Faculty & Research

International IMS Forum 2004 The HP Solution Factory by

H. Brumme and

L. Van Wassenhove 2004/32/TM

Working Paper Series

International IMS Forum 2004 The HP Solution Factory Hendrik Brumme 1, Luk N. Van Wassenhove 2 1

University of Reutlingen, 2 the Henry Ford Chaired Professor of Manufacturing at INSEAD Copyright © 2004, INSEAD, Fontainebleau, France

Abstract The HP- Solution Factory built and configured HP Unix/ Integrity servers, technical workstations and HP storage products for Europe, Middle East and Africa. The challenge for manufacturing within enterprise markets is to offer highly individual solutions/ services for the price of commodity products. At HP a new industry leading fulfilment model was developed in two phases. In phase one the focus had been on velocity, quality and cost competitiveness. The site now offers the advantage of being centrally located within the main customer base with a cost structure ready to compete with low labour cost countries in Europe. In phase two the factory was completely integrated into the sales process and demonstrated that fulfilment can contribute to revenue generation. An integrated value collaboration network was needed to retain HP´s competitive edge when shifting towards individual fulfilment services and integration of highly customized solutions. The fulfilment model now was adapted to the specific customer segment needs. Keywords Manufacturing, services, solutions, value collaboration, operational excellence

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Background

Founded in 1939 in Palo Alto, California, Hewlett Packard offered a wide range of computing and imaging solutions and services for business and home consumers. In early 2002, Hewlett Packard merged with Compaq to become the largest computing solutions provider in the world. Hewlett Packard was then organized into four business segments: Imaging and Printing Group (IPG), HP Services (HPS), Personal Systems Group (PSG) and the Enterprise Systems Group (ESG). The ESG produced servers, mass storage devices, network solutions, software and other business solutions. In 2001, the Computing Systems segment was worth $17.84 billion in sales revenue. The ESG had distribution centres located all around the world with three distribution centres in the United States, two in Europe, and one each in Tokyo and Singapore. The two factories located in Scotland and Germany/Herrenberg (near Stuttgart) served the European market. The Herrenberg factory produced workstations that provided UNIX, Windows and Linux based systems. The UNIX server offerings ranged from low-end servers to high-end scalable systems, such as the Superdome line capable of handling large-scale applications and databases used in online transaction processing and collaborative product development. In all, the Herrenberg plant produced 2000 different products with more than 10,000 options and offered 19 languages. The plant produced 80,000 boxes per month (18,000 different orders) and generated annual revenues of nearly $2.5 billion. Much of what the Herrenberg plant produced consisted of high-end, complex IT infrastructure solutions for mission critical projects. The key customer requirements were high performance, reliability, scalability and security. Fulfilment of these requirements was critically dependent on interactions with 1

channel partners and customers, and integration of their design requirements. Product demand could vary from anything between $0.5million (equivalent of a single high/end system or alternatively 100 workstations) to $16 million (32 high/end systems or up to 1000 workstations) a day. Coping with this kind of volatility required immense flexibility at the shop floor level in order to avoid incurring inventory carrying and obsolescence costs on the one hand and lost sales or dissatisfied customers on the other hand.

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The Velocity Factory Concept

In order to deal with these issues, in 1998, HP conceptualized the velocity factory. The components of the velocity factory were: disaggregating the order fulfilment process to build to forecast and assemble to order; parallel processes; work force flexibility and outsourcing. A state of the art system (SAP and in-house developed Backplane system) supported each of these changes and ensured smooth flow of information across the supply chain.

2.1

Supply Chain Process

The first step in design of the velocity factory was to disaggregate the product architecture into modular systems and to use the concept of late differentiation. Separating the order fulfilment process into two distinct parts eliminated the uncertainties associated with the final configuration from the production of Lowest-Common-Denominator items (LCD).

customer order

-Globalparts and components

final assembly, distribution and test priorities:

priorities: :

-total customer satisfaction -speed - precision

-total cost - cycle time -flexibility

cost

- Regional -

inventory

speed

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Figure 1: HP Supply Chain The ordering of component parts from suppliers was similarly separated into two parts: generic LCD assemblies and unique parts. The generic LCD pre-assembled kits were built in manufacturing facilities located in “tax and salary havens”. The LCDs were typically ordered centrally based on worldwide requirements and were part of HP’s global inventory replenishment process. The orders for unique parts were consolidated by the purchasing system at a global level and forwarded to suppliers with deliveries split by region in order to gain economies of scale in 2

purchasing. To ensure visibility and minimize delays, HP owned all material flows between suppliers, HP manufacturing locations and customers. The inventory of these parts was stored locally at the Herrenberg plant. Figure 1 shows HP’s supply chain structure.

2.2

Parallel Processes

The second element of the velocity factory was executing manufacturing processes in parallel. All customer orders were received centrally in the SAP system. A customer order was broken down into independent work objects such as computers, disk drives, software products and accessories. The entire order fulfilment process was triggered based on a backward schedule driven by scheduled truck departures as shown in Figure 2. The work objects document listed all the parts required to complete the order and when and where the parts were needed, when the assembly had to begin and the deadline for shipment.

SAP Acknowledgement-Date

1 Sales Order

Manufacturing Time

Integration Time

Production Time

Integration Time

3 Planned Order Production Time

SAP Scheduling

Integration Time

Production Time

Test

Start Assy

Work Objects 1. Planned Order

Solution Integration

Integrate

Test

Assy

Start

St a

rt

Shop floor Scheduling

Integration Time

2 Planned Order 3 Planned Order

Time Stamp

Prod. Start

Backward Scheduling

Shipment

Figure 2: Integrated Backward Scheduling using SAP and Manufacturing Backplane

2.3

Work Force Flexibility

The third component of HP’s velocity factory concept was the flexible structure of its workforce. This model was designed to deal with the variations in demand patterns faced by the Herrenberg Plant. The idea was to introduce flexibility in the working hours of shop floor workers in such a way as to cover up to half of the demand variation and to deal with the remaining variation using temporary workers (Figure 3). The fact that more than 67% of the workers at the Herrenberg plant were employees of subcontractors, service providers and partners and that the workforce was non-unionized made it easier to implement the flexible work time model. The flexible workforce structure had four distinct components. The first component consisted of HP permanent workers also known as ‘solution experts’. Solution 3

experts accounted for 14% of the workforce. They were the core of the HP workforce and were the ones who kept the know-how within HP. The second component consisted of ‘HP temporary staff’, which provided monthly flexibility. HP temporary staff accounted for 9% of the workforce and could be hired and fired on a monthly basis. The third component consisted of ‘External temporary staff’, which provided weekly flexibility. They accounted for another 10% of the workforce and could be hired and fired on a weekly basis. The fourth component was the work-time model, which provided daily and hourly flexibility. HP required the same degree of flexibility from its partners and service providers. Under the work-time model, each worker had an individual ‘flex account’ which kept track of the number of hours worked. In order to achieve this flexibility, each worker was trained on an average of 5 different types of jobs. The entire workday was split into four blocks with maximum possible work time of 10 hours per block. A worker was given a 14-hour advance notice to show up any time within the pre-assigned block by a mobile phone text message. Alternatively, he could log on to the HP intranet to check approximately when to expect to be called in. Workers could be asked to stop work anytime and go home without any prior notice. Workers were given a 3-day advance notice for a change in block.

Workforce Flexibility and Adaptive ness

Short term contracts HP perm 15%

€

Partners 67%

HP temp 8%

HP permanent HP temp Students

ext. temp 10%

Experts

monthly Flexibility

daily Flexibility

cross department

weekly Flexibility

Workforce Service Provider

Workforce Flex Model

hourly Flexibility

Figure 3: Collaborating with partners in combination with a workforce flexibility model

2.4

Outsourcing

HP used outsourcing of its processes extensively where the strategic partners had to co-locate into the HP factory, working on HP’s IT infrastructure and ERP system. Of the nine production lines, six were outsourced to a service provider. Extensive outsourcing at Herrenberg had shifted the business environment from an internally integrated supply chain to a complex network of contract manufacturers, third party logistics providers and suppliers. Managing such a network involved more than transactional interaction. It involved bi-directional information, material, and financial flows. The role of HP in the supply chain was becoming that of an orchestrator.

2.5

The Results

There were significant benefits of the redesign. The raw material inventory had dropped by more than half. On-time delivery performance that was averaging 60% in 1995 had improved to more than 98% in 2003. Order fulfilment time (including logistics to customer) had 4

dropped to an average of 5 days. Factory response time to a sudden surge in demand had dropped from 40 days in 1990 to 2-3 days by 2001. The work-time model completely eliminated the overtime paid to employees, resulting in 17% savings in labour costs compared to traditional worker deployment methods. In addition, this model allowed the much needed flexibility. HP could now respond to 0-150% fluctuations in demand within 1 day and 0-180% fluctuations in demand within 3 days. Finally total spend on manufacturing, administrative expenses including all subcontracting activities had dropped by 50% in 2001.

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The Way Ahead: The Solution Factory© Concept

Having rolled out the velocity factory design new approaches to deliver solutions to customers had to be considered.

Solution Factory Evolution regional solutions

to be a competitive differentiator

supply chain

value collaboration

Partner Park Value Collaboration

Chapter 4

Solution Factory Services and Solutions

solution integration

Velocity Factory Speed & Adaptive ness

Chapter 3

build to order

prebuild - computers

global components

boards

Distribution Center Cost Efficiency

Chapter 2

metal sheet commodities

Chapter 1

Å93

95

97

99

01

03Æ

Computer Manufacturing High Tech Products & Processes

from minimizing negative impact

Figure 4: The evolution from manufacturing to value collaboration and service offering The lack of opportunities to differentiate in product offerings was putting significant pressure on margins in this industry. On the other hand customers required a wide range of complex, customized and integrated solutions. This demanded a change in how to collaborate with partners and leverage their complementary capabilities. Outsourcing reduced the manufacturing depth within the factory. There was a need to develop a business model that would collapse the supply chain under a single roof and bring in-house all the value adding activities related to system integration and system start-up from the channel partner’s, the system integrator’s and the customer’s site. The basic idea of the new business model, called ‘The Solution Factory ©’ model was to: •

Increase value add of the factory

•

Shift activities to a lower cost point in the value chain 5

•

Leverage existing infrastructure from mainstream business by combining standard processes (like modules) to build individual solutions

Figure 4 presents a schematic view of the historical evolution from a classical fabrication unit to the velocity factory, the solution factory and, eventually, the partner park © concept. The chart demonstrates the reduction of manufacturing depth and the move toward services over time.

3.1

From Velocity Factory to Solution Factory ©

Moving from Velocity Factory to Solution Factory required making three important changes to the existing set-up. Firstly, HP needed to get its channel partners such as resellers, distributors and value added service providers to collaborate to bring in house some of the activities traditionally carried out by them. For example, the supply chain partners would let HP conduct the entire physical assembly of the solution and the complete solution would be directly shipped from HP’s site to the end customer without any further intervention from the channel partners. The channel partners would be able to use HP’s infrastructure, at the HP factory or through remote access, to carry out some modifications or customizations on a product (in case HP does not have the know-how and they do) before HP delivered them to the end customer. They would also be able to work with HP engineers on joint problem solving teams. Each partner within the value collaboration network would focus on what they are good at. So anything to do with the physical product and order fulfilment would be done in the Solution Factory, to gain leverage and efficiency in the Supply Chain. Doing all the integration work at a single place eliminates a lot of duplication work. It is faster and guarantees quality (see Figure 5).

New Fulfillment Models Partner Park - Co-location

24h logistics

Factory and Partners with duplicated resources • Warehousing • Integration • Logistics

- Build To Order - Configure To Order - Customization - Integration - Shipping

QuickShip

Channel Partner • Warehousing Center Integration • Warehousing Customization

Quarter End • Customization Integration Shipments

Shipping • Integration Shipping

Losgistics Service LGI Provider

Customers

Optimize resource utilization

Sales SSP’s Partner

QuickShip

- Warehousing

HP Solution Factory

Logistics LSP + CDP Partner

OneTouch

Logistics

Channel Partners

HP Solution Factory

HP Factory

Logistics

Channel Partners

Benefits for partner • no assets • pay for use • cost adaptive ness infrastructure • broad range of capabilities

Reduce inventory points

Leverage resources

Combine competencies

Inventory and transportation cost reduction, Inventory leverage!

Infrastructure cost reduction; tightest cooperation

New customers and deals thru increased capabilities

Figure 5: Moving Channel Partners integration activities into the Partner Park ©

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Secondly, HP had to develop a portfolio of service offerings that would allow it to provide complex plug and play solutions at the factory, much more than just building the box. It required HP to go beyond its current build to customer order model to be able to fulfil totally customized ready-to-go solutions. For example, some of its solutions included procurement of third party components (sometimes competitors’ products, if so desired by customers), customized labelling, installation of specific software applications and pre-integration. The customer received a pre-integrated solution in less than 4 boxes, which would have otherwise come in 12-15 boxes. It reduced complexity of the system installation at the customer site and reduced the on-site installation time from days to hours causing minimum disruption at the customer’s site. The customer no longer had to order hardware and software applications separately. Furthermore, HP tested the pre-integrated solutions before shipment. Thirdly, the solution factory would assume a new role, as it would work very closely with the sales organization. As part of this initiative, HP opened up its factory to the customers allowing them to ‘tour the factory’ to see how their solutions were being built, to share some best practices and to provide training to their engineers. This also acted as a key market differentiator, as the customers gained higher confidence in HP’s ability to meet their requirements after visiting the factory.

HP Solution Factory Velocity Factory

Focus on efficiency Speed Reliability Quality

Products

Solution Factory

Factory as service provider value collaboration services capabilities new fulfillment models integral part of sales / customer network

Delivery of complete solutions

Figure 6: From Velocity Factory to Solution Factory

3.2

Solution Factory © Service Offerings

There were four building blocks of the solution factory’s service offerings: •

Start-up services: These included configuration, integration, installation of operating system (custom software), testing and shipping the entire solution in one shipment to a customer site. These solutions were ready to operate requiring minimum start-up time. HP also provided documentation for rapid deployment. Under the package of services offered, one of the solution factory partners helped the client install the solution at the customer site with minimum disruption to their day-to-day operations. 7

An HP solution factory partner also trained the system administrator and performed any on-site software and network integration if required. •

OEM/Independent Software Vendors (ISVs) catalogue solutions: HP provided a variety of ready to go solutions under this umbrella including services such as order fulfilment, procurement, customer specific application loading, product life cycle management, customized labelling and boxing and relationship management. HP had developed a matrix of relationships with a number of ISVs to provide the services mentioned above to its customers. When an ISV sold its product to a customer with HP hardware, it recommended the customer to buy an integrated solution from HP.

•

Complex Solutions: These one-off solutions were managed like a project. HP nominated an overall project leader – also known as the single point of contact at the factory – which organized everything related to the delivery of the solution.

•

Supply Chain Services: HP provided a range of supply chain services like procurement, distribution and also consulting. The focus was to link HP with customer supply chains.

3.3

Value Collaboration

The solution factory was a network of different organizations with complementary capabilities (see Figure 6). There were three internal supply chain partners and three value chain partners. The internal supply chain partners included service provider, engineering partner and HP’s order fulfilment centre. The value chain partners included HP customer facing organizations such HP Consulting (HPC) and HP Services (HPS), Competence Centres and business partners. Service Providers: They provided a range of services including manufacturing, subcontracting, logistics and other supply chain services. They were located at the HP factory. Engineering Partners: They provided certain engineering change related services. Due to the high volume of work required on the engineering front in delivering complex integrated solutions, HP initially faced some bottlenecks when solution order volumes were high. In order to deal with this problem, HP modularized some of the engineering work and outsourced it to a third party service provider. Whenever the volume of solution orders reached critical level, certain modules of the engineering work were offloaded to the engineering partners. Engineering partners provided HP with the same kind of flexibility as HP had in its production operations. Order fulfilment Centre: This was the core solution factory organization and the fulfilment arm of HP. All customer service orders were received at the fulfilment centre and converted into a manufacturing or service order. The solutions were assembled, tested, configured, integrated, packaged and delivered to client location. The order fulfilment centre also carried out procurement activities. HP’s customer facing organizations: As sister organizations of HP, the customer facing organizations (e.g. HPC) carried out their own stand alone business such as IT services or business consulting. As part of their regular business activities they often had to provide their customers with advice on sourcing of IT infrastructure. They used the solution factory to complement their own service offerings that might eventually bring new business for the solution factory. In order to operate the value collaboration model successfully, HP developed certain principles for cooperation. Firstly, it set up a formalized system of communication requiring 8

each of the collaboration partners to provide dedicated people to channel the communications. Secondly, there was a clearly agreed service portfolio with well-defined roles and responsibilities. Thirdly, all the partners had access to the factory resources. Fourthly, the information about solution delivery was shared across the partners. Finally, the partners met regularly to review projects and discussed ways of improving their co-operation. The overall objective of the collaboration was to leverage complementary capabilities of each of the partners to the fullest extent. Acknowledgement The authors wish to acknowledge the Commission for their support. We also wish to acknowledge our gratitude and appreciation to HP providing all information and support needed.

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