Edelman Award: Less is More for HP
Hewlett-Packard earns coveted analytics practice prize by transforming management of massive product portfolio.
By Peter Horner
They say that variety is the spice of life, but don’t tell that to Hewlett-Packard, whose abundance of product variety bumped up revenues but also gave the world’s largest technology company a serious case of indigestion that ultimately and negatively impacted its bottom line. The cure: operations research.
HP’s ground-breaking use of analytics, including operations research, not only enabled the high-tech giant to successfully transform its product portfolio program and return $500 million over a three-year period to the bottom line, it also earned HP the coveted 2009 Edelman Award from the Institute for Operations Research and the Management Sciences (INFORMS) for outstanding achievement in operations research. The announcement of the award winner, capping a day-long competition in which six finalists from around the world made a series of presentations before a panel of judges, was delivered in dramatic fashion by INFORMS President Don Kleinmuntz at the 2009 INFORMS Practice Conference in Phoenix. Robert Bixby served as master of ceremonies for the Oscars-like Edelman Awards gala.
“This is not the success of just one person or one team,” said Kathy Chou, vice president of worldwide commercial sales at HP, in accepting the award on behalf of the winning team. “It’s the success of many people across HP who made this a reality, beginning several years ago with mathematics and imagination and what it might do for HP.”
To put HP’s product portfolio problem into perspective, consider these numbers: HP generates more than $135 billion annually from customers in 170 countries by offering tens of thousands of products supported by the largest supply chain in the industry. You want variety? How about 2,000 laser printers and more than 20,000 enterprise servers and storage products. Want more? HP offers more than eight million configure- to-order combinations in its notebook and desktop product line alone.
The something-for-everyone approach drives sales, but at what cost? At what point does the price of designing, manufacturing and introducing yet another new product, feature or option exceed the additional revenue it is likely to generate? Just as important, what are the costs associated with too much or too little inventory for such a product, not to mention additional supply chain complexity, and how does all of that impact customer satisfaction?
According to Chou, HP didn’t have good answers to any of those questions before the Edelman award-winning work.
“While revenue grew year over year, our profits were eroded due to unplanned operational costs,” Chou said in HP’s formal Edelman presentation. “As product variety grew, our forecasting accuracy suffered, and we ended up with excesses of some products and shortages of others. Our suppliers suffered due to our inventory issues and product design changes. I can personally testify to the pain our customers experienced because of these availability challenges.”
Chou would know. In her role as VP of worldwide commercial sales, she’s “responsible and on the hook” for driving sales, margins and operational efficiency.
Constantly growing product variety to meet increasing customer needs was the HP way – after all, the company is nothing if not innovative – but the rising costs and inefficiency associated with managing millions of products and configurations “took their toll,” Chou said, “and we had no idea how to solve it.”
Compounding the problem, Chou added, was HP’s “organizational divide.” Marketing and sales always wanted more – more SKUs, more features, more configurations – and for good reason. Providing every possible product choice was considered an obvious way to satisfy more customers and generate more sales.
Supply chain, on the other hand, always wanted less. Less to forecast, less inventory, less complexity to manage. “The drivers (on the supply chain side) were cost control,” Chou said. “Supply chain wanted fast and predictable order cycle times. With no fact-based, data- driven tools, decision-making between different parts of the organization was time-consuming and complex due to these differing goals and objectives.”
By 2004, HP’s average order cycle times in North America were nearly twice that of its competition, making it tough for the company to be competitive despite its large variety of products. Extensive variety, once considered a plus, had become a liability.
It was then that the Edelman prize- winning team – drawn from various quarters both within the organization (HP Business Groups, HP Labs and HP Strategic Planning and Modeling) and out (individuals from a handful of consultancies and universities) and armed with analytical methodology – went to work on the problem. Over the next few years, the team: 1) produced an analytically driven process for evaluating new products for introduction, 2) created a tool for prioritizing existing products in a portfolio, and 3) developed an algorithm that solves the problem many times faster than previous technologies, thereby advancing the theory and practice of network optimization.
The team tackled the product variety problem from two angles: pre-launch and post-launch.
“Before we bring a new product, feature or option to market, we want to evaluate return on investment in order to drive the right investment decisions and maximize profits,” Chou said. To do that, HP’s Strategic Planning and Modeling Team (SPaM) developed “complexity return on investment screening calculators” that took into account downstream impacts across the HP product line and supply chain that were never properly accounted for before.
Once a product is launched, variety product management shifts from screening to managing a product portfolio as sales data becomes available. To do that, the Edelman-award winning team developed a tool called revenue coverage optimization (RCO) to analyze more systematically the importance of each new feature or option in the context of the overall portfolio.
|Edelman: The Final Six|
|Led by Kathy Chou, vice president of worldwide commercial sales at Hewlett-Packard, the 2009 Edelman Award-winning team included Ann Brecht, Brian Cargille, Russ Chadinha, Gavin DeNyse, Shailendra Jain, Holger Mishal, Thomas Olavson, Cookie Padovani, Kurt Sunderbruch, Robert Tarjan, Julie Ward, Joseph Woods, Bin Zhang of HP; Jason Amaral of Emeraldwise LLC; Dirk Beyer of M-Factor; Chris Fry of Strategic Management Solutions; Qi Feng of the University of Texas at Austin; Sesh Raj of DSApps, Inc.; Krishna Venkatraman of Intuit; and Jing Zhou of the University of North Carolina at Charlotte. Their presentation was entitled, “HP Transforms Product Portfolio Management with Operations Research.”Other finalists included:
CSX Transportation for “CSX Railway Cashes in on Optimized Equipment Distribution.” CSX used math modeling to create a system for assigning and repositioning empty cars. The company claims approximately $2 billion total savings from car mileage reductions, car management workforce reduction and capital avoidance, and notes other qualitative benefits of the system to the public.
IBM for “Operations Research Improves Sales Productivity at IBM.” IBM used operations research to help the company identify new sales opportunities and to better allocate sales resources to the best future revenue-generating accounts.
Marriott International for the “Group Pricing Optimizer.” The company’s operations research-aided system empowers the sales team with the information they need to profitably negotiate the price of proposed group bookings. The system automates a complex manual process to maximize revenue, hotel profitability and the quality of time spent taking care of customers. Since its implementation GPO has been used to contract over $1 billion in group business.
Norske Skog for “Norske Skog Improves Global Profitability using O.R.” The publication paper industry has faced declining markets and margins for several years. The Norwegian-based company, with plants in 12 countries on four continents, used operations research to downsize and reduce manufacturing and supply chain costs, potentially $120 million per annum (~3% of turnover). Thanks to robust analysis, tough decisions were made and implemented with minimal disruption.
Zara for “Zara Uses Operations Research to Reengineer Its Global Distribution Process.” The Spanish clothing manufacturer and retailer, which achieves Fast Fashion by making millions of shipments a week to stores from its central warehouses, used operations research to optimize its distribution process and increase in-season sales by an estimated 3 percent to 4 percent – in excess of $230 million in 2007 and $350 million in 2008.
The RCO algorithm and the complexity ROI calculators helped HP improve its operational focus on key products, while simultaneously reducing the complexity of its product offerings for customers. For example, HP implemented the RCO algorithm to rank its Personal Systems Group offerings based on the interrelationship between products and orders. It then identified the “core offering,” which is composed of the most critical products in each region. This core offering represented about 30 percent of the ranked product portfolio. All other products were classified as HP’s “extended offering.”
Based on these findings, HP adjusted its service level for each class of products. Core offering products are now stocked in higher inventory levels and are made available with shorter lead times, and extended offering products are offered with longer lead times and are either stocked at lower levels or not at all. The net result: lower costs, higher margins and improved customer
service. (Detailed technical accounts of the HP Edelman-winning work, as well as the work of all of the other 2009 Edelman finalists, are scheduled to appear in an upcoming issue of Interfaces: www.informs.org/site/Interfaces/.)
The RCO software algorithm was developed as part of HP Labs’ “analytics” theme, which applies mathematics and scientific methodologies to help decision-making and create better-run businesses. Analytics is one of eight major research themes of HP Labs, which last year refocused its efforts to address the most complex challenges facing technology customers in the next decade. “Smart application of analytics is becoming increasingly important to businesses, especially in the areas of operational efficiency, risk management and resource planning,” says Jaap Suermondt, director, Business Optimization Lab, HP Labs. “The RCO algorithm is a fantastic example of an innovation that helps drive efficiency with our businesses and our customers.”
In accepting the Edelman Award, Chou emphasized not only the company-wide effort in developing elegant technical solutions to incredibly complex problems, but also the buy-in and cooperation of managers and C-level executives and the wisdom and insight of the award-winning team to engage and share their vision with those managers and executives.
“For some of you who have not been a part of a very large organization like HP, this might sound strange, but it required
tenacity and skill to bring about major changes in the processes of a company of HP’s size,” Chou said. “In many of our business [units], project managers took the tools and turned them into new processes and programs that fundamentally changed the way HP manages its product portfolios and bridged the organizational divide.”
|The ‘Super Bowl of O.R.’|
|Named in honor of a pioneer of operations research practice at the RCA Corporation, the Franz Edelman Award for Achievement in Operations Research is considered the “Super Bowl of O.R” because it honors the best applications of operations research in the world. The nearly eight-month competition begins with a call for nominees in the fall. The nominees are asked to provide a two-page summary of a practical application of O.R. that has had a significant, positive impact on the company’s operations and bottom line. A team of verifiers is then sent forth to make on-site visits to learn more about the nominated work and verify claims made in the application process.The field of nominees is gradually narrowed down until six finalists are invited to present their cases before a panel of judges at the INFORMS Practice Conference in the spring.
2009 Edelman Committee Chair Srinivas Bollapragada of General Electric served as one of the judges, along with Peter Bell of the University of Western Ontario, Terry Harrison of Penn State University, Russ Labe of Merrill Lynch, Patricia Neri of Southwest Airlines, Leon Schwartz of Yeshiva University, Donald (Bob) Smith of Monmouth University, ManMohan Sodhi of City University London and Mike Trick of Carnegie Mellon University.
By most accounts, the 2009 Edelman event was perhaps the most competitive in its 38-year history, with CSX Transportation, IBM, Marriott International, Norway’s Norske Skog and Spain’s Zara (see box) all providing first-class presentations. When asked what put HP over the top with the judges, Randy Robinson, a former executive director of INFORMS and Edelman Committee member and frequent Edelman coach who served as one of the coaches of this year’s HP team, offered this:
“Certainly the impact of the work on HP was substantial and pervasive. Secondly, they had great teamwork. They were able to handle the trouble that you so often see in a big company with different departments and competing interests. They had the magic to overcome those obstacles and get people to work together. They received enthusiastic support from all levels of the company, including senior management. Third and perhaps most important, the technical work was outstanding. It was practical, but part of it involved cutting-edge advances and methods. I think all of that combined to set them apart from some very tough competition.”
HP’s Chou, who congratulated the other finalists in her acceptance remarks, later said “that just being a part of the Edelman Awards has really raised the visibility of operations research at HP. We’ve seen tremendous improvements thus far, but after this, I will personally make sure that O.R. becomes the foundation of any major process improvement going forward. This project has taken us to the next level. What has really come through is senior management’s involvement and the understanding of how important O.R. is … to how we do business in the future in a much more sophisticated and higher impact way.”
That message is already clear based on the comments of Shane Robison, executive VP and chief strategy and technology officer at HP. “Innovation is the lifeblood of our company,” he said via video as part of HP’s Edelman presentation. “We believe continuous innovation is just as vital to our business processes as it is to our products and services. Our work in operations research is relevant to both areas and critical to retaining a competitive edge in the marketplace.”
Peter Horner (email@example.com) is the editor of Analytics and OR/MS Today. Barry List (firstname.lastname@example.org), the director of communications for INFORMS, contributed to this article. A version of this article appeared in OR/MS Today. More information about the Edelman competition can be found online at www.scienceofbetter.org/Edelman.