Executive Briefings

Hewlett-Packard's Design for Supply Chain Program

For more than 10 years, Hewlett-Packard has evaluated supply chain impacts on design decisions. Now, design for supply chain (DfSC) is a systematic, repeatable process for product development teams and engineers across the company. DfSC allows HP to consider the impact of decisions:

• On supply chain partners, including suppliers, manufacturing and logistics service providers, resellers, retailers, and end-customers, and

• Over time, including during the pre-launch, production, and end-of-life phases of the product lifecycle.

With DfSC, HP avoids decisions that improve inventory efficiency by pushing risks onto suppliers or that reduce material costs but cause warranty costs to skyrocket. DfSC has allowed HP to introduce a greater variety of new products more rapidly, while simultaneously lower costs, increase revenues, and enhance the customer experience. To implement DfSC, the program established four questions as a roadmap for development:

1. What is it about a product that makes it a good or a bad fit for a particular supply chain?

2. Which design decisions result in products with those characteristics? For example, if lack of common parts causes excess inventory and lost sales, which design decisions result in unique parts?

3. How and why are these decisions being made? More specifically, when in the product lifecycle, who is involved, which performance metrics are important, and what information is available and being used?

4. How do we continue to deliver great products, but at higher end-to-end margins?

In practice, HP uses a portfolio of six DfSC techniques to reduce supply chain costs, enhance customer experience, and increase profits:

1. Variety control: Trade-off supply chain costs and lost sales to determine which product variants are justified in terms of margins, brand equity, and/or channel requirements. Marketing, sales, and retailers usually want more SKUs. But design, manufacturing, and distribution usually want fewer SKUs. The business PC organization reduced inventory by 42 percent while increasing product availability by moving from 107 modules and 95 options to 55 modules and 49 options.

2. Logistics enhancement: Compare distribution costs with design and material costs. A smaller and lighter product may enable economical airfreight, reducing inventory costs and increasing responsiveness. A more rugged product requires less packaging material and experiences fewer returns due to damage. Reducing the physical size of an InkJet printer by 45 percent saved more than $1 per unit.

3. Commonality and re-use: Evaluate the use of unique parts versus common, re-used, or industry standard parts. Unique parts often have lower material costs and enable product distinctiveness. Common parts often reduce inventory costs. Re-used and industry standard parts frequently accelerate time-to-market. For example, the server business saved $32m in annual material costs by moving from 12 to five kits for mounting servers on racks.

4. Postponement: Determine whether it is worthwhile to design products and manufacturing processes to delay the point of differentiation/customization until end-customer demand is better known. For example, a new product customization process for LaserJet printers in Europe achieves more than 98 percent fill rate with less than two weeks of supply.

5. Tax and duty reduction: Decide where to source parts and assemble products. Taxes and duties for components, subassemblies, and products will be different based on the country of origin. For example, the network printing capability of a printer is moved to a removable card built in a low-tax location, saving more than $10m.

6. Take-back facilitation: Consider product and packaging changes to reduce reverse supply chain and environmental costs. Depending on warranty terms, corporate policies, and government regulations, HP will experience costs and benefits of taking back products. For example, design change increases the recycling of InkJet supplies by 25 percent.

Over the past three years, DfSC has been broadly adopted by all HP's business groups and regions. In addition, there have been over 50 individual projects undertaken in collaboration with engineering, marketing, supply chain and finance teams. Savings directly attributable to these programs have exceeded $200m per year and are expected to reach the $1b mark in 2006.

For more than 10 years, Hewlett-Packard has evaluated supply chain impacts on design decisions. Now, design for supply chain (DfSC) is a systematic, repeatable process for product development teams and engineers across the company. DfSC allows HP to consider the impact of decisions:

• On supply chain partners, including suppliers, manufacturing and logistics service providers, resellers, retailers, and end-customers, and

• Over time, including during the pre-launch, production, and end-of-life phases of the product lifecycle.

With DfSC, HP avoids decisions that improve inventory efficiency by pushing risks onto suppliers or that reduce material costs but cause warranty costs to skyrocket. DfSC has allowed HP to introduce a greater variety of new products more rapidly, while simultaneously lower costs, increase revenues, and enhance the customer experience. To implement DfSC, the program established four questions as a roadmap for development:

1. What is it about a product that makes it a good or a bad fit for a particular supply chain?

2. Which design decisions result in products with those characteristics? For example, if lack of common parts causes excess inventory and lost sales, which design decisions result in unique parts?

3. How and why are these decisions being made? More specifically, when in the product lifecycle, who is involved, which performance metrics are important, and what information is available and being used?

4. How do we continue to deliver great products, but at higher end-to-end margins?

In practice, HP uses a portfolio of six DfSC techniques to reduce supply chain costs, enhance customer experience, and increase profits:

1. Variety control: Trade-off supply chain costs and lost sales to determine which product variants are justified in terms of margins, brand equity, and/or channel requirements. Marketing, sales, and retailers usually want more SKUs. But design, manufacturing, and distribution usually want fewer SKUs. The business PC organization reduced inventory by 42 percent while increasing product availability by moving from 107 modules and 95 options to 55 modules and 49 options.

2. Logistics enhancement: Compare distribution costs with design and material costs. A smaller and lighter product may enable economical airfreight, reducing inventory costs and increasing responsiveness. A more rugged product requires less packaging material and experiences fewer returns due to damage. Reducing the physical size of an InkJet printer by 45 percent saved more than $1 per unit.

3. Commonality and re-use: Evaluate the use of unique parts versus common, re-used, or industry standard parts. Unique parts often have lower material costs and enable product distinctiveness. Common parts often reduce inventory costs. Re-used and industry standard parts frequently accelerate time-to-market. For example, the server business saved $32m in annual material costs by moving from 12 to five kits for mounting servers on racks.

4. Postponement: Determine whether it is worthwhile to design products and manufacturing processes to delay the point of differentiation/customization until end-customer demand is better known. For example, a new product customization process for LaserJet printers in Europe achieves more than 98 percent fill rate with less than two weeks of supply.

5. Tax and duty reduction: Decide where to source parts and assemble products. Taxes and duties for components, subassemblies, and products will be different based on the country of origin. For example, the network printing capability of a printer is moved to a removable card built in a low-tax location, saving more than $10m.

6. Take-back facilitation: Consider product and packaging changes to reduce reverse supply chain and environmental costs. Depending on warranty terms, corporate policies, and government regulations, HP will experience costs and benefits of taking back products. For example, design change increases the recycling of InkJet supplies by 25 percent.

Over the past three years, DfSC has been broadly adopted by all HP's business groups and regions. In addition, there have been over 50 individual projects undertaken in collaboration with engineering, marketing, supply chain and finance teams. Savings directly attributable to these programs have exceeded $200m per year and are expected to reach the $1b mark in 2006.