Hewlett-Packard: HP Transforms Product Portfolio Management with Operations Research
The Problem
As the world’s largest technology company, HP offers a wide spectrum of innovative products to meet diverse customer needs. A broad product portfolio gives customers choices and increases market reach. However, product variety also comes with significant operational costs and challenges. By offering several similar products instead of a single product, a manufacturer increases its overall demand volatility, reduces forecast accuracy, and generates a host of complexity-driven revenue and cost impacts across the whole product life cycle. These impacts include increased inventory costs; poor order responsiveness; high operational, research and development, marketing, and administrative costs; and increased liabilities to channel partners, among others. Furthermore, complexity in a product line can confuse customers and sales representatives, in some cases driving business to competitors.
Because of its vast product portfolio, HP’s Personal Systems Group’s (PSG) order fulfillment performance was much worse than that of its competition. This difference adversely affected HP’s customer satisfaction and market share. By January 2004, product variety problems in HP were so severe that, at the Senior Leaders Communication Meeting, former HP CEO Carly Fiorina said, “The complexity of our products is a huge problem for us and for our customers. …Reducing the number of products we have in the portfolio is a big deal.” HP needed an approach to managing its portfolio that was robust enough to handle the different cost profiles and challenges of HP’s businesses.
The Analytics Solution
HP developed two powerful analytics-based tools for product variety management that, together, address the diverse needs of its businesses throughout their products’ life cycles. The first is a framework for evaluating the projected complexity-adjusted return on investment (ROI) for each proposed new product, prior to its creation, using a Complexity ROI Calculator that is customized for each business. The ROI Calculator is a spreadsheet tool that is developed through a one-time analysis of the up-front and ongoing costs and revenue impacts of introducing and managing products. The one-time analysis uses stochastic inventory modeling and a range of statistical techniques to identify the right costs to focus on and the right strategies and guidelines for managing them. The calculator is then used on an ongoing basis to evaluate new products. Products that do not meet a threshold ROI level are targeted for exclusion from the proposed lineup.
Once products have been launched and a sales history is available, HP applies a second analytics tool called Revenue Coverage Optimization, or RCO. This tool embodies a state-of-the-art breakthrough optimization algorithm to identify a core portfolio of products offering maximum order coverage, defined as the portion of the number, revenue, or margin of orders that can be completely fulfilled with products in the portfolio. The results enable HP businesses to prioritize among products for promotions, improved turnaround time commitments, or rationalization.
The Value
Together, RCO and the Complexity ROI Calculators provide HP with systematic processes for evaluating new products, honing existing product portfolios, and ultimately improving operational focus. These tools have led to hundreds of millions of dollars in bottom-line savings for HP, as well as a more streamlined product offering, improved execution, faster delivery performance, lower overhead, and increased customer satisfaction and market share.
