Mending the Weaker Links - Hewlett-Packard: Performance Measurement in the Supply Chain

Computer makers were faced with a host of new challenges in the 1990s. Sales cycles and customer behaviour became far more unpredictable. Professors Regine Slagmulder and Luk Van Wassenhove explain how Hewlett-Packard's introduction of its Inventory-driven Cost metric (IDC) into its global manufacturing operations was critical in focusing employees' attention on supply and demand issues through the entire supply chain. This case offers valuable insight into how the adoption of such a comprehensive performance metric can effect profound changes in a company of H-P's stature.

by Luk Van Wassenhove,Régine Slagmulder
Last Updated: 23 Jul 2013

Computer makers experienced a radical change in competitive dynamics during the 1990s. Suddenly, a host of new competitors were arriving to challenge the market leaders. Once-loyal customers were also proving more fickle in the face of so much new product availability, and what had been fairly predictable sales cycles were becoming harder to gauge. Computer buyers were increasingly looking to overall price first, not technological features. Moreover, the major manufacturers were also offering roughly the same product lines, quite often even sharing identical components from the same suppliers.

Associate Professor of Accounting & Control Regine Slagmulder and Henry Ford Chaired Professor of Manufacturing Luk N. Van Wassenhove present the strategic response of Hewlett-Packard to the very complex challenges it faced during this period- a critical element in the company's ability both to maintain a competitive advantage, and to try to revive its flagging financial performance.

Remarkably for such a massive corporation, the more important financial consequences of demand/supply mismatches for HP products were largely overlooked by the accounting systems of the time, despite the serious drains in profitability such imbalances created. As a response, HP introduced a new performance metric, Inventory-Driven Cost (IDC), the primary goal of which was to focus employees' attention on better balancing supply and demand through the entire supply chain.

The authors detail the methods by which HP was able to build on its established reputation for supply chain innovation with the implementation of IDC throughout its manufacturing operations around the world. This effort ? and the greater understanding of the multinational's supply chain operations that it engendered ? helped profoundly to change the way in which many of HP's most important divisions were run.

The case offers valuable insight into how the adoption of a comprehensive performance metric like IDC can profoundly effect changes in an organisation of HP's size and status. The supply chain-wide focus of the metric, for example, allowed HP to gain a far greater degree of across-the-board co-operation between what had often been very diverse and semi-independent divisions, helping to nurture a culture of common understanding.

Another massive challenge faced HP in 2002 during its merger with Compaq, when IDC was used to bring the latter company's inventory-driven expenses down. The authors also describe the evolution of the essential function of IDC on Hewlett-Packard over time from an improvement-driving metric to one used essentially for cost monitoring.


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