Supply Chain Managementfor the adaptive enterpriseThe innovation, success, and vision of HPs Global Supply Chain

1

Dynamic business conditions create opportunities for changefor better or worse. In the highly publicized merger of Hewlett-Packard Company and Compaq Computer Corporation, corporate executives saw only positive opportunitiesa chance to exploit the value derived from synergies between the two companies.

HPs leadership embraced innovative applications of the combined supply chain best practicesapproaches that would allow the company to maintain market leadership. HP used a multi-disciplinary strategy to evaluate and execute adaptivesupply chain processes by exploiting key leverage

points. This experience provided HP with first-handexperience about the difficulties presented by suchcomplex and monumental evaluations of merging twoindustry leading companies, as well as insight into how to best find the opportunities that can producemaximum advantage.

The merger efforts have clearly succeeded. The company cut $3.5 billion in annual costsone billion more and one year earlier than was originallypromised to stakeholdersand $1.5 billion of this cost reduction came from the supply chain. An adaptive supply chain strategy was crucial to this success. But HPs experience is not unique. Everycompany can take advantage of the opportunity to benefit from adaptive supply chain optimization.

Let HP show you how it can be done, and how we can extend that knowledge to your company. Weve honed our supply chain strategy to serve our customers needs around the world, says Dick Conrad, HPs Senior Vice President, Global Operations Supply Chain. We can help you do the same.

Executive summary

More than a half century ofmanufacturing innovationThe 20th century produced unprecedented change in global business practices, social structures, andinformation transfer. This makes the legacy of HP thatmuch more compelling.

The well-known story of Bill Hewlett and David Packarddeveloping products in a garage was just the start. Uponforming the company in 1939, one of HPs first clients was Walt Disney Studios, which purchased electronicinstrument technology to create a new approach forcinema sound for the movie Fantasia. Decades ofproduct and manufacturing innovation continuedwithHP developing microwave signal and radar generatorsduring World War II, radio frequency counters andoscilloscopes in the 1950s, analytical instruments anddesktop scientific calculators in the 1960s, handheldcalculators and microprocessors in the 1970s, andbecoming one of the largest global IT providers as theworld entered a new millennium.

Meanwhile, in 1982, three former Texas Instrumentsexecutives met in Houston, Texas to design a portablecomputer that could run IBM software. In a matter ofmonths, Compaq Computer Corporation had designed,manufactured, and distributed its first product line. Duringthe decades that followed, Compaq designed and

manufactured increasingly powerful desktop systems andservers. By the 1990s, HP and Compaq were industryleaders in markets as diverse as personal computers, laserprinters, mainframes, workstations, imaging, and personaldigital assistants (PDAs). The manufacturing expertise andrecord of innovation held by these two companies rivaledany in the world.

Citing corporate synergies and the opportunity for jointinnovation, HP and Compaq merged in 2002. With $72 billion in revenue and operations in 178 countriesaround the world, HPs merger was the largest of its kind.Not everyone was convinced it would succeed. Yet oneyear after the merger, the new HP delivered $3.5 billionin reduced costs. Of that, $1.55 billion was associatedwith supply chain optimization and efficiencies.

Today, HP is the ninth largest industrial supply chain in the world and the largest supply chain in hightechnologyin terms of dollars, breadth, productcomplexity, and global reach. The company excels atcreating exactly the products that customers need to meettheir business requirementsat affordable price points,and with the technological leadership that the market has come to expect. The merger fused the manufacturingexpertise, strength, and innovation that marked bothcompanieslaying the foundation for the continuedsuccess of HP.

2

HPs four business units include:

Enterprise Systems Group (ESG)

Imaging and Printing Group (IPG)

HP Services (HPS)

Personal Systems Group (PSG)

Focuses on providing the key technology components of enterprise IT adaptive infrastructure solutions to increasebusiness agility. This group includes enterprise servers, storage, and management software.

Maintains HPs role as the leading provider of printing and imaging solutions for business and consumer use, aswell as digital imaging and digital publishing. IPG includes printer hardware, digital imaging devices such ascameras and scanners, as well as industrial-sized printers that HP acquired through its 2001 purchase of Indigo.

Delivers premier global IT services and solutions. It offers guidance, know-how, and a comprehensive portfolio ofservices to help customers realize measurable business value from IT investments. These services require a steady,cost-effective supply of spare parts in locations across the globe.

Focuses on supplying simple, reliable, and affordable personal computing solutions and devices for home andbusiness use; this group includes desktop PCs, notebooks, workstations, thin clients, smart handhelds, personaldevices and emerging technologies. Manufacturing in this business unit is heavily outsourced, creating an intensedemand for supply chain collaboration to meet business goals.

3

The challenge of streamliningcomplexityHP designs and manufactures an extremely broad mix ofproducts, from hand-held computers to cameras, largeUNIX servers, and ink jet printersall of which are sold in countries all over the world. Doing so requires multiplesupply chains that can be extremely complex because ofdiverse business needs.

These business needs vary based on the objectives of thecompanys four business divisions. Each division is a multi-billion dollar business that is the equivalent of a Fortune500 company, having multiple business drivers, industrypressures, and customer demands. Each unit has a goalof operating profitablywith a competitive cost structure,discrete manufacturing operations, and unique supplychain characteristics.

Leveraging intellectual capital and supply chain experienceIn seeking supply chain innovation, during the mergerprocess HP looked inward first. With so much internalintellectual capital, the company only had to unleash anopportunity for creative ideas to form and take flight. HP created a governance council, staffed by seniormanagement and executives from both of the originalcompanies, with expertise represented from theinformation technology and business sides. Each of the key business divisions in the new company wasrepresented. Council members were exonerated of theirformer duties and given an executive commitment thatdecisions would be rapidly executed.

The governance council collaborated to create acorporate-wide view of HPs global business needs withthe goal of building the framework for a best-in-classsupply chain strategy. The team looked at business goals and processes to identify and evaluate similarities,opportunities for standardization, and prime areas for consolidation, while eliminating duplicate efforts,maximizing efficiencies, and minimizing cost structures. In addition, HP strove to devise supply chain processessuch as events, activities, interactions, and transactionsthat could be performed once, rather than multiple times across the company. With more than 200,000 product offerings, customers, and global supply chain points involving morethan100,000 suppliers, this was a lofty goal.

Another objective was to maintain a laser focus oncustomer needs by utilizing and leveraging all of thesolutions and platforms to create additional value for thecompanys customers. By embracing a total enterprisefocus, rather than just supporting an end-to-end supplychain, the council hoped to extend opportunities forcollaboration beyond the supplier network to includecustomers as well.

Through this assessment, the governance council identified both differences and commonalities throughoutthe supply chain. Areas of commonality that spannedbusiness units included:

Customer Relationship Management

Partner Relationship Management

Product Data Management

Planning

Order Management

Procurement

Logistics

eBusiness

HP faced a multitude of challenges

ComplexityA desktop PC with a six-monthproduct lifecycle has differentsupply chain requirements from ahigh-end Superdome computer thatrequires long product lifecyclesand extensive customer materials.

Global reachTwo of the four HP business unitstouch similar markets. Combined,they have yearly sales of 40 millionprinters, 18 million PCs, and 1.2 million digital cameras. Theseproducts are sold by 100,000retail outlets in175 nations.

DiversityThe services business unit servesmore than 250,000 accountsworldwide. It supports an installedbase of over 70 million units withwarranty service as well as hotspares requests, which are metwith two-hour response times.

HPs five supply chain models

No-touchDelivers goods directly from themanufacturer to customers, with no intervention of HP in thephysical flow.

Low-touchEnables customer variety andenhanced product offeringsthrough product localization andcustomization while still leveragingeconomies of scale in thecomplexity of high technologymanufacturing.

Configure-to-orderDelivers high-volume configurationcapabilities to quickly assembleproducts to meet customerspecifications.

High-valueSupports complex, highlyconfigurable products for thesolutions that businesses expect tobe engineered expressly for theirneeds, such as infrastructuresolutions, servers, and high-endprinter products.

ServicesExecutes on a wide variety ofservice level agreements to ensure the right part is in the right place, at right the cost, and at the right time to meetcustomer service requirements and to support the consulting andintegration business of HP Servicesglobal business units.

Imaging andPrintingGroup

4

Although they are separategroups, the HP units areinterwoven and work together to create an adaptive business environment.

A strategy in motionAfter considering the business and internal requirements,HP leadership recognized that synergizing the supplychain also required innovative new approaches.

The council considered how HP could use the companysbest ideas and best practices to create an agile supplychain environment, one that would provide competitiveadvantage in the present while offering the flexibility to adapt to changing business needs. Each business unit had key touch points in its product development,manufacturing/outsourcing, and distribution processes

that could be shared and optimized by creating horizontaland vertical integration in specific functional areas. Tosupport this integration, the team honed 40 separategeographical and product-line systems into five generic,optimal supply chain models based on commonattributes. In this way, each business unit could use the model(s) that best fit its processes by product; this approach would allow each product line to most effectively meet customer demand and maintain customer satisfaction, while keeping HP keenly competitive in quality, innovation, price, and delivery.

PersonalSystemsGroup

Enterprise SystemsGroup

HP Services

5

For example, the Enterprise System Group, whichmanufactures high-end infrastructure components, servers, and storage devices, uses four supply chainapproaches in its operations. Driven by the divisionsbusiness and market requirements, ESGs utilization of the supply chain models is approximately:

25% no-touch

33% low-touch

29% configure-to-order

13% high-value

This split supply chain model allows ESG to leverage the best supply chain channel based on business drivers, industry pressures, competitive cost structures,customer demands, and unique product and support characteristics.

Another division, the Imaging and Printing Group,expanded into the commercial printing market through the acquisition of Indigo N.V., a Dutch manufacturer ofcommercial and industrial printers. Because of HPsadaptive supply chain strategy, IPGwhich traditionallyuses the high-volume low-touch/no-touch approachescan now easily and flexibly use the supply chain model that best meets the needs of its new, robust high-end product.

The merger of two high-tech leaders empowered us to seek cutting-edge solutions, says Gilles Bouchard,HPs Executive Vice President of Global Operations andCIO. We were determined to rise to the challengespresented by todays changing business conditions.

In a global organization such as HP, the supply chain is a complex, multi-faceted entity that includes myriadpractices, systems, transportation modes, warehousinglocations, vendors, and customers. Merely adjusting oneor two of these elements could not address the completesupply chain process. By considering the companysbusiness and supply chain needs at a broad and high level, the team was able to more clearly see the end-to-end implications of their decisions. HPs five supply chain models, mapped against the identified points of commonality, have allowed each business unit the increased responsiveness and flexibility necessary to address dynamic industry and market demands.

Further intensifying the complexity was the extension ofHPs supply chain to customers. By allowing customers toelectronically manage their interactions with HPbyconfiguring-to-order hardware and software solutions,checking order status, viewing information on productshipments, and receiving order confirmation, forexamplethe new organization provides the access andcontrol that enhances customer service and satisfaction,keys to success in todays fast-paced high-tech market.

We were deter-mined to rise to thechallenges pre-sented by todayschanging businessconditions. Gilles Bouchard,HPs Executive VP ofGlobal Operationsand CIO

Keys to execution: collaboration, consolidation, and extended processesExecuting the new HP supply chain approach requiredthree primary steps: collaboration among the suppliercommunity, consolidation of the IT infrastructure, andextension of supply chain processes.

HPs supply base collaboratedThe supplier base had to be simplified and standardizedto reduce costs, complexity, and risk in HPs existingsupply chain. This process included outsourcing non-strategic processes and selected distribution assets, aswell as analyzing HPs total supplier base. Using a modeldesigned to emphasize value capture, HP consideredsupplier price, service, value, and benefit.

Several key realities emerged from this analysis, includingthe realization that some suppliers dealt with differentorganizations as individual unitssetting prices and termson a case-by-case basis. To take strategic advantage of its enormous buying power, the company encouragedbusiness partners who serviced different divisions to now view HP as a whole. In this new light, suppliers were asked to provide the best possible terms, improvepricing, and create more cost-effective, consistent business practices.

In addition, the rationalization process gave HP a globalperspective on its suppliersa view that helped thecompany to consolidate the total number of business

partners. The remaining partners faced increased HPexpectations for integrated collaboration with both HPand other suppliers up and down the supply chainmodels. HPs tremendous purchasing volume created areal incentive for business partners to cooperate withthese changes. For example, HP is the worlds largest userof contract manufacturing, and it consumes 15% of theworlds dynamic-memory chips. Suppliers of these goodsand services had every incentive to collaborate in supportof HPs business.

In rationalizing the supply base, HP effectively leveragedits most powerful toolthe volume it buys from suppliersand manufacturers. Further, by outsourcing non-coreprocesses, reducing suppliers, and increasing integrationand collaboration with existing partners, HP increasedsupply chain efficiencies and has saved approximately $1 billion thus far. From an earnings perspective, there isnothing more important than the leverage we can driveoff of our supply chain, says Connie Spiess, HPs Vice President of Supply Chain Integrated Solutions.

HPs IT infrastructure consolidatedIn parallel, HP assessed and mapped its existing ITinfrastructure to the new supply chain models andidentified areas that could be consolidated. Using new tools and methods that allowed visibility intoinformation flows, HP was able to identify opportunitiesfor consolidation that would help enhance the quality ofdata, increase response time, lower operational costs,remove redundancy, and increase visibility into the supplychain environment.

6

A view inside HPs real-time logistics and distribution processes

One global instance

170,000,000 supply chain events

Queried every 3.7 seconds

Order details on 26,000 customers

130 countries

241 transportation carriers

391 plants

1,900 suppliers

7

The IT consolidation effort created higher quality data thatallows better business decisions and responsiveness alongthe supply chain. It maximized the utility of every IT asset,and it integrated processes into a more uniform, easilymanaged and modified environment that is more adaptiveto business change.

HP now interacts with its extended supply chain morerapidly and efficiently. It has lowered costs and increasedquality of real-time information. Moreover, suppliers andcustomers find the company easier to do business with.

HPs supply chain processes extendedFurther, HP integrated key supply chain components intoa uniform, extended supply chain. We realized thatdelivering more agility in the supply chain is all aboutmeasuring, architecting, and operating IT as efficientlyand effectively as every other business process, says Fred Spalanzani, Director of Supply Chain and BusinessIntelligence IT. IT requires solutions, services, andtechnology that link not just business processes andapplications to the supporting IT infrastructure, but thatalso connect customers, partners, and employees.

Some examples of how HP has extended and integratedits supply chain reach include:

Procurement and sourcing: KeyChain is the HP real-time networked supply chain hub that enables HP businesses to move to a world-class cost structure,increase profitability, and realize the full potential ofsupply chain integration. KeyChain handles many-to-many relationships and hundreds of trading partners; itaccepts various ERP systems and business processes, aswell as the supply chain models used by the four HPbusiness units. Last year 500 million transactions ranthrough the system, and KeyChains total ROI in 2003increased to $20 million as it added more HP businessunits and partners.

Product lifecycle management: HPs adaptive PLMstrategy allows all divisions the interoperability to createand support the unique solutions they need to satisfycustomer demand. Business benefits enabled by HPsPLM environment include timely coordination of

New direct ship capabilitiesgained a 62%improvement in delivery lead time.

competitive new product introductions; more efficientservice and support; cost savings through elimination ofduplication, inconsistency, and redundant informationand processes; opportunity for IT consolidation; andconsistent interaction with customers and partners.

Logistics and distribution: HPs cost proposition (that is,percentage of revenue) in this area is superior, thanks to an integrated suite of supply chain visibility andreporting tools that examine processes from thecustomer order to final delivery. These tools haveimproved customer turn-around time, reduced costs, andimproved velocity by providing a horizontal view of theHP supply chains in near real-time. The tools monitortransactions by geographies, product lines, sales,purchase and production orders, shipments, invoices,carrier status, and goods receipts.

With this extended supply chain functionality, employee,supplier, and customer transactions are more consistentproviding cost savings across the enterprise.

The companies that are winning in the marketplaceand will continue to winunderstand that there is noseparation between information technology and business change, says Craig Flower, Vice President and Group Information Officer for Global Operations IT.For HP, competitive success has always been tied to the innovation of our manufacturing processes and IT support.

The benefits and real value of HPs adaptive supply chainmanagement strategyHPs adaptive, integrated supply chain initiative creatednumerous business benefitsfor the enterprise, suppliers,and customers.

Benefits to HPThe adaptive supply chain strategy has delivereddramatic benefits to HP, including adaptation andresponsiveness to changing business dynamics; fastertime-to-market with new and competitive products;decreased manufacturing production, distribution, andchannel costs; increased customer satisfaction; fasterservice and response time; and continued leadership inthe high-tech market.

HP has realized a significant improvement in gross marginfor the company as well as a substantial contribution tothe companys earnings per share growth.

8

With extended supply chainfunctionality, employee, supplier,and customer transactions aremore consistentproviding costsavings across the enterprise.

For HP, competitivesuccess has alwaysbeen tied to theinnovation of ourmanufacturingprocesses and IT support. Craig Flower, VP and GroupInformation Officerfor GlobalOperations IT

1 year since merger ($millions)

Manufacturing area Procurement Supply chain and operations

9

Direct materials

Product re-design

Indirectprocurement

Subtotal Logistics Mfg andlaboroverhead

Systems andprograms

Subtotal Global Total

Supply chain savings since the merger of HP and Compaq

459 309339

1,107

160 169 115

444

1,555

Benefits to suppliersFor HPs strategic suppliers, the key benefits realized from implementing the changes recommended by thecouncil include:

Ease of doing business

The supply chain strategy allows a single point of collaboration with HP, simplifying suppliersinteraction with HP, increasing business collaboration,and lowering costs for both parties.

Enhanced supply and demand visibility

This visibility improves participants ability to predictdemand. It also enables suppliers to build purchasing,manufacturing, and logistical efficiencies into theirown supply chains. Further, it enables suppliers topass associated discounts onto customers such as HP.

Elimination of non-value-added steps, such asadministration, and costs

Benefits to customersAs HP exploits the new efficiencies of its supply chain,customers benefit in several ways, including:

Incremental product value delivered for the same oreven lower purchase cost

HP now offers a one-stop shopping experience forglobal corporate customerswith the ability to procureeverything from PDAs to commercial printers and serversfrom the same source

The economies of scale have helped HP focus on itslegacy of manufacturing innovationbuilding anddelivering precisely the product that customers need andwant to buy. As an example, the HP Multifunction andAll-in-One office devices for the small and home officemarket combine three formerly separate units (fax,copier, and printer) into one moderately pricedappliancesaving customers money, space, and time.

HPs adaptive supply chain strategy facilitates fastershipments, quicker response times, and greater customer service response and control anywhere in the world. As a result, customers receive the right productat the right price, available through the right channel, at the right time.

10

11

This concept stresses the need foragile processes that can be used torespond to changing businessrequirements and conditions,wherever they existincludingglobally, or by country, region, or location.

The future of HPs adaptive supply chainHP will continue to examine and deploy business and IT efficiencies throughout its supply chain. At the sametime, HP has an eye on tomorrows best practices andprocesses. For instance, HP will continue to review andevaluate business and IT processes that were originallydesigned for manufacturability, determining whetherdesign for supply chain better benefits the company andcustomer objectives. For example, designing for supplychain considerations may reduce assembly times throughthe use of common parts. It could also help companiesselect the optimal facility for final assembly, based ongeographic proximity to other manufacturing facilities orto end customers. Designing with these considerations inmind can help HP meet specific business objectives, suchas reducing costs or improving customer satisfaction.

HP may also apply other innovative uses of its adaptivesupply chain strategy, including a concept called designfor x. This concept stresses the need for agile processesthat can be used to respond to changing businessrequirements and conditions, wherever they existincluding globally, or by country, region, or location. In a given situation, the company may design for supply chain, logistics, recyclability, or environmentallyresponsible disposal of waste materials; the supply chainprocesses should be able to support these criticaldemands without radical or costly change.

Balancing the costs and opportunities related to supply chain concerns is no longer just a manufacturingproblem; it is an enterprise business issue with manystakeholders. Achieving maximum efficiencies andeconomies of scale requires an agile supply chainstrategy that is truly global, will integrate and evolve cost-effectively, can adapt to dynamic business changes,and benefits all key stakeholders.

Building on the adaptive supply chain

Supp

ly c

hain

impa

ct

IT infrastructure impact

Time

Supply chainoptimization

Small, select internalsupply chaincommunity

Get house in order

Internally developed,first partnersdeployed

Enhance partnerrelationships

Capitalizing oncollaboration

Business and ITsynchronized

Partners deployed,first customersdeployed

Fully deployed, planfor next generation

Advancedsupply chain

Leveraginge-business

E-business for theadaptive enterprise

Vital statistics:

$72 billion global corporation Leader in high technology infrastructure solutions 140,000 employees Sales and service operations in 178 countries $200 million per day in revenue 200,000 products 100,000 suppliers Millions of customers Multiple business models Billions of dollars per year in direct material costs 5 distinct supply chain models integrated at pivotal

points for optimization

Today, HP is

#1 globally in imaging and printing #1 globally in management software #1 globally in UNIX and Windows servers #1 globally in enterprise storage

12

Capitalize on HPs experienceWith the merger of HP and Compaq, an opportunityemerged. HP seized that opportunity to innovate in supplychain operations. But our experience is not unique.

For every business, innovating as a means of achieving ormaintaining competitive advantage is not an optionit isa means of survival. In todays global economic andcompetitive climate, all organizations must review theirinternal and external processes and policies in an effort torid themselves of inefficiencies. Your company can do thistooand benefit from the expertise of a company thathas been through supply chain optimization before.

HP understands the difficulties in the process, knowswhere the opportunities are, and can extend thatknowledge to your company. No other IT company onthe planet can provide the global reach of HP, says DickConrad. Weve honed our supply chain strategy to serveour customers needs around the world. We have provenperformance and execution in supply chain processes.We can help you do the same for your company.

Every day we help forward-looking companies seizeinnovative practices and technology to achieve maximumbusiness and competitive results.

HPs impressive experience creating an adaptivesupply chain is only the latest example of our talentfor innovation. Throughout the 20th century, weconsistently responded to changing business andconsumer conditions with exactly the innovative new technology solutions that customers needed.Today, HP has the expertise to transform extremebusiness change into tomorrows opportunity. Weunderstand how an adaptive supply chain can helpcompanies streamline processes, cut costs, improvecustomer responsiveness, and better the bottom line.Let us help you.

www.hp.com

2004 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice. The only warranties for HP products and services are set forth in the express warranty statementsaccompanying such products and services. Nothing herein should be construed as constituting an additional warranty. HP shall not be liable for technical or editorial errors or omissions contained herein.

5982-2878EN, 03/2004