Hewlett-Packard: Using Procurement Risk Management to Protect HP from the Unknown

The Problem:

Supply chain risks due to uncertainty in product demand, component price, and availability can do serious damage to a company’s top- and bottom-line performance. The Procurement Risk Management (PRM) Group at HP has employed analytics to develop and implement a mathematical model, a business process, and software to measure and manage supply chain risks. 

The Analytics Solution

The PRM framework involves quantifying uncertainty to measure sourcing risks using the forecast scenario approach, and the proactive management of these risks using portfolios of structured contracts.
An analytics-based HPRisk suite of PRM software was developed to support the implementation of the risk management process. The PRM process and software have been implemented for over $7 billion worth of HP’s spending over the past year, covering a range of procurement situations from direct procurement of components to indirect and services procurement. In direct procurement, PRM has been applied to standard components such as memory and hard- disk drives, and to custom components such as microprocessors and assemblies. In indirect and services procurement, PRM has been applied to energy spare parts and advertising procurement.

The Value

This wide range of application illustrates the power and portability of the PRM approach. Savings of over $425 million over the past six years have been obtained. The benefits of implementing PRM are thanks to material costs savings, cost predictability, assurance of supply, and inventory cost reductions. Given the risk-sharing aspects of PRM, suppliers have also benefited substantially. Plans are in place to extend the use of the PRM process and tools to a majority of HP’s spending in direct and indirect materials.
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