Anyone following business headlines these past few weeks could not miss the less than flattering headlines surrounding the recent decision by Hewlett Packard’s board of directors to oust CEO Leo Apotheker with newly appointed CEO Meg Whitman.  These headlines have particular significance for supply chain implications because of HP’s previous publically announced decision to explore strategic options for possibly shedding its PC division.

In our Supply Chain Matters commentary surrounding the ouster we observed that the PC division decision raised yet another bomb of uncertainty for HP’s customers and supply chain partners, that could  also threaten to unwind HP’s high volume leverage in contracting and procurement of strategic hardware components such as displays, memory and other key components.

Today, business media is now reporting that HP is actively re-thinking its previous decision.  The Wall Street Journal reported that fresh analysis conducted by HP indicates that the cost implications related to a spinoff may well outweigh the benefits. Specifically cited in the WSJ reporting is that the company is acknowledging that separating the PC division “would significantly diminish H-P’s buying power with component makers because H-P would lose economies of scale.  It could complicate H-P’s supply chain and decrease profit margins on some products, the analysis suggest.”

For most procurement and supply chain management leaders, this new HP development should be a no-brainer, since grounding in supply chain’s strategy’s impact to business bottom line results comes with the designation of supply chain leader.  The obvious question remains- were any of HP’s former senior leadership team actively voicing such cautions, and why was this recent analysis not completed prior to the announced spin-off decision? Only insiders can provide a true account.

From a broader perspective, Supply Chain Matters believes that it brings forth a very current and real reminder that C-level executives residing in any manufacturing or retail firm need to possess a solid understanding of the tradeoffs of supply chain strategy.  Some argue that senior operational and former supply chain executives, for instance Tim Cook, the current CEO of Apple, are adequately experienced in leading manufacturing and branded companies because of their supply chain roots.  Others, including ourselves advocate that a senior supply chain or operations executive  needs to have a meaningful voice at the senior management table for business strategy discussion.

There is credence for both approaches.

Suffice to reiterate that for manufacturers and retailers, supply chains do matter a lot in formulating and deploying change in corporate strategy. Supply chain input is also crucial in tactical decision-making when overall service level, bottom-line cost, and asset tradeoffs are being considered.

Readers may recall that under the leadership of former CEO Mark Hurd, HP elected to de-centralize its supply chain voice several years ago, folding that voice within separate business units. HP lost that voice and input at the senior management ranks, and we trust that it quickly returns before it is too late.

Bob Ferrari

©2011 The Ferrari Consulting and Research Group, LLC and Supply Chain Matters

No sooner had Supply Chain Matters provided commentary on the supply chain implications of Kraft’s intent to split into two companies, the business newswires lit-up yesterday with HP’s blockbuster announcement that it intends to spin off its PC business and is halting the sale of tablets and smartphone products based on the webOS operating system it previously acquired from Palm.  HP explicitly states it is exploring strategic alternatives, including transactions, regarding its PC division.

No doubt there will be lots of commentary in the blogosphere regarding the implications of the announcement to HP and to the industry. For our part, we will provide some initial summary thoughts from a global supply chain lens.

HP’s PC business represented $41 billion in revenues in 2010 and a significant amount of HP’s physical, operational and procurement related supply chain capabilities. In its press release HP states: “PSG is a world-class scale business with a leading market share position and a highly effective supply chain and broad reach and go-to-market capabilities. We believe there are alternatives that could afford PSG more autonomy and flexibility to make strategic investment decisions to better position the business for its customers, partners and employees.”

The obvious question lies with the strategic decisions, and how did PSG get to this point. It is no secret that PC sales have been impacted by the explosive popularity of mobile devices as an alternative form of computing for consumers.  In 2010, HP ponied-up $1.8 billion to acquire Palm and its WebOS operating system with the stated intent to “deliver customers a unique and compelling experience across smartphone and other mobility products.” Many will opine whether Apple’s lead in tablets and smartphones was too great to overtake or whether HP’s decision to integrate the Palm team within PSG was a wise one. Then again, HP management got very distracted with the events surrounding the sudden departure of its CEO and the recruitment of its new CEO, Leo Apotheker.  At the time of the announcement of the Palm acquisition, a ComputerWorld article noted that many analysts were skeptical as to whether HP could overcome existing market momentum in mobility products as well as significant time-to-market obstacles. The intent was noble but the innovation cycle came too late. We will provide some follow-on commentary regarding what impacts outsourcing has had to timely production innovation.

Now the picture is dramatically different, and the high tech landscape equilibrium is about to change.  Will PSG remain as a separate HP spin-off?  Will it be acquired by another high tech manufacturer, contract manufacturer or software provider? (dare we whisper Microsoft) ?  Will HP lose some of its component buying leverage? Lots of business and a whole lot of supplier purchased volume will be at stake.

When IBM sold off its PC hardware division several years ago, Lenovo, the new company, struggled for many years to achieve profitability, even though it was a company with a lower-cost manufacturing base in China. Because of its former roots as a contract manufacturer solely dependent on IBM, it had to overcome needs to assume product branding and global marketing capabilities from its former parent, build independent distribution and fulfillment within supply chain along with developing its own enterprise and supply chain management applications.  PSG comes with a self-contained marketing and supply chain capability but there are reliance’s to HP corporate and shared services.

A posting by San Jose Mercury News columnist Brandon Bailey on SiliconValley.com reminded readers that back in March, a Taiwanese newspaper speculated that HP might sell its PC business to Samsung. That would be a whole different kettle of fish since Samsung provides existing world-class marketing and supply chain fulfillment capabilities.  Samsung’s supply chain is very vertically integrated, extending to the semiconductor, LCD and component levels.  Samsung is also embroiled in a patent battle with rival Apple and another hardware and software option may be strategic.

What about Lenovo, would it jump at this opportunity to seize market share by buying the competition? Would market regulators allow that to happen?

As world financial markets continue to suffer extreme volatility, many commentators point to high uncertainty from governments and politicians as a potential cause.  Business does not like uncertainty. As I pen this commentary on Friday morning, six Wall Street analysts have lowered their ratings and HP stock has already taken a 20 percent dive.

Here at the office of Supply Chain Matters, we were impressed by HP’s technology and recently acquired both a new HP desktop and laptop in the past six months.  Now, we join other customers under the umbrella of uncertainty for long-term support.

In the high tech word of PC and mobile device supply chains, HP just dropped a huge uncertainty bomb. The only player currently in the catbird seat is Apple.

Needless to say, we should all be watching for what comes next.

Bob Ferrari

©Copyright 2011 The Ferrari Consulting and Research Group LLC

The Institute of Public and Environmental Affairs’ Green Choice Alliance, (also referred to as the Green Choice Alliance) a consortium consisting of 36 environmentally focused groups across China, has issued a report which is titled The Other Side of Apple. This report is gaining lots of Web pickup because of the very nature of its title.

On its web site, the Alliance indicates that it is a coalition of NGO organizations that promote a global green supply chain by pushing large corporations to concentrate on procurement and the environmental performance of their suppliers.

International news media is noting that the report consists of a ranking of 29 multinational technology companies based on how each responded to inquiries and concerns related to occupational health hazards at various supply chain factories within China.  Apple was ranked dead last among 29 companies, hence the selection of the report title. We at Supply Chain Matters wanted to actually read this report, but discovered that report currently only exists in its Chinese version.  We trust that the English version will be made available soon, since it is the details, not the headlines of this report that matter most

An article published in the Financial Times (free preview account may be required) referencing the report outlines a specific incident involving the alleged poisoning of workers at Liajian Technology, a subsidiary of Taiwan-based Wintek, which produces touch screen modules for Apple.  In that specific 2099 case, 49 workers were hospitalized for poising due to chemical exposure.  Wintek for its part, indicated that the factory in question stopped using the chemical.  Where Apple is being taken to task by these China based environmental groups was Apple’s refusal to confirm or deny whether polluting or harmful companies were Apple suppliers. Many in our global supply chain community are aware that Apple has a rather unfortunate iron-clad policy regarding not disclosing any details about its value-chain.

While the headlines of this story are indeed disturbing, we believe that more focus should be placed on the positive aspects.  First, the fact that a consortium of dozens of Chinese environmental teams is diligently monitoring workplace and environmental safety, and taking multi-nationals to task, is certainly a positive.  Second, the companies that have been cited as proactive and responsive, namely Alcatel-Lucent, Hewlett Packard, Hitachi, Samsung, Sharp, and Toshiba , should each receive positive accolade.

Apple was not the only company cited as not responsive, but that does not make headlines, especially when Apple was ranked as lowest.  There is also an obvious two-edge sword to Apple’s extraordinary business success.  On the one hand, Apple has been very open and public about declaring its commitment to worker safety and environmental responsibilities across its global supply chain.  On the other, a policy of secrecy and/or supplier protection may not be serving Apple well.

As is the usual case in these affairs, what really matters in the end is how Apple and other multi-nationals respond with concerted actions to their publically declared corporate commitments for social responsibility.  Let us all, as a global community, praise those companies who have placed positive action to their words.

Bob Ferrari

No sooner had we published our Supply Chain Matters commentary, Palm Reaches the Crossroad, than the announcement came that Hewlett Packard will be acquiring Palm for an estimated $1.2 billion.

I had not planned to revisit my two previous conclusions so soon, but the temptation is too great not to.  Conclusion one noted that Palm can no longer remain an independent company. Never underestimate the power and influence of private equity and venture capitalists when they begin to cast the nets of a company looking for an acquirer.  The question in my mind was whom, and I must admit that HP was somewhat of a surprise. Then again, the networks of silicon valley are deep, sometimes to the detriment of Asia based companies. Conclusion two noted that end-to-end supply chain capability must always be aligned to the needs of the overall business.  While Palm badly stumbled, HP is an entirely different story.

There is no doubt that there is lots of speculation on the merits of HP as the potential new player in the smartphone market.  HP officials note that they plan to leverage Palm’s webOS operating system in a host of mobile devices which could include tablet computers, netbooks as well as smartphones, and this strategy makes lots of sense to this blogger.  Where Palm was weak in integrated marketing, HP is superb.  Where Palm didn’t quite understand the power of leveraging channel partners, HP surely does.  While Palm might have struggled with the planning and ramp-up of suppliers and contract manufacturers, HP does not.

Some industry observers are already noting that when this deal is consummated, HP will have a lot of catching-up to do.  This blogger is looking forward to noting how HP jumps into the battle of Apple, Google, Microsoft, Samsung, LG, Lenovo and others to come.  It is about time that a new global savvy player now competes with the ‘magnificent arrogants’.

What’s your view? Are you surprised that HP turned out to be the suitor?  Is HP a viable competitor in this market?

Bob Ferrari

It seems that there is no firm, whether big or small, that does not have a concern these days about its products being ripped-off by unscrupulous operators, or finding security concerns within an overseas supply chain. However, when you are a very large global OEM who happens to sell a very profitable product, the mechanisms to attack such activity are wide reaching.

A posting in SiliconValley.com notes that Hewlett Packard is accusing several Asian companies of selling inkjet cartridges that allegedly infringe on HP patents, and in some cases, include components stolen from HP’s contract manufacturing plants. A lawsuit alleges that Microjet Technology of Taiwan and PTC Holdings of Hong Kong sold cartridges that infringe on HP designs. It further accuses another firm, Mipo Technology of selling cartridges containing alleged stolen components. The article notes that from 2005 to 2008, HP has conducted 4620 investigations to seize nearly $800 million worth of counterfeit products within its supply chains.

Lawsuits are a familiar weapon utilized by high tech companies when profits are threatened. In the case of HP vs. Microjet Technology, lawsuits date back to 2001. It seems that in any given year, HP has some sort of lawsuit underway protecting its IP interests in inkjet cartridges. Apple Computer has also been in the headlines of late as it has also filed lawsuits with a major contract manufacturer to protect its intellectual property and patents.  Apple is another high tech company that does not shy from this policing activity.

Not every firm has the resources of an HP to police its supply chain for patent infringement, counterfeits or stolen materials. Constant diligence and supplier monitoring are an unfortunate necessity within today’s extended supply chains.

 Bob Ferrari