SCDigest editorial staff

The News: HP (Hewlett Packard) uses an aggressive set of technology tools and advanced processes to drive its procurement function.

The Impact: HP is pioneering new technologies and approaches that many companies should consider emulating.

The Story: The efforts of HP to turbocharge its procurement processes have been well-publicized in the past year or so, most recently in a new book by Patricia Moody.

We thought it was worth summarizing for SCDigest readers.

With tens of billions in annual spend, HP has a lot at stake in maximizing its procurement effectiveness. A couple of years ago, HP launched a Procurement Competitive Edge initiative, currently led by director Patrick Sholler. Highlights of HP’s approach to procurement and supporting technology includes the following:

• Aggressive use of “e-sourcing” and on-line auctions: HP’s has developed a web-based e-sourcing application that allows real-time, interactive capabilities, including vendor bidding, traditional auctions, and reverse auctions. The auctions can either be open to any bidders, or “private” auctions with a controlled bidder list.

HP now flows more than $30 billion through its e-sourcing process and technology, and in some business units the level of spend through the system reaches 80%.

In fact, HP has run over 800 auctions across numerous product and service categories.

In addition to automating these processes, HP recognized security will be an increasingly important component of its e-sourcing efforts. For example, it is working to allow its buyers to purchase over the web using an encrypted credit card.

• Procurement optimization: This is interesting, not only in its own right, but in its seeming parallels to the notion of “carrier bid optimization” (CBO) used by many to procure transportation services.

What is it? In a recent article in Supply Chain Management Review, Moody explains: “E-optimization can be explained by using the example of a buyer working with a commodity, such as memory, for which there are several hundred part numbers. ‘When we get quotes from the vendor, we usually receive several hundred quotes to reference,’ says HP’s Scholler. ‘With five suppliers, we get five times the number of quotes. At the end of the day, when we have committed a percentage of our business to a given vendor, how do we make sure we have optimized our allocation with a specific vendor, part number by part number? It’s a huge information management challenge that this new tool makes easy to manage.’" 

There would seem to be many parallels to the concepts of CBO.

• “Transformational bidding”:  The e-sourcing tool allows vendors in some cases to bid not only price but other service aspects associated with the product. So, in effect, the bidders are combining a price quote with a “service level agreement” in terms of quality, services, delivery performance, etc. The tool also allows HP buyers to look at a variety of historical performance and financial data associate with vendors. This addresses one of the early criticisms and limitations of the auction process, that it was too price driven and not well suited to goods that weren’t highly commoditized.

• Better information for buyers:  You can’t assume, even if you are as big as HP, that you are getting the best price. For many components, HP’s tools give its buyers a “should cost” number. This is used to give the buyers better information, focus more on the key factors that matter and less on the price negotiation, and can put a “ceiling” on the price for something that helps HP get to the right price and deal much faster.

• Absolute Best Cost: Relatedly, HP uses an ABC (Absolute Best Cost) framework in its procurement application that predicts and optimizes the total cost of a complete product or subcomponent. In part, it turns the traditional approach to pricing and sourcing on its head. Most companies start with a “top down” approach - what the market will bear from a price point perspective and required margins, and then engineer the product and purchase components to meet those targets. In the ABC framework, it’s “bottom up” - you look for the lowest total possible cost, or cost-value trade-offs. A company using this approach could have a huge competitive advantage versus a company focusing on the top-down strategy. For example, it could use its advantage to lower the end user price point upon which the top-down strategy was based.

We believe there are huge gains for many companies to make using procurement related technology and process transformation. HP is setting the example.

What do you think of HP’s use of procurement technology? With all the capabilities now, why aren’t more companies moving to on-line auctions? Is the “top-down” approach to component sourcing and costing a problem? Let us know your thoughts.