HP applies risk management to procurement
By Dann Anthony Maurno, contributing editor -- Manufacturing Business Technology, 11/1/2005 7:00:00 AM
Uncertainty in procurement can be expensive. To protect itself, Hewlett-Packard (HP) systematically assesses procurement risk with an eye toward writing flexible contracts that factor in changing supply chain conditions.
Using its procurement risk management (PRM) methodology, HP claims to have saved more than $50 million in three years on the purchase of microprocessors, memory, custom assemblies, energy, and packaging products. It's now offering the system to others.
PRM gets procurement professionals to think quantitatively about risk. They are asked to consider both corporate revenue and cost objectives—along with historical demand, price, and availability of components. They can then use HP's proprietary statistical analysis software to gauge how a particular purchasing plan might be affected by short-term supply shortages resulting from an act of God, product recalls, or supplier bankruptcy.
Overall, HP's approach emphasizes binding commitments—i.e., agreements to buy in a certain quantity range with price flexibility—instead of fixed contracts. "Once you understand the uncertainties, you can start thinking how the business unit can best manage them to structure binding commitments for equipment and supplies," says Venu Nagali, leader of HP's PRM group.
Nagali says the HP method goes beyond either real-options analysis, to which it is similar, or traditional demand planning and forecasting to provide a top-to-bottom business process for managing risk. "Contract monitoring and forecasting identifies new risks and uncertainties that existing contracts cannot. So every month you look at the new forecasts, the existing contracts, and identify the risks you are not currently managing to write new deals."
The HP Outbound Services team is rolling out PRM at some large customer sites, with plans to offer the service more broadly by year's end. The PRM package includes statistical analysis software, user training, and consulting around business process reengineering.
Components purchasing meets risk management
09/01/2004Components purchasing meets risk management
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