Supply Chain Evolution at HP (B)

INS578
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Supply Chain Evolution at
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HP (B)
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07/2014-4947
This case was written by, Kumar Neeraj, Research Associate under the supervision of Professor James Teboul, Luk N.
Van Wassenhove, the Henry Ford Chaired Professor of Manufacturing at INSEAD, and Professor Enver Yücesan. It is
intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of
an administrative situation.
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Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at
cases.insead.edu.
Copyright © 2002 INSEAD
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IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.
This document is authorized for educator review use only by Pradeep Kumar Behera, Navrachana University until Jul 2020. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860
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By the end of 1997, Hewlett Packard had undertaken many groundbreaking initiatives with
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the existing supply chain: the move to build-to-order, channel replenishment and creation of a
supply hub had all helped reduce costs, inventory, and lead times. The supply chain processes
were now aligned and provided the appropriate visibility across the chain. However, the
competitors were not far behind; as the competitive advantage resulting from these initiatives
was short lived. In addition, the cost and response time pressures continued to increase in the
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industry. HP needed to conceive and deploy supply chain architectures that clearly recognized
the competencies of each of the players in the supply chain and leveraged them to gain cost
and customer service advantages. Further supply chain initiatives were therefore introduced.
Channel Assembly Program

HP started the channel assembly program in 1997. Under this program semi-finished PCs
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were shipped from an HP site to 1st tier resellers who carried out the final assembly only after
the exact customer requirements were known. The objective of this program was to deliver
personalized configurations to customers within 48 hours. By 1999, this program was
operational with six resellers in Europe and represented a significant portion of HP’s sales.
François Larivière, Channel Programs Manager, explains the reasons behind this initiative:
“We realized that about half of the standard products that we shipped to the
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channel partners were touched or modified by them. They would either add extra
memory or add accessories. There was a two-touch1 manufacturing process
already happening informally due to these modifications carried out by the
resellers. HP was not getting the benefits of these sales, as some of the
components added by the resellers were not HP components.”
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The resellers operating under this program normally served only those customer requirements
that were non-standard.
Channel assembly started with the shipment of the hardware: base models and components in
fully certified material kits from HP to the channel assembly partners (CAPs). The CAP
downloaded test and other necessary software from a dedicated HP web site. CAPs
assembled, tested and shipped the finished PCs to customers, and sent production control
reports and test results back to HP (Figure 1). A CAP was able to assemble, test and deliver a
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small or medium sized order in less than week within a defined geography.
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All numbers and figures represent authors’ estimates and the real figures have been disguised to protect
confidentiality.
1 The PC was assembled at the HP factory and sent to the resellers. The resellers would then open the box
and add custom configurations like hard disk, accessories or software, depending on customer requests. So
the total “assembly operation” could be viewed as going through an assembly process twice, once at the HP
factory and again at the reseller’s location.
Copyright © INSEAD 1
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HP Product structures, software, test
Production report (configuration & test)
E-Link
HP
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Base models
Complete
Software download
Configuration
CAP PC
stock End
Test
Components Customer
(HDD, µpro,memory,..) Invoice
Acquisition
Installation
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Hub and Support
fulfillment and
Reseller order
Order
2nd Tier
support
Third party 2nd Tier
Hardware & Software Reseller
Back office support for

1st Tier Reseller Processes Order Fulfillment related
activities.
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Figure 1: Channel Assembly Process
HP conducted quality systems audits at the CAP site regularly and provided engineering
support to the CAP partners.
Mr. Jeorg Bruenig, Director Configuration and Assembly Services, Computer 2000 Germany,
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a channel assembly partner of HP explains the role their company plays in the supply chain:
“We are incurring an additional 2-3% cost on the PCs sold through the channel
assembly program. For this additional cost, our operation provides tremendous
flexibility and variety, and shortens the response time required to handle unique
customer requests dramatically without compromising on the quality of products
that we provide to our customers.
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The Channel Assembly program has also allowed us to capture more value in the
supply chain and to provide superior service to the 2nd tier resellers. For example,
we not only provide the 2nd tier resellers with customized products that are
delivered to their end customer’s site but we also carry out their order processing
and invoicing operations on our system. The 2nd tier resellers are now largely
conducting tasks related to customer acquisition, on-site installation of equipment
and technical consulting.”
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Increasingly, HP was partnering with CAPs and 2nd tier resellers to serve large customer
accounts. HP was leveraging the channel partner’s customer-specific knowledge, their
physical proximity to customers and their technical skills to serve large accounts better.
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 HP product and
Large Account End Customers

brand
 Customized and
SMI from supplier hub

shipped to the end
Suppliers
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Regional HUB or
customer by CAP
CAP
 Installation and
customer support
2nd Tier by 2nd Tier reseller
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Figure 2: HP Supply Chain Under CAP – Partnership Approach
For large customer accounts, HP supplied the hardware, the 1st tier reseller carried out the
customisation, and the 2nd tier reseller carried out the on-site installation process (Figure 2).
Such initiatives were proving to be very competitive and were increasingly being used to
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acquire large accounts. Such accounts were acquired jointly by HP and by the 1st and 2nd tier
resellers, with a clear-cut understanding of the roles and competencies of each player in the
partnership.
Select Express
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In an effort to eliminate two-touch manufacturing and improve cost effectiveness, HP

launched another initiative called Select Express. The value proposition of this model was to
provide rapid access to personalized configurations. The customer contacted the reseller with
the requirements of a personalized configuration. HP assembled the PC in the configuration
ordered by the customer and shipped it directly to the customer. The reseller got a margin
related to customer order handling.
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Top Value
The objective of the Top Value program was to provide delivery of the standard
configurations that customers wanted most. This program was supported by a number of
marketing promotions. This program generated a good proportion of sales. François explained
the rationale behind the program:
“This program was designed to support our “push” strategy. If a customer is

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looking to buy a PC and he finds out, through our flyers and ads, that our
standard product meets his requirements, then, all he has to do is to walk into a
2nd tier HP reseller and get immediate delivery of the product. The relationship
with the customer, in most situations, is transactional in nature.”
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The operation of this model was the same as that of a classical retail shop. A customer would
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contact the second-tier reseller with either a broad set of requirements or a specific model or
configuration. If the customer needed assistance the reseller would help the customer refine
his requirements and identify an appropriate HP product fulfilling his requirements. The
products were available off-the-shelf. HP had a vendor-managed inventory program with
about 80 of these resellers. The stock replenishments at these resellers took into consideration
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marketing “push” plans.
Hewlett Packard’s Supply Chain Today

As a result of all the supply chain initiatives introduced so far, HP achieved substantial cost
reductions. According to Xavier:
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“We managed to reduce the inventory driven cost by half, manufacturing
expenses and trading expenses significantly and the cash to cash2 drop by half, in
the last two years alone. So far the rate of cost reduction has been faster than the
drop in average selling price of the PC. We reduced our total supply chain costs
by more than 20% while the drop in average selling price was 15% over the past
two years.”
In terms of lead times, HP had achieved a 25% reduction. The factory throughput time was
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down to two days; it took 10-30 minutes to complete the box assembly and hours to test the
PC. The average replenishment cycle at the resellers was one week.
On the supply side, by 1999, HP had reduced significantly the number of suppliers. It
leveraged on supplier’s capabilities for sourcing integrated systems and in some cases even
finished products.
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In the downstream channel, however, there was a constant realignment of roles and a
redistribution of value among them. The 1st tier resellers, specially the ones with some
assembly capabilities, were appropriating more and more value added activities in the supply
chain both from HP and the 2nd tier resellers. Thus, on the one hand, they were keen on
conducting customization related activities at their end (representing value migration from
HP); on the other hand, they were carrying out order fulfillment related activities on behalf of
the 2nd tier resellers (representing value migration from 2nd tier). Some 2nd tier resellers were
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focusing on customer acquisition, installation and consultancy related aspects of the business
and were trying to avoid dealing with the physical product.
Thus, there was greater emphasis on channel partners adding more value to the sales process.
The 1st tier resellers’ role was changing and their existence as box movers or middlemen
seemed to be under threat.
At the same time, HP was testing supply chain models for carrying out extensive
customizations itself and delivering finished products directly to the end customers through
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the Select Express program. In addition, in some cases where HP did not add any value to the
2 Cash to Cash is the financing cost of accounts receivable, accounts payable and financing inventory costs.
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product at its manufacturing locations, it would ask its suppliers to ship finished products
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directly to end customers – which, in a way, represented value migration to the suppliers.
HP-PC’s Internet Strategy

“Reach versus richness,” summed up Xavier, as he pointed to the graph presented by
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Michael Brown of BDD (Figure 3). “Has the Internet really allowed us to break this trade-
off?”
Over the past decade, Xavier had overseen the implementation of several vital supply chain
initiatives. The migration from build-to-plan to build-to-order, the launching of just-in-time
channel replenishment, the creation of supplier hubs, and the implementation of channel
assembly programs had all been instrumental in making HP the third largest PC manufacturer.
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While the streamlining of the indirect channel had been necessary in an environment where
the product did not age gracefully, the direct channel had been gaining increased importance.
As e-commerce was taking off at a dizzying rate, the Internet was providing enormous
challenges. As Xavier was thinking about BDD’s Internet strategy, he wanted to be sure that
HP was turning each of these challenges into new business opportunities. Specific questions
were on his mind:
• Should HP simply replicate other On-Line models, which have, thus far, been the
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successful ones in the industry?
• Could HP go further?
• How could HP launch a direct channel without alienating its channel partners? In fact,
how could HP leverage the supply chain improvement initiatives undertaken in the
indirect channel to create a high-performance direct channel?
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Fierce competition was pushing PC manufacturers to capture more value from their supply
chains and to offer a wider range of services to maintain profitability. This move required
heavy reliance on direct channels, which was increasingly welcomed by the customers.
Direct channel already made up 27% of the total European market and was projected to be the
fastest growing segment between 1999 and 2003 in all customer segments, attaining 42% of
the total market by 2003 (Exhibit 1).
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Purchasing decisions were based less on price and product features, which were already taken
for granted, and increasingly on ownership experience, ease of purchase and state-of-the-art
technology. Direct customer relationship was becoming a requirement!
All of HP’s competitors had incorporated the direct channel into their supply chains with
varying degrees of success and pain. Dell became the benchmark, realizing half of its sales
through the Internet. Compaq, on the other hand, went direct three times, creating a lot of
confusion, meeting considerable resistance from its indirect channels, and losing a CEO in the
process. IBM was also moving very aggressively into the direct channel as part of its e-
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commerce strategy. The challenge for HP was therefore to surpass Dell and IBM while
avoiding the conflicts experienced by Compaq.
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Richness
service offerings?
channel assembly?
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direct
sales force
configuration?
channel
auctions?
on-line store
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in-channel
promotion
Reach
Enterprise Medium Small and Medium
Customer Businesses Business
Figure 3: The Impact of the Internet on the PC Supply Chain

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“We have to start thinking outside the box,” asserted Michael. “Our customers do
not simply buy a personal computer. We have to offer a different bundle of
services, above and beyond our high-performance hardware, to our customers
with different computing needs. The richness of the Internet is that we can
customize these offerings on this single platform.”
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Xavier was curious to see the details of Michael’s blueprint. He wanted as much
customization for each customer as possible. But, above all, he was hoping that HP PC’s
Internet strategy was fully leveraging all the supply chain change initiatives they had
undertaken in the past five years, while avoiding conflicts with the existing channels.
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Annexure I
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Dell’s Direct Supply Chain
Dell was the largest direct distributor-manufacturer of PCs in Europe. Dell served primarily
corporate customers, with business institutions and governments accounting for 77% of its
sales in 1999. Home and small office users accounted for 18% and educational institutions
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5% of its sales. Dell had five manufacturing sites world-wide from where they shipped PCs
directly to their customers.
Dell divided its customer base into relationship and transactional customers. It devoted
significant resources to relationship customers and paid little attention to the transactional,
one-time buyers. For the relationship customers, Dell deployed thousands of sales agents in
the field who took customer orders and had access to the entire customer sales history. There
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was a separate toll-free number for the transactional buyers, where they could contact a sales
representative, who would help the customer make the purchase decision. Once the customer
orders were received, they were sent to the appropriate manufacturing site where the PCs
would be assembled and then shipped to customers via UPS or Airborne Express. The
production process took about 1.5 days.
With the relationship customers, Dell leveraged its closer ties in identifying requirements and
demand forecasting. Dell had an average of 11 days of inventory in its supply chain. It shared
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its planning data extensively with its suppliers and was increasingly asking its suppliers to
locate their facilities nearer to its own manufacturing centers. In 1996, Dell started selling on-
line.
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Exhibit 1
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Commercial PC Major Players by Channel, Europe, 1999 (Unit Share, Percent)
Source: International Data Corporation
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Other
s
NEC Compaq
3.6% NEC
40.2%
17.4%
Acer
5.2%
Compaq
Others 11.4%
54.4%
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Acer
IBM 9.1%
HP
17.7% IBM
HP 0.1%
7.6%
21.3%
Distributors – 1st Tier Retailers

Distributors 12.5%
Retailers – 2nd Tier
69.1%
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Direct Direct
Other Channels
Other Channels
15.9%
1.7%
Others Compaq
20.8% Others 26.7%
Dell 29.7%
HP
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65.4%
0.7%
NEC
5.2% Apple
Compaq 18.3%
1.8% IBM
3.8% HP
IBM 13.1%
Gateway 7%
7.5%
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INS578

Channel Assembly Program

Back office support for

Large Account End Customers

SMI from supplier hub

In an effort to eliminate two-touch manufacturing and improve cost effectiveness, HP

“This program was designed to support our “push” strategy. If a customer is

Hewlett Packard’s Supply Chain Today

HP-PC’s Internet Strategy

Figure 3: The Impact of the Internet on the PC Supply Chain

Source: International Data Corporation

Distributors – 1st Tier Retailers

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