While many jaded procurement executives have grown frustrated by the unfulfilled promises of e-procurement, not all have lost faith. One notable exception is Hewlett-Packard Co.
The company, which is likely to merge with Compaq Computer Corp. if the buyout vote succeeds, has saved "in excess of $30 million" in its first year of deploying e-procurement practices, according to Jeff McKibben, director of HP's worldwide e-procurement program. That number is expected to increase tenfold as more procurement activities migrate online and e-business standards mature.
Using a combination of a private portal, Rosetta-Net b2b standards, and third-party auction sites, the Palo Alto, Calif., PC maker has transformed the way it sells excess parts, buys components on the spot market, handles strategic sourcing, and manages orders, forecasts, and inventory, according to McKibben.
"We project a savings of over $300 million by the end of fiscal year 2004," McKibben said last week during a RosettaNet Partner Seminar Web conference. "These are hard savings we have seen in materials cost reduction, inventory cost reductions, and transaction cost reductions."
Several cost reductions
HP spends about $20 billion annually on direct materials and has lowered inventory costs by 30%, sliced transaction costs by 40%, and saved between 10% and 40% on some of its materials costs, McKibben said.
From a productivity standpoint, HP has noticed that buyers spend 30% less time processing an order, time better served by performing higher-value tasks.
While McKibben declined to comment on how the Compaq merger might affect e-procurement efforts, analysts said a focus on streamlining purchasing efficiencies would sharpen HP's competitive stance against the likes of Dell Computer Corp., a company that some analysts believe has the best just-in-time supply chain practices in the industry.
"The principal objective [of the e-procurement initiatives], particularly now that HP may be merging with Compaq, is inventory. Inventory is the enemy in a commodity business," said Daniel Kunstler, an analyst at J.P. Morgan Chase & Co. in San Francisco.
"HP uses the distribution channel, so their e-procurement has to have transparency between the end sale of the product and the sources of supply. It needs to automate the information to HP. The merger with Compaq makes it all the more urgent," he said.
The results of HP's e-procurement strategy stem from a major initiative that started to take shape 18 to 24 months ago. In the early days of the Internet boom, individual HP divisions were quick to jump on the idea of using the Web, which led to many different projects being developed across the organization and enabled suppliers to interface with HP on various platforms.
In 2000, the company scanned its operations and found dozens of initiatives under way. "People were trying to use the Internet to enable processes, but many of the projects were funded by individual divisions and were not leveraged across the company," Mc-Kibben said. "We wanted to maintain the strength of divisional decision-making, but we also wanted to have the advantage of global visibility and understand what was happening across our extended supply chain."
To do that, HP chose four major supply chain and procurement areas that would benefit the most from an e-business switch: strategic sourcing, order and forecast collaboration, inventory collaboration, and excess inventory disposition and spot purchases through auctions.
Of these, HP placed the greatest emphasis for b2b connectivity on the order, forecasting, and inventory collaboration functions. More specifically, HP has created a private portal, Keychain, and is implementing RosettaNet Partner Interface Processes (PIPs) to facilitate information sharing with its trading partners, McKibben said.
Keychain, which is being used by 17 HP divisions and 120 trading partners, provides a real-time look into the purchasing transaction and forecasting process, and is the platform by which HP shares forecast data, he said.
While a number of users access Keychain through a browser, HP is working to build stronger machine-to-machine connections with its trading partners' back-end systems. That's where Rosetta- Net comes in.
HP is using a handful of PIPs related to order management, forecasting, PO management, and advanced shipment notices. As a RosettaNet member, it is also working on new guidelines that will address a broader range of information sharing and enable vendor-managed inventory programs, McKibben said.
For the auctions services, HP relies on Converge Inc., Peabody, Mass. As one of the online component broker's founding members, HP uses auction services to sell excess parts and buy components that are in short supply. With Converge's help, the company has significantly increased the amount of money it has recovered from the sale of excess parts from 30 cents on the dollar to about 80 to 90 cents, McKibben said.
HP is planning to roll out e-procurement projects with 23 other internal organizations and develop tools to enable strategic sourcing, he added. OR
Additional reporting by Robin Lamb