HP’s ground-breaking use of operations research not only enabled the-tech giant to successfully transform its portfolio program and return $500 million over a 3-year period to the bottom line, it also earned HP the coveted 2009 Edelman Award from INFORMS for outstanding achievement in operations research. “This is not the success of just one person or one team,” said Kathy Chou, Vice President of Worldwide Commercial Sales at HP, in accepting the award on behalf of the winning team. “It’s the success of many people across HP who made this a reality, beginning several years ago with mathematics and imagination and what it might do for HP.”
To put HP’s product portfolio problem into perspective, consider these numbers: HP generates more than $135 billion annually from customers in 170 countries by offering tens of thousands of products supported by the largest supply chain in the industry. You want variety? How about 2,000 laser printers and more than 20,000 enterprise servers and storage products. Want more? HP offers more than 8 million configure-to-order combinations in its notebook and desktop product line alone.
The something-for-everyone approach drives sales, but at what cost? At what point does the price of designing, manufacturing, and introducing yet another new product, feature or option exceed the additional revenue it is likely to generate? Just as important, what are the costs associated with too much or too little inventory for such a product, not to mention additional supply chain complexity, how does all of that impact customer satisfaction? According to Chou, HP didn’t have good answers to any of those questions before the Edelman award-winning work.
“While revenue grew year over year, our profits were eroded due to unplanned operational costs,” Chou said in HP’s formal Edelman presentations. “As product variety grew, our forecasting accuracy suffered, and we ended up with excesses of some products and shortages of others. Our suppliers suffered due to our inventory issues and product design changes. I can personally testify to the pain our customers experienced because of these availability challenges.” Chou would know. In her role as VP of Worldwide Commercial Sales, she’s “responsible and on the hook” for driving sales, margins, and operational efficiency.
Constantly growing product variety to meet increasing customer needs was the HP way—after all, the company is nothing if not innovative—but the rising costs and efficiency associated with managing millions of products and configurations “took their toll,” Chou said, “and we had no idea how to solve it.”
Compounding the problem, Chou added, was HP’s “organizational divide.” Marketing and sales always wanted more—more SKUs, more features, more configurations—and for good reason. Providing every possible product choice was considered an obvious way to satisfy more customers and generate more sales.
Supply chain managers, however, always wanted less. Less to forecast, less inventory, and less complexity to manage. “The drivers (on the supply chain side) were cost control,” Chou said. “Supply chain wanted fast and predictable order cycle times. With no fact-based, data-driven tools, decision-making between different parts of the organization was time-consuming and complex due to these differing goals and objectives.”
By 2004, HP’s average order cycle times in North America were nearly twice that of its competition, making it tough for the company to be competitive despite its large variety of products. Extensive variety, once considered a plus, had become a liability.
It was then that the Edelman prize-winning team—drawn from various quarters both within the organization (HP Business Groups, HP Labs, and HP Strategic Planning and Modeling) and out (individuals from a handful of consultancies and universities) and armed with operations research thinking and methodology—went to work on the problem. Over the next few years, the team: (1) produced an analytically driven process for evaluating new products for introduction, (2) created a tool for prioritizing existing products on a portfolio, and (3) developed an algorithm that solves the problem many times faster than previous technologies, thereby advancing the theory and practice of network optimization.
The team tackled the product variety problem from two angles: prelaunch and postlaunch. “Before we bring a new product, feature or option to market, we want to evaluate return on investment in order to drive the right investment decisions and maximize profits,” Chou said. To do that, HP’s Strategic Planning and Modeling Team (SPaM) developed “complexity return on investment screening calculators” that took into account downstream impacts across the HP product line and supply chain that were never properly accounted for before.
Once a product is launched, variety product management shifts from screening to managing a product portfolio as sales data become available. To do that, the Edelman award—winning team developed a tool called revenue coverage optimization (RCO) to analyze more systematically the importance of each new feature or option in the context of the overall portfolio.
The RCO algorithm and the complexity ROI calculators helped HP improve its operational focus on key products, while simultaneously reducing the complexity of its product offerings for customers. For example, HP implemented the RCO algorithm to rank its Personal Systems Group offerings based on the interrelationship between products and orders. It then identified the “core offering,” which is composed of the most critical products in each region. This core offering represented about 30 percent of the ranked product portfolio. All other products were classified as HP’s “extended offering.”
Based on these findings, HP adjusted its service level for each class of products. Core offering products are now stocked in higher inventory levels and are made available with shorter lead times, and extended offering products are offered with longer lead times and either stocked at lower levels or not at all. The net result: lower costs, higher margins, and improved customer service.
The RCO software algorithm was developed as part of HP Lab’s “analytics” theme, which applies mathematics and scientific methodologies to help decision making and create better-run businesses. Analytics is one of eight major research themes of HP Labs, which last year refocused its efforts to address the most complex challenges facing technology customers in the next decade.
“Smart application of analytics is becoming increasingly important to businesses, especially in the areas of operational efficiency, risk management and resource planning,” says Jaap Suermondt, director, Business Optimization Lab, HP Labs. “The RCO algorithm is fantastic example of an innovation that help drive efficiency with our business and our customers.”
In accepting the Edelman Award, Chou emphasized not only the company-wide effort in developing elegant technical solutions to incredibly complex problems, but also the buy-in and cooperation of managers and C-level executives and the wisdom and insight of the award-winning team to engage and share their vision with those managers and executives. “For some of you who have not been a part of a very large organization like HP, this might sound strange, but it required tenacity and skill to bring about major changes in the processes of a company of HP’s size,” Chou said. “In many of our business (units), project managers took the tools and turned them into new processes and programs that fundamentally changed the way HP manages its product portfolios and bridges the organizational divide.
Questions for the Case
1. Describe the problem that a large company such as HP might face in offering many product lines and options.
2. Why is there a possible conflict between marketing and operations?
3. Summarize your understanding of the models and the algorithms.
4. Perform an online search to find more details of the algorithms.
5. Why would there be a need for such a system in an organization?
6. What benefits did HP derive from implementation of models?
