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Write a Performance Measurement Inventory-Driven Cost Metrics of HP’s Supply Chain?
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Over the years, performance metrics are being used as a mechanism to evaluate the competency and successful operation of certain functional activities within an organisation. There is a growing trend among the academicians and industry experts to develop a perfect performance measurement system that is suitable for the current globalised economic conditions and the operating environment of manufacturing companies. Traditionally adopted performance measurement systems are reported to adopt a narrow approach having a one-dimensional focus. This has created a need for a balanced set of measures that address challenges arising from different perspectives including financial, internal operations, customers and stakeholders and innovativeness and learning opportunities (Neely et al. 1997, p. 1131). This report analyses how the Inventory-Driven Cost (IDC) method adopted by Hewlett-Packard (HP) helped in measuring the supply chain performance and offered a competitive advantage for the company.
With worldwide operations, HP Inc. is one of the leading technology solutions providers with a major focus on imaging and printing systems, computing systems, mobile devices, solutions, and services for commercial and residential uses (Bloomberg 2017). Its product portfolio comprises of laser and inkjet printers, scanners, copiers and faxes, personal computers, workstations, storage solutions, and other computing and printing systems. In 2015, HP was ranked 19th in the Fortune 500 list based on its revenue (Narcisi 2015). As of 31 October 2016, HP reported net revenue of $48.24 billion (HP Inc 2016, p. 30). According to the company, it outsources the manufacturing of its products to a significant number of manufacturers to maintain flexibility in its supply chain and manufacturing processes. Having an irregular sales cycle impacts, it’s planning and inventory management adversely impacting the financial forecasts. This report analyses the IDC approach implemented by HP during the 1990s to resolve issues in its supply chains.
During the 1990s, the personal computer and peripherals industry experienced changes in its industry structured as HP showed high interests in that market. HP faced a shift in customer purchasing behaviour with their inclination towards price and availability of the product rather than technical features. By then the industry became fragmented, had similar product offerings using the same technology and components. Though, market demand increased fivefold, selling prices dropped by 15% in the period (Slagmulder & Wassenhove 2004, p. 66). HP’s strategic objective was to determine an approach to translate its high-level strategic and financial goals into action plans at the operational level. HP was forced to focus on cost factors to avoid price erosion and maintain profitability as it began to operate in a high volume, lower margin, shorter product cycle and highly competitive industry. Under such business scenario, in order to gain competitive advantage and gain profit over other players, HP identified that enhancing its supply chain operations would be a suitable option.
Though supply chain issues were considered as execution challenges associated with logistics, the management determined that the supply chain would be able to create value when the mismatch between supply and demand was reduced. The major drawback was that the financial perspective of such a mismatch was not reported in the accounting information system. HP was using Return on Sales (ROS) metric, which has the ability to indicate the level of profit from sales generated. ROS is a financial ration which has the ability to explain whether HP would be able to survive the competition, rising costs, price fluctuations and sales decline. Though it measures the efficiency of HP, it failed to give visibility to the potential sources of losses. Hence, the company decided to identify the financial impact of supply-demand mismatch.
HP determined that inventory holding in any part of the supply chain was squeezing its profit as it impacts the final sales volume and value. There was a lack of definite performance measurement system that would assist stakeholders across the supply chain in decision making. This resulted in the set up of an internal consulting team, the Strategic Planning and Modelling Group (SPaM) to assist in determining the quantitative approach to improve the supply chain function. HP management introduced the IDC metric (Slagmulder & Wassenhove 2004).
Initially, HP implemented IDC in its Mobile Computing Division (MCD) which posted losses despite increased sales. Within a year of implementation, MCD achieved break-even in 1998 and earned a profit in 1999. Motivated through this success, HP rolled out IDC to its other product groups across the organisation. IDC was first introduced by top management at the product group level and then cascaded down to the line management. As the performance evaluation of managers was based profits, IDC was included in the income statement as a separate item. This ensured that IDC reporting was visible to the management team and that all business functions had a clear understanding of the metric. This implementation was the combined effort of the finance and operations team wherein the finance team was responsible for establishing the IDC metric and putting the monthly reporting structure in place, while operations were in charge of driving concrete actions for improvement. The finance team set targets by IDC line item for each region and product line, based on future planned projects and market conditions and after management negotiation (Slagmulder & Wassenhove 2004, p. 69). The management team scrutinised the impact of various elements of IDC to arrive at managerial tradeoffs. The performance of IDC was further improved through the implementation of several projects such as Build-to-Order, Channel Replenishment and Supplier-Managed Inventory.
