Executive Briefings

HP's Logistics Strategy: Simplify, Standardize and Optimize

A conversation with John Frasca, director of global logistics procurement at Hewlett-Packard, Palo Alto, Calif

John Frasca is a mechanical engineer by training. He has worked in nuclear design engineering for Combustion Engineering (now ABB) and then as a senior engineer for Hamilton Standard (a subsidiary of United Technology Corp.), where he also headed up the company's Malcolm Baldrige quality award initiative. Frasca later spent time as a senior manager and automotive consultant with KPMG (now BearingPoint) and then held a senior management position at Coleman PowerMate, a Coleman Co. subsidiary that manufactured generators, compressors and power washers. He left there to lead the supply-chain group for Inacom, which was bought by Compaq, which merged with HP. Following what he terms "this wacky career path" led to his current position as director of global logistics and procurement for Hewlett-Packard, where he manages a $2.5bn annual budget.

Q: Having worked as an engineer and for a variety of businesses, what commonalities have you found that also are applicable in your job today?
Frasca: If you step back and think about logistics, it is all process based. Whatever industry you are in, it requires you to understand what a customer wants-not only in terms of hard metrics but soft metrics as well-and then to put a process in place with the right suppliers to excite the customer. That is a basic fundamental whether you are designing nuclear fuel rods or working on the automotive floor or managing transportation and redesigning the supply chain.

That's something that I also saw when working on the Malcolm Baldrige award. It all goes back to process thinking. You need to have an end-to-end perspective and not a myopic view. You can't look at transportation without looking at the bigger picture of logistics and you can't look at logistics without looking at the bigger picture of the supply chain.

Q: How big is HP's logistics operation?
Frasca: I manage $2.5bn worth of logistics spend annually. That's a big number and it predominantly represents outbound distribution, via all modes, around the world.

One of the things we did very well as a company when HP merged with Compaq nearly three years ago was to focus on three things: simplify, standardize and optimize. As part of that, we decided to standardize on only two global logistics contracts, one for 3PLs and one for transportation providers. As of now, over 99.2 percent of our spend and our movement of goods on the outbound is contracted. At the same time, we reduced our supply base by 68 percent. This gave us the ability to truly partner with the remaining best-of-breed suppliers. When you are dealing with over 370 or 380 different transportation providers, as we were at that time, you can't really have robust strategic conversations about how to best use each other's core competencies. You simply are spread too thin to do that. So by harnessing the $2.5bn worth of spend and reducing our supply base and understanding the infrastructure or network nodes, we are now able to look at things from an end-to-end supply-chain perspective, not just from a transportation perspective.

Q: Is this something both companies were already working on prior to the merger?
Frasca: I used to manage logistics for the Compaq side and I would say both companies absolutely were going through the same thought process. Where we were able to truly leverage this was in the work that occurred leading up to the actual merger transaction in what we called the "clean room." As we focused on what our combined structure would look like, we uncovered a lot of opportunity. And upon close of the transaction, we were able to come out of the gate in a full sprint.

One of the value propositions of the merger actually was the logistics horizontal and that has not wavered over the three years since, which has allowed us to exceed far beyond people's expectations. When we combined both spends to get to that $2.5bn, that was big-bigger than most companies. So in the first six months we had a very clear-cut strategy and that was to simplify, standardize and optimize our transportation/logistics network. We did that, again, by reducing our supply base, by truly partnering with the balance of the folks and by putting standard contracts in place. Obviously, there was a lot of work to get us to that point; a lot of RFQs, negotiating and so on, but at the end of the day, we brought forth a sound strategy. It wasn't really a new strategy or a new thought process, but we were all about execution. A lot of people come up with great ideas that go nowhere. I can't say this strategy was invented here, but I can say we executed it here.

Q: What is HP's approach to logistics outsourcing?
Frasca: HP will never own warehouses or warehouse management systems or transportation management systems. That is just not our core competency. We outsource that to third-party logistics providers. As far as the transportation piece, we mostly manage that in-house and we are continually looking at ways to save money and to leverage our $2.5bn spend. That is our core competency and, therefore, we retain that.

In terms of our partners, we have very strict criteria for carriers in all modes to become a preferred partner and cost is only one of those. We look at how much the carrier invests in its IT infrastructure. We look at what it is doing to protect our product while it is in their care, custody and control. We are very concerned about security and these conditions are part of our core contract. If you have our product in your warehouse that is operated by your systems and your people and you lose it, then you really should be held accountable.

Another criterion we look for is innovative thinking. In the past, a company typically would think about the service it wanted and would put together an RFQ and send it out to qualified providers. The providers would then respond to the exact specifications of that RFQ. But sometimes, on review, you would realize that what you asked for was not really the best solution.

So what we are saying to our premier partners is this: You know our business and you have customers in verticals different from ours, so what we expect is for you to bring us some value propositions that we haven't thought about yet, something that will intrigue us.
Finally, we look for companies that are financially sound. As you well know, everyone in the transportation industry seems to be buying everyone else and a lot of people are going bankrupt. We are in it for the long haul and, therefore, we want to partner with people who are financially stable. Every quarter I check out the health and wealth of my providers because we don't want to get caught with product in a trailer when a company closes its doors.

Q: Can you tell us who some of your key logistics providers are?
Frasca: Well, I can tell you they are the best and the largest in the world. Oftentimes, we could get a cheaper price with a niche player in any particular region of the country, but these providers typically can't do all that we are asking our partners to do.

Q: Are most of your contracts on an annual basis or for a longer period?
Frasca: The time period has been extended in some modes but pricing always is looked at annually. The thought process around the global contracts was to increase the velocity of doing future business. So the contract has all the legalese in it, all the cost drivers in it-net turns, intellectual property, liability-all of those things are there. So when a new opportunity comes, you are just adding on business to an existing contract. This does two things: (1) the attorneys don't get rich re-negotiating terms and conditions associated with the contract and they can focus, instead, on the statement of work; and (2) we can more easily leverage the core competencies of our premier partners.

Q: Can you give me an example of how one of your providers has come up with an innovative solution?
Frasca: Yes, but I will have to keep at a 35,000-foot level. We have an awful lot of product that comes from Shanghai and we are now able to move goods from Shanghai all the way to the customer with one provider. This means the provider organizes it off the manufacturing dock, puts it on the plane, clears it through customs, moves it into a gateway and puts it on a truck for delivery to a hub or directly to the customer-all very seamlessly. What that allows us to do is collapse the transit time and provide end-to-end visibility to our customers so they know and we know exactly where the product is in the supply chain.

Q: Are you working on any new initiatives you can share with us?
Frasca: We have an awful lot of initiatives. One of the things that we have done is reduce our logistics infrastructure by closing distribution centers. As an example, we are closing down the Roseville facility in California and the Omaha facility and consolidating them with other facilities. That is allowing us to not only do modal shifts, but also to reduce our expedites. In other words, we are able to take freight from the air to the ground and from an LTL environment to a full truckload environment. As we move in that direction, we reduce our transportation costs with the same or even better transit times.

Our team also is educating HP employees via web training to say, "transportation is not free." We want them to set the expectation with the customer and to meet that expectation, but don't just hit the overnight button for Federal Express because you think you will be a hero if you get it there overnight. Oftentimes getting it there faster than the expectation of the customer is a bad thing, as bad as getting it there late because they also are trying to skinny up their inventories.

We have been moving an awful lot of domestic heavyweight air-domestic being North America-to a ground network. A lot of this has been accomplished by working with Federal Express to move freight out of airplanes and onto their ground freight service. Federal Express is a major customer and a major partner of ours.

Another thing we are looking at right now is inbound logistics. More than 99 percent of our logistics spend today is on outbound. How powerful would it be to harness our inbound costs as well and leverage that and provide visibility to the customer both upstream and downstream? We believe that is the next big thing for us and it is something that we have been working on for the last six months. Again, it gives us one throat to choke and it gives us an end-to-end solution. Of course, you have to partner with the right people and I believe we have. That's why over the last three years it was very important to establish those partnerships and to become best in class on the outbound. Now the next natural progression is to go after the inbound.

Q: What challenges of your job keep you up at night?
Frasca: One of the things that keeps me up at night is how to move our group to a model that is more predictive. What I mean by that is to be able to let our executives know, to the best of our ability, what is going to happen six, nine, 12 or 18 months in the future. Now we believe we have some of the best transportation rates in the industry, which is really a function of our size. But one of the things that we need to get better at predicting are those cost drivers that not a lot of people focus on. For example, what happens if the government should decide that no cargo at all will go in the belly of a passenger aircraft? Not a lot of people are focusing on that but it's part of my job managing $2.5bn in logistics spend to focus on that.

So I have started sending out internally to the executives something that I call the quad slide, which takes a look at different cost drivers. These are things like transportation capacity out of China-that's very important to HP because we represent 12 percent of all airlift coming out of Shanghai to North America. So capacity, fuel, cleaner but less efficient truck engines, port slowdowns-I want to educate our executive community about all these cost drivers so there are no surprises.

Of course the question then is, "OK, John, if you are forecasting a rate increase in 18 months, what are you doing to mitigate that?" And that's where we start leveraging our partners to get out-of-the box thinking. Or where we start asking them, "What are you doing with Nike or what are you doing with Tyco that might be applicable to us?" And at the same time, I am having conversations with other companies and doing some benchmarking of my own, because we all are faced with the same challenges.

Q: What most excites you about your job?
Frasca: Everything. I have fun everyday. And I have some of the best and most talented professionals in the business working on my team. Since the merger, I have not lost anyone in my group, which means they like what they are doing and they like the company they are working for. That's a great thing because when you are partnering with providers it's all about people and relationships. You have to stay consistent with relationships that build trust.

John Frasca is a mechanical engineer by training. He has worked in nuclear design engineering for Combustion Engineering (now ABB) and then as a senior engineer for Hamilton Standard (a subsidiary of United Technology Corp.), where he also headed up the company's Malcolm Baldrige quality award initiative. Frasca later spent time as a senior manager and automotive consultant with KPMG (now BearingPoint) and then held a senior management position at Coleman PowerMate, a Coleman Co. subsidiary that manufactured generators, compressors and power washers. He left there to lead the supply-chain group for Inacom, which was bought by Compaq, which merged with HP. Following what he terms "this wacky career path" led to his current position as director of global logistics and procurement for Hewlett-Packard, where he manages a $2.5bn annual budget.

Q: Having worked as an engineer and for a variety of businesses, what commonalities have you found that also are applicable in your job today?
Frasca: If you step back and think about logistics, it is all process based. Whatever industry you are in, it requires you to understand what a customer wants-not only in terms of hard metrics but soft metrics as well-and then to put a process in place with the right suppliers to excite the customer. That is a basic fundamental whether you are designing nuclear fuel rods or working on the automotive floor or managing transportation and redesigning the supply chain.

That's something that I also saw when working on the Malcolm Baldrige award. It all goes back to process thinking. You need to have an end-to-end perspective and not a myopic view. You can't look at transportation without looking at the bigger picture of logistics and you can't look at logistics without looking at the bigger picture of the supply chain.

Q: How big is HP's logistics operation?
Frasca: I manage $2.5bn worth of logistics spend annually. That's a big number and it predominantly represents outbound distribution, via all modes, around the world.

One of the things we did very well as a company when HP merged with Compaq nearly three years ago was to focus on three things: simplify, standardize and optimize. As part of that, we decided to standardize on only two global logistics contracts, one for 3PLs and one for transportation providers. As of now, over 99.2 percent of our spend and our movement of goods on the outbound is contracted. At the same time, we reduced our supply base by 68 percent. This gave us the ability to truly partner with the remaining best-of-breed suppliers. When you are dealing with over 370 or 380 different transportation providers, as we were at that time, you can't really have robust strategic conversations about how to best use each other's core competencies. You simply are spread too thin to do that. So by harnessing the $2.5bn worth of spend and reducing our supply base and understanding the infrastructure or network nodes, we are now able to look at things from an end-to-end supply-chain perspective, not just from a transportation perspective.

Q: Is this something both companies were already working on prior to the merger?
Frasca: I used to manage logistics for the Compaq side and I would say both companies absolutely were going through the same thought process. Where we were able to truly leverage this was in the work that occurred leading up to the actual merger transaction in what we called the "clean room." As we focused on what our combined structure would look like, we uncovered a lot of opportunity. And upon close of the transaction, we were able to come out of the gate in a full sprint.

One of the value propositions of the merger actually was the logistics horizontal and that has not wavered over the three years since, which has allowed us to exceed far beyond people's expectations. When we combined both spends to get to that $2.5bn, that was big-bigger than most companies. So in the first six months we had a very clear-cut strategy and that was to simplify, standardize and optimize our transportation/logistics network. We did that, again, by reducing our supply base, by truly partnering with the balance of the folks and by putting standard contracts in place. Obviously, there was a lot of work to get us to that point; a lot of RFQs, negotiating and so on, but at the end of the day, we brought forth a sound strategy. It wasn't really a new strategy or a new thought process, but we were all about execution. A lot of people come up with great ideas that go nowhere. I can't say this strategy was invented here, but I can say we executed it here.

Q: What is HP's approach to logistics outsourcing?
Frasca: HP will never own warehouses or warehouse management systems or transportation management systems. That is just not our core competency. We outsource that to third-party logistics providers. As far as the transportation piece, we mostly manage that in-house and we are continually looking at ways to save money and to leverage our $2.5bn spend. That is our core competency and, therefore, we retain that.

In terms of our partners, we have very strict criteria for carriers in all modes to become a preferred partner and cost is only one of those. We look at how much the carrier invests in its IT infrastructure. We look at what it is doing to protect our product while it is in their care, custody and control. We are very concerned about security and these conditions are part of our core contract. If you have our product in your warehouse that is operated by your systems and your people and you lose it, then you really should be held accountable.

Another criterion we look for is innovative thinking. In the past, a company typically would think about the service it wanted and would put together an RFQ and send it out to qualified providers. The providers would then respond to the exact specifications of that RFQ. But sometimes, on review, you would realize that what you asked for was not really the best solution.

So what we are saying to our premier partners is this: You know our business and you have customers in verticals different from ours, so what we expect is for you to bring us some value propositions that we haven't thought about yet, something that will intrigue us.
Finally, we look for companies that are financially sound. As you well know, everyone in the transportation industry seems to be buying everyone else and a lot of people are going bankrupt. We are in it for the long haul and, therefore, we want to partner with people who are financially stable. Every quarter I check out the health and wealth of my providers because we don't want to get caught with product in a trailer when a company closes its doors.

Q: Can you tell us who some of your key logistics providers are?
Frasca: Well, I can tell you they are the best and the largest in the world. Oftentimes, we could get a cheaper price with a niche player in any particular region of the country, but these providers typically can't do all that we are asking our partners to do.

Q: Are most of your contracts on an annual basis or for a longer period?
Frasca: The time period has been extended in some modes but pricing always is looked at annually. The thought process around the global contracts was to increase the velocity of doing future business. So the contract has all the legalese in it, all the cost drivers in it-net turns, intellectual property, liability-all of those things are there. So when a new opportunity comes, you are just adding on business to an existing contract. This does two things: (1) the attorneys don't get rich re-negotiating terms and conditions associated with the contract and they can focus, instead, on the statement of work; and (2) we can more easily leverage the core competencies of our premier partners.

Q: Can you give me an example of how one of your providers has come up with an innovative solution?
Frasca: Yes, but I will have to keep at a 35,000-foot level. We have an awful lot of product that comes from Shanghai and we are now able to move goods from Shanghai all the way to the customer with one provider. This means the provider organizes it off the manufacturing dock, puts it on the plane, clears it through customs, moves it into a gateway and puts it on a truck for delivery to a hub or directly to the customer-all very seamlessly. What that allows us to do is collapse the transit time and provide end-to-end visibility to our customers so they know and we know exactly where the product is in the supply chain.

Q: Are you working on any new initiatives you can share with us?
Frasca: We have an awful lot of initiatives. One of the things that we have done is reduce our logistics infrastructure by closing distribution centers. As an example, we are closing down the Roseville facility in California and the Omaha facility and consolidating them with other facilities. That is allowing us to not only do modal shifts, but also to reduce our expedites. In other words, we are able to take freight from the air to the ground and from an LTL environment to a full truckload environment. As we move in that direction, we reduce our transportation costs with the same or even better transit times.

Our team also is educating HP employees via web training to say, "transportation is not free." We want them to set the expectation with the customer and to meet that expectation, but don't just hit the overnight button for Federal Express because you think you will be a hero if you get it there overnight. Oftentimes getting it there faster than the expectation of the customer is a bad thing, as bad as getting it there late because they also are trying to skinny up their inventories.

We have been moving an awful lot of domestic heavyweight air-domestic being North America-to a ground network. A lot of this has been accomplished by working with Federal Express to move freight out of airplanes and onto their ground freight service. Federal Express is a major customer and a major partner of ours.

Another thing we are looking at right now is inbound logistics. More than 99 percent of our logistics spend today is on outbound. How powerful would it be to harness our inbound costs as well and leverage that and provide visibility to the customer both upstream and downstream? We believe that is the next big thing for us and it is something that we have been working on for the last six months. Again, it gives us one throat to choke and it gives us an end-to-end solution. Of course, you have to partner with the right people and I believe we have. That's why over the last three years it was very important to establish those partnerships and to become best in class on the outbound. Now the next natural progression is to go after the inbound.

Q: What challenges of your job keep you up at night?
Frasca: One of the things that keeps me up at night is how to move our group to a model that is more predictive. What I mean by that is to be able to let our executives know, to the best of our ability, what is going to happen six, nine, 12 or 18 months in the future. Now we believe we have some of the best transportation rates in the industry, which is really a function of our size. But one of the things that we need to get better at predicting are those cost drivers that not a lot of people focus on. For example, what happens if the government should decide that no cargo at all will go in the belly of a passenger aircraft? Not a lot of people are focusing on that but it's part of my job managing $2.5bn in logistics spend to focus on that.

So I have started sending out internally to the executives something that I call the quad slide, which takes a look at different cost drivers. These are things like transportation capacity out of China-that's very important to HP because we represent 12 percent of all airlift coming out of Shanghai to North America. So capacity, fuel, cleaner but less efficient truck engines, port slowdowns-I want to educate our executive community about all these cost drivers so there are no surprises.

Of course the question then is, "OK, John, if you are forecasting a rate increase in 18 months, what are you doing to mitigate that?" And that's where we start leveraging our partners to get out-of-the box thinking. Or where we start asking them, "What are you doing with Nike or what are you doing with Tyco that might be applicable to us?" And at the same time, I am having conversations with other companies and doing some benchmarking of my own, because we all are faced with the same challenges.

Q: What most excites you about your job?
Frasca: Everything. I have fun everyday. And I have some of the best and most talented professionals in the business working on my team. Since the merger, I have not lost anyone in my group, which means they like what they are doing and they like the company they are working for. That's a great thing because when you are partnering with providers it's all about people and relationships. You have to stay consistent with relationships that build trust.