Procurement Risk Management PRM at Hewlett-Packard Company

1. Procurement Risk Management (PRM) at Hewlett-Packard Company Venu Nagali, Ph.D. Distinguished Technologist Procurement Risk Management Group Stanford Risk Management Roundtable November 13, 2006

2. page 2 Venu Nagali – ESCA Sep 06 HP has the largest IT supply chain #1 in Material Spend -$43B Memory - #1 Microprocessors (Intel & AMD) - #1 Windows Software (Microsoft) - #1 Hard Disk Drives - #1 Laser Engines- #1 Optical Disk Drives - #1 Chipsets (Intel) - #1 LCD Panels & many more - #1 #1 in CM/ODM Spend #1 in Electronics Industry Logistics Procurement - $1.7B Provide spare parts for 1M Service interactions per month

3. page 3 Venu Nagali – ESCA Sep 06 HP’s Supply Chain Strategy:Adaptive Supply Chain Customers demand more. Supply chains must be agile enough to adapt to constant changes in their markets. [note] These are key messages around the Adaptive Supply Chain that are derived &/or taken from HP’s external Adaptive Enterprise collateral Key Point Convey HP’s internal vision and imperative for an Adaptive SC and how we characterize it. At HP, we are continuously striving to build adaptive and responsive SC process capabilities. Our objectives for doing so are to improve Speed Range Ease Profit and Economic Efficiency Do this however never miss a beat in operational execution[note] These are key messages around the Adaptive Supply Chain that are derived &/or taken from HP’s external Adaptive Enterprise collateral Key Point Convey HP’s internal vision and imperative for an Adaptive SC and how we characterize it. At HP, we are continuously striving to build adaptive and responsive SC process capabilities. Our objectives for doing so are to improve Speed Range Ease Profit and Economic Efficiency Do this however never miss a beat in operational execution

4. page 4 Venu Nagali – ESCA Sep 06 Lack of risk mgmt processes has resulted in billions of dollars in losses for OEMs …

5. page 5 Venu Nagali – ESCA Sep 06 … and cause pain throughout the supply chain

6. page 6 Venu Nagali – ESCA Sep 06 Objectives of PRM @ HP:Measure & Manage Procurement Uncertainties

7. page 7 Venu Nagali – ESCA Sep 06 PRM at HP addresses risks due to high probability events

8. page 8 Venu Nagali – ESCA Sep 06 Organizational challenges in implementing PRM

9. page 9 Venu Nagali – ESCA Sep 06 Components for PRM framework A fundamental tool used in risk management is the forecast scenario. Forecast scenarios measure and make use of information about uncertainty, information which is often available, but ignored! Measuring and using uncertainty, however, increases our flexibility for meeting business objectives in rapidly changing markets. This slide illustrates the use of uncertainty to segment, then allocate demand. Demand segmentation provides a mechanism for allocating demand to suppliers based on individual strengths. Based on choice of cost structure, some suppliers are better at providing flexibility. Quantity contracts designed and allocated based on financial strengths are likely to produce cost benefits for both buyer and seller. The use of multiple contract types to meet demand requirements is called a procurement portfolio. This portfolio approach produces results similar to personal asset portfolios: return and managed risk. A well design procurement portfolio improves returns and reduces AOS risk through complementary contracts. Fixed quantity contracts improve cost and ensure committed supply, flexible contracts reduce inventory exposure and provide upside demand flexibility. A fundamental tool used in risk management is the forecast scenario. Forecast scenarios measure and make use of information about uncertainty, information which is often available, but ignored! Measuring and using uncertainty, however, increases our flexibility for meeting business objectives in rapidly changing markets. This slide illustrates the use of uncertainty to segment, then allocate demand. Demand segmentation provides a mechanism for allocating demand to suppliers based on individual strengths. Based on choice of cost structure, some suppliers are better at providing flexibility. Quantity contracts designed and allocated based on financial strengths are likely to produce cost benefits for both buyer and seller. The use of multiple contract types to meet demand requirements is called a procurement portfolio. This portfolio approach produces results similar to personal asset portfolios: return and managed risk. A well design procurement portfolio improves returns and reduces AOS risk through complementary contracts. Fixed quantity contracts improve cost and ensure committed supply, flexible contracts reduce inventory exposure and provide upside demand flexibility.

10. page 10 Venu Nagali – ESCA Sep 06 PRM Approach: Manage risks using structured contracts with suppliers A fundamental tool used in risk management is the forecast scenario. Forecast scenarios measure and make use of information about uncertainty, information which is often available, but ignored! Measuring and using uncertainty, however, increases our flexibility for meeting business objectives in rapidly changing markets. This slide illustrates the use of uncertainty to segment, then allocate demand. Demand segmentation provides a mechanism for allocating demand to suppliers based on individual strengths. Based on choice of cost structure, some suppliers are better at providing flexibility. Quantity contracts designed and allocated based on financial strengths are likely to produce cost benefits for both buyer and seller. The use multiple contract types to meet demand requirements is called a procurement portfolio. This portfolio approach produces results similar to personal asset portfolios: return and managed risk. A well design procurement portfolio improves returns and reduces AOS risk through complementary contracts. Fixed quantity contracts improve cost and ensure committed supply, flexible contracts reduce inventory exposure and provide upside demand flexibility. A fundamental tool used in risk management is the forecast scenario. Forecast scenarios measure and make use of information about uncertainty, information which is often available, but ignored! Measuring and using uncertainty, however, increases our flexibility for meeting business objectives in rapidly changing markets. This slide illustrates the use of uncertainty to segment, then allocate demand. Demand segmentation provides a mechanism for allocating demand to suppliers based on individual strengths. Based on choice of cost structure, some suppliers are better at providing flexibility. Quantity contracts designed and allocated based on financial strengths are likely to produce cost benefits for both buyer and seller. The use multiple contract types to meet demand requirements is called a procurement portfolio. This portfolio approach produces results similar to personal asset portfolios: return and managed risk. A well design procurement portfolio improves returns and reduces AOS risk through complementary contracts. Fixed quantity contracts improve cost and ensure committed supply, flexible contracts reduce inventory exposure and provide upside demand flexibility.

11. page 11 Venu Nagali – ESCA Sep 06 Re-engineering business processes to implement PRM

12. page 12 Venu Nagali – ESCA Sep 06 HP PRM implementation methodology

13. page 13 Venu Nagali – ESCA Sep 06 PRM enables a combination of objectives PRM differs from most corporate risk mgmt initiatives in that we are focused on reducing operational costs and risks, not just mitigating catastrophic risks. The structured sourcing approaches are not new in themselves. Some have been applied previously in hi-tech (qty commitments, inventory buys), but without a rigorous, systematic approach to making tradeoffs they entailed high inventory risk. Other approaches have been applied in other industries (price caps, flex qty agreements in energy). What is new is that we are providing analytical tools to enable us to reap the potential of these approaches while understanding the risks.PRM differs from most corporate risk mgmt initiatives in that we are focused on reducing operational costs and risks, not just mitigating catastrophic risks. The structured sourcing approaches are not new in themselves. Some have been applied previously in hi-tech (qty commitments, inventory buys), but without a rigorous, systematic approach to making tradeoffs they entailed high inventory risk. Other approaches have been applied in other industries (price caps, flex qty agreements in energy). What is new is that we are providing analytical tools to enable us to reap the potential of these approaches while understanding the risks.

14. page 14 Venu Nagali – ESCA Sep 06 PRM implemented for a range of commodities & across all HP businesses

15. page 15 Venu Nagali – ESCA Sep 06 Commitments across the supply chain have reduced the “bull-whip” effect

16. page 16 Venu Nagali – ESCA Sep 06 PRM Accomplishments: HP has obtained significant financial benefits from implementing PRM

17. page 17 Venu Nagali – ESCA Sep 06