Hp Options

informs

Vol. 38, No. 1, January–February 2008, pp. 51–60 issn 0092-2102 eissn 1526-551X 08 3801 0051

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doi 10.1287/inte.1070.0333 © 2008 INFORMS

THE FRANZ EDELMAN AWARD

Achievement in Operations Research

Procurement Risk Management (PRM) at Hewlett-Packard Company

Venu Nagali, Jerry Hwang, David Sanghera, Matt Gaskins, Mark Pridgen, Tim Thurston, Patty Mackenroth, Dwight Branvold, Patrick Scholler, Greg Shoemaker

The Procurement Risk Management Group, Hewlett-Packard Company, Houston, Texas 77070 {venu.nagali@hp.com, jerry.hwang@hp.com, david.sanghera@hp.com, matt.gaskins@hp.com, mark.pridgen@hp.com, tim.thurston@hp.com, patty.mackenroth@hp.com, dwight.branvold@hp.com, patrick.scholler@hp.com, greg.shoemaker@hp.com}

Supply chain risks related to product demand, component cost, and availability uncertainties can have a significant impact on a manufacturing company’s revenue and profits. The Procurement Risk Management (PRM) Group at Hewlett-Packard (HP) developed and implemented a mathematical model, business process, and software to measure and manage supply chain risks on the procurement side. In 2006, the software-enabled business process helped HP to manage over $7 billion in spending; this resulted in material-cost savings of $128 million. Over the past six years, HP has realized more than $425 million in cumulative cost savings using the PRM approach. Key words: supply chain risk management; inventory management; operations; planning; procurement; structured contracts.

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embers of HP’s procurement community know that uncertainty in product demand, component cost, and component availability results in significant procurement risks. Other manufacturers, such as Ford, Cisco, and Dell, know these risks all too well. In December 2001, Ford posted a $1 billion loss on precious-metals inventory and forward-contract agreements. In April 2001, Cisco took a $2.5 billion inventory write-down due to weakening demand for networking products. In...