Components purchasing meets risk management
By Staff -- Manufacturing Business Technology, 9/1/2004 12:00:00 AM
Whether it's tissue or pig iron, an unexpected rise in commodity prices can either be passed onto angry end users or chip away at profits.
Procurement risk management (PRM) seeks to balance demand, futures pricing, contracts, and the inventory that can buffer commodity swings by means of transparent processes.
It turns out Hewlett-Packard(HP) has developed in-house a software program that does just that. But if history is any indicator, it might be some time before the solution sees the light of day as a marketed product.
"The problem with demand forecasting for components is inaccuracies [due to] the end customer's unknown demand," says Venu Nadali, a PRM manager for HP.
HP had been stung in the past by a scarcity of flash memory chips used in its printers. Cutting what Nadali called a "risky deal," HP signed a three-year, fixed-price, fixed-quantity contract for the chips. As chip prices fell and competition heated up in the printer market—driving prices lower—HP was stuck with higher costs.
HP decided to "manage uncertainty," explains Patrick Scholler, director of the company's PRM program. Internally developed, HP Risk is a stand-alone PRM tool for forecasting component costs and is available only for the next 12 months. Unlike standard commodity-centric risk-management systems that serve the commodity and financial sectors, this is a component-centric modeling tool aimed squarely at the manufacturing sector, he says.
HP Risk bases its calculations on factors such as historic customer demand and the current cost of a component, like memory chips. HP procurement managers then combine their opinions on component costs in the next 30 days with market intelligence. It's all added into a "what-if" scenario. While it sounds simple, Scholler and Nadali say the algorithms took two years to develop.
"There's a growing demand for this type of capability as sourcing pros think more tactically, with better decision-support tools and optimization engines," observes Carl Lehmann, a VP and enterprise applications strategy analyst at Meta Group, Stamford, Conn. "If what HP has actually works, I think there's a market for it.
"But HP [has a tough time] selling software ... and infrastructure for that matter," Lehmann continues. "It's had plenty of great products it couldn't get out: Bluestone [an applications server]; a change management engine; and HP's answer to JAVA, E-speak, went nowhere. HP has not demonstrated its sales force can sell software."
HP reports taking more than $50 million out of "several billions" worth of component purchase contracts in the last 36 months using HP Risk, although this is a relatively small amount of HP's total $35 billion in direct material buys.
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