HP - Buy Sell Process - Manufacturing Outsourcing and Supply Management

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

2

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.


3


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.


4


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


5

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:


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.


6

Through the program the team consistently works on:


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:


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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


8

3 Party Buy Sell Process Capabilities overview


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


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


9


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)

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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.”


10

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.”


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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:


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)


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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)


13

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:


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.


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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.


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Buy Sell directly supports HP strategy with major contributions in 3 areas:


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


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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%


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


17


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


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


18


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


CPOD

conf

iden

tial


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


$ / shipment

89% efficiency improvement over 4 yearsthrough major process reengineering efforts


19


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


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

Documents

HP - Buy Sell Process - Manufacturing Outsourcing and Supply Management