It's been a while since I last spoke about the HP Supply Chain and what we put in place to manage uncertainty and variance in the current economic conditions. Most of the best practices I have been discussing have actually been in place for a number of years now, but have proven very useful in the current volatility. Today I would like to talk about an inventory practice involving supplier relationships with the objective to increase supply chain transparency via a standard and scalable collaboration solution. We call this approach Dynamic Replenishment.
Dynamic Replenishment (DR) is an evolution of standard SMI (Supplier Managed Inventory) and got developed around the year 2000. HP's was having inventory issues with one of its key integrated circuit suppliers in its printing supply division. To address those issues, HP recognized the need to open up the supply chain between themselves and their supplier and to share the inventory responsibility between the two partners. Indeed, up till then the forecast had to be frozen three months in advanced and used to negotiate the demand with the supplier. Misses in forecast were extremely costly as they were leaving HP with excess inventory or the supplier scrambling to catch up with an underestimated demand. A collaborative approach appeared to be the only way the partners could address the needs.
Fundamentally, DR is an e-procurement mechanism using internet applications, services and technologies to automate and streamline purchasing processes and enable new procurement processes and business models. The inventory is managed by the supplier (which is a biggest change) all the way from the manufacturing facilities to the supplier's stocking locations (inventory consignment).
The approach balances the responsibility between the customer and the supplier by putting in place service level agreements and a feedback loop. The service level metric represents the availability of material against planned consumption. If HP's planned-to-actual variability (within the lead time) is higher than expected, the service level shows that the supplier managed the inventory well, while HP's planning was poor. Controversially, if the consumption level matches the plan, but the inventory isn't there, then the service level of the supplier needs to be improved. This creates a true partnership where both parties attempt to manage to a service level.
In practice, HP uses signals from its distributors to establish a realistic consumption plan. This plan is then sent via the internet to the back-end systems from the supplier which responds with the capacity information. It is only if capacity cannot match plan that manual intervention is required. The supplier is then shipping materials based on the manufacturing sites' daily consumption plans. "Advanced shipment notifications" and "goods receipt notifications" are used to close the loop.
This approach replaces discrete order management with blanket purchase orders, avoiding a costly management, provides both parties with full visibility of inventory updated automatically, and it shares the daily updated HP demand automatically. The whole process is automated and alerts are generated only for exceptions.
This approach has allowed us to increase the availability of components drastically while keeping the safety stocks low. At the same time, the management of the interactions with the supplier have been reduced and focused on exceptions, increasing its efficiency. By giving the supplier full visibility of the demand, much tighter relationships have been built, making HP an important client of the supplier.