HP Faces Questions As Rivals Cut Costs - InformationWeek

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HP Faces Questions As Rivals Cut Costs

It's slashing costs from its complicated supply chains, but will that be enough?

Hewlett-Packard took a leap of faith last year in its megamerger with Compaq, betting it could gain pricing advantages from increased scale and reduce operational costs with supply-chain improvements. Last week showed just how vital it will be to deliver those savings as rivals Dell and IBM cut prices on some PCs and servers.

HP execs already have done better than many people expected, pulling off a corporate marriage that led to a $3.5 billion cut in operating costs. Of that, $1.55 billion was trimmed from supply-chain operations, and the company pledges another $1 billion in savings.

Major challenges remain. Although HP's build-to-order PC program has grown significantly, it's still playing catch-up with Dell. HP also seemed caught off guard last week when Dell disclosed price reductions of as much as 22% on select PCs, servers, and printers, just one day after HP revealed a $56 million quarterly loss in its PC business. HP's overall earnings improved from a year ago, but the company admitted it was hurt by the low prices it charges to counter competitors in PCs and Intel-based servers.

JEFF CLARK PHOTO

The $37 billion that HP spends on direct materials yearly lets it leverage its supply chain, says Clarke, executive VP of global operations.

Photo by Angela Wyant
But HP maintains it's effectively leveraging its most-powerful tool--the volume it buys from suppliers and manufacturers--to ensure a long-term pricing advantage over rivals such as Dell and IBM. "There's nothing from an earnings perspective more important than the leverage we can drive off of our supply chain," says Jeff Clarke, executive VP of global operations for HP. "We buy $37 billion in direct materials a year, and that makes us the largest procurer in many industries."

The company has worked its volume leverage hard. Post-merger, HP went to all its suppliers and demanded a "price collapse"--all deals moved to the lowest price available to HP or Compaq. Within about 30 days, HP also renegotiated prices to reflect its new size. Brian Dexheimer, executive VP of sales and marketing for Seagate Technology Inc., which supplies disk drives and other components, says HP's change to a more centralized supply-chain approach means it gets more than the best price. "Maybe more important is what happens when it's two weeks to go in the quarter, and they need a 10% upside on a key product line," Dexheimer says. "What do you think happens at Seagate's factory in Singapore when that order comes across as an HP order versus some smaller customer?"

Yet HP's greatest challenges remain in improving its supply chains, not just leveraging size. Even before the ink dried on the $19 billion acquisition, the company had identified, in most cases down to number and style, every part it ordered and from whom, documented every ERP, supply-chain, customer-relationship-management, and logistics system used by the two organizations, and begun figuring how to eliminate redundancies.

HP created a five-pronged supply-chain infrastructure: "Low-touch" contract manufacturing is the largest segment and includes printers, PCs, and some servers. Its vertically integrated, high-volume supply chain ships 50,000 printer cartridges an hour. A direct configure-to-order supply chain tries to directly answer Dell's strength. A systems-and-solutions supply chain includes mainframe and high-end Unix systems. And a services logistics supply chain handles customer support.

It's a far more complicated supply chain than that run by direct-sales rival Dell, says Gene Tyndall, associate director of the University of Miami's Center for Advanced Supply Chain Management. Dell will likely always have lower inventory because all of its sales are online, but competitors need to guard against using that fact as an excuse to keep inventory high. "It doesn't mean you can't be better," Tyndall says.

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