With Supply Management, Technology Rules! [page 3]
-- Supply Chain Management Review, 5/1/2006
Page 3 of 6 -- For example, when HP completed a three-deal contract with supplier LG Phillips LCD for $5 billion in TFT-LCD panels, company planners did not know what price or market conditions would arise in the future. The planners were thus unsure of the exact quantities that would be required. But they needed to put a value on the contract that would protect their interests. The risk management software allowed them to do that by generating a contract valuation solution.
By balancing critical cost factors against projected market conditions, planners use the software to minimize their risk exposure and to protect their financial investment as uncertainty increases over time. No one can predict exactly the moment when hot commodity prices will peak or drop. But when buyers want to keep their place in line without paying long-term premiums to suppliers, they can use risk management software to play with different scenarios. Simulating market swings takes some of the risk out of buying over long-term contracts; risk management software helps planners lock-in reliable supplies of key commodities from great suppliers without giving away the store.
Another software offering analyzes forecast quality, which helps to further frame forecast uncertainty. Scholler describes the tool’s benefits: "When we know that [uncertainty], we can know how much we can commit as a fixed quantity. Even with a portfolio of contracts, the valuation tool will take into account the uncertainty of the market and supply conditions, as well as demand, and uncertainty in the market price." On a range of specific volumes, planners can work at an 80 percent confidence level that whatever happens HP will buy certain parts. This, in turn, enables HP to request a discount because with a fixed commitment, the company assumes the risk itself. Shifting risk from suppliers to HP also reduces the suppliers’ costs.
Further, technology allows planners to calculate lifetime buys, resulting in one less headache for the supply management function. Price forecast tools, particularly for volatile commodities such as drams and panels, bring HP buyers one solid step closer to a world of less uncertainty and more control—a supply manager’s dream.
The ABC Framework
Few procurement organizations have detailed insight into life-cycle costs from design through shipment. HP does, however, through its ABC (absolute best cost) framework. This software provides an advanced framework that predicts and optimizes the total cost of a complete product or subcomponent. The tool provides information on life-cycle cost to enable better buying and design decisions. Its value lies in ensuring delivery of market-competitive product prices; prices are defined, however, as customer value, which is not always "lowest cost." This software tool is especially relevant in any heavily outsourced business, because it focuses in so sharply on true competitive pricing.
The ABC framework is an aggressive approach to seeking the best total-cost solutions that improve profitability. The software allows commodity managers, for instance, to execute cost-to-value optimization across various corporate functions, such as manufacturing or packaging. Further, it identifies and values cost competitive threats and opportunities. This gives buyers better positions during supplier negotiations.
Scholler contrasts the approach enabled by the ABC framework with traditional cost planning: "Usually when you do cost planning of a product, you start with an affordability model—that is, what is the customer willing to pay, how much margin, and so forth. Next, you go down a level to prepare a budget for each part of the product—so much for the power supply, the keyboard, motherboard, and so forth." Basically, it’s a top-down approach, he says.
The ABC framework, by comparison, gives HP another cost perspective—working from the opposite direction. Continued...
View All Blogs
