM and Seagate (Partners in developing standards for Ultrium)

Philips (Suppliers)

B. Financial Performance

In 2000 sales were US$48.8 Billion and employed 89,000 which included

21.1 Billion from Computing Systems.

Storage was expected to be a large market, estimated at $46 Billion in 2003

C. Timeline of the Case

1997- HP decided to start developing the LTO standard together with

IBM and Seagate for Ultrium.

1997-2000 HP outsourced all its models in the DDS product family

1998 Involvement of HPs divisional finance function.

2000- Production of Ultrium

2001 (July) -Recommendations for moving toward virtual

manufacturing

II. Issues

A. Conflicts

1. Management:

Hewlett-Packard Global Support Logistics (GSL) organization faced the

competing issues of a rapidly growing installed base and maintaining HPs

award-winning level of customer satisfaction. They encountered major

conflict trying to reduce costs in the management of field-replaceable units

(FRUs). Some of the issues they faced with their management are as

follows:

- Supply chain for FRUs involved hundreds of suppliers

- Semi-automated system for ordering parts, managing and planning

inventory, and payment management were inefficient due to large

number of suppliers

- Larger number of stocking locations between suppliers and customers

created delays and levied higher costs to move parts

As competition increased and costs skyrocketed, HP began to feel the

wrath of aforementioned issues during the turn of millennium. Similar was

the case in HPs tape drive unit. The need for enhanced visibility across

the supply chain, reduced inventory costs and increased customer and

supplier satisfaction was felt indispensable more than ever to gain the

competitive edge in the market.

2. Legal

Necessity of management of the operation in Ireland.

3. Ethical

B. Central Problem

Need to take manufacturing to the next stage

Customers business transformation created the exponential rise in

demand for storage.

Possibility of product obsolescence.

Getting product to market as quickly as possible

Tape technology was in transitional phase

Quantum was the market leader in the tape drive business.

Sales Linkage between tape drives and media (tape)

Lack of in-house special technology and expertise to produce main

components

OEMs were demanding but were larger in terms of volume and

consequently were less profitable than resellers.

Extravagance costs incurred by distribution centers

No more space or investment for manufacturing LTO standard

(Ultrium)

Compulsion to outsource all its models in the DDS product family

Lack of overall organizational strategy

OEM customers ambivalent reaction to outsourcing

Limited number of staffs to manage two products as they were already

managing DDS2. Contract manufacturer were not properly

communicating.

Deterioration of relationship with contract manufacturer.

Evolution of complex supply chain.

High overhead costs to manage large number of relationships in the

supply chain

HPs lack of faith in its CM capabilities in tape engineering

III. Analysis

As pointed out by the case, tape technology was in a transitional phase and although

HP had enjoyed significant amount of success in traditional technologies of DDS and

DLT, its competitor Quantum was the major player in the market. Customer needs

were increasing and at the same time cost of production was skyrocketing. A strategy

was to be applied to bring down the costs incurred in various stage of production.

Some of the costs incurred are:

Production cost

Costs to CM

Costs to suppliers

Costs to storage

Logistics costs

Internal and External factors were both at play regarding increase in costs. Lack of

expertise and technology to produce main parts, outsourcing, and lack of good

coordination with CMs were some of the internal factors. Stiff competition from the

companies like Quantum, increase in demand from storage media, and the

performance and quality of the products as a qualifying criteria were some of the

major external causes.

The virtual supply chain when put in place promised to control the excess production

cost and bring down the high costs in managing products. Getting product to market

as quickly as possible was deemed critical factor for the company hence with the

implementation of virtual supply chain, large number of intermediaries could be

skipped to expedite the logistics. Smoothness and quickness in logistics is the main

focus of virtual supply chain.

IV. Identify Alternatives:

Derek Gray had three alternatives to choose from when it came to application of

virtual supply chain.

1. Path of Least Resistance: HP would give the FAST and configuration and

distribution to Philips as they had good manpower and resources for those

processes.

Philips might not be interested to take on the business as it had high overhead

costs and the practicality of the alternative might not in accord with the

companys strategy.

2. The Ultimate Supply chain:

Emergence of Mitsumi as a major tape drive manufacturer in the future with some

support from HP in the areas like technology development helps to create the

ultimate supply chain. Partnering with Mitsumi meant producing everything from

scratch.

3. Consolidation:

Partnering with competitor is necessary to concentrate on supply chain efficiency

as it takes the focus away from the competition. In order to go head to head with

major player like Quantum this option is aptly suitable.

V. Conclusion and Recommendation

Keeping mind the HP culture, Derek Gray should choose the ultimate supply chain

option as it would create less friction within the company and also proposes extensive

benefits for long period of time. Mitsumi is showing sign of advances in its

operations hence the matrimony between HP and Mitsumi to create products from

scratch could be easy to get the overall consensus.

VI. Action

HP should support Mitsumi in technology development. It should fortify its positive

relation with Mitsumi. Mitsumi can focus on manufacturing parts and HP can look

after the logistics.