The following also appears as a published guest commentary on the Supply Chain Expert Community web site.

Technology and services provider Hewlett Packard remains in crisis and the challenges that have led up to the current crisis, have in this author’s point of view, much to do about supply chain strategy decisions that now span three different CEO’s.

In October 2011, the Supply Chain Matters blog featured two separate commentaries, The Need for C-Level Grounding in Supply Chain Strategy, and HP Finally Reverses its PC Spinoff Decision- What Needs to Come Next, which were penned just after the ouster of previous HP CEO Leo Apotheker and the entrance of new CEO, Meg Whitman.  Both reflected on the botched decision to jettison HP’s personal systems business and the potential implications that the decision had not only on HP’s future PC revenues, but also on diluting HP’s supply buying leverage.  The takeaways related to this 2011 commentary were our observations that CEO Meg Whitman needed to quickly look at HP from a broad supply chain strategy lens.  Under the former leadership of CEO Mark Hurd, HP elected to de-centralize its supply chain strategy voice in favor of de-centralizing supply chain capabilities among each of HP’s existing business units.

During these past two weeks, HP has once again made financial news headlines that raise cautions for existing stockholders and supply chain stakeholders.  In the latest fiscal quarter, HP’s overall profitability among all HP businesses declined a whopping 44 percent. Revenues within its personal computing business unit fell by 15 percent, printing and imaging revenues fell by 7 percent, while server and data storage declined by 10 percent.

In her public remarks to stockholders and Wall Street analysts, Ms. Whitman pointed directly to supply chain concerns as causes to the current performance, directly indicating that years of underinvestment in processes and systems made these problems worse.  In an Associated Press syndicated article published in the  online Wall Street Journal titled HP CEO pleads patience as earnings fall 44 percent, Whitman is quoted: “ We were not as effective as we needed to be in matching that supply with that demand, ..”. Ms. Whitman is further quoted: “ I’m not sure I’d say we were world class in terms of how we think end to end about supply chain.” Members of the supply chain community are more than cognizant to the reality that when the CEO makes these types of statements reflecting on a company’s supply chain capabilities, then change must inevitably occur.

The effects of the flooding in Thailand were directly attributed to more than half of the company’s revenue drop.  Yet shortly after the potential magnitude Thailand flooding crisis on hard disk supply began to become more visible in the Fall, CEO Whitman indicated that HP’s buying influence and supply chain capabilities would be able to successfully manage the crisis.

In the specific case of HP, those of us who have followed supply chain developments for many years can well remember the days when HP’s supply chain capabilities were clearly viewed as a world class benchmark.  Strategies related to segmented supply chain strategy across diverse product segments, risk management practices among volatile and rapidly changing high tech businesses, the first implementation of multi-echelon inventory and extended supply chain trading partner collaboration, and leading edge aspects of sales and operations planning were all attributed to HP’s supply chain teams.

Something obviously changed, and we argue that change can be traced to the former decision to organizationally de-centralize supply chain among the various business units and then expose supply chain capabilities to needs for individual business cost cutting and profitability mandates.

We know all too well, however, that the past is past, and HP’s lens needs to quickly focus towards its current dilemmas.  Thus, we have elected to re-iterate our past commentary in the belief that HP, more than ever, needs the voice of supply chain strategy and execution at the senior executive table.

Many of the latest business media articles related to HP speculate that even after the Hurd era of extreme cost cutting, HP senior management may be facing yet another long, tough turnaround path that may call for yet additional headcount and cost reductions.  More across-the-board cuts would, in our view, be the obvious simplistic approach.  HP would be better served with consideration of two key decisions.  The first is appointing a senior executive with the responsibility and authority for leading HP’s overall supply chain strategies and resource requirements.  The second would be a reassessment of the current and, more importantly, required future supply chain capabilities needed to support HP’s revenue growth and profitability needs.  Such a plan may involve re-investments or re-assessments of the three key areas we all know are so important: processes, technology and people.  The context is improving execution, more timely supply chain global visibility and  decision-making, as well as making HP’s supply chain once again a competitive advantage. To perhaps use a simple medical analogy, HP’s supply chain may is in need of a complete physical and new health regimen.

What about further community viewpoints?  Is the voice of supply chain strategy and execution at the senior executive table a mandatory requirement for high tech focused supply chains?

Bob Ferrari, Founder and Executive Editor, Supply Chain Matters

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.

Supply Chain Matters provides our February update commentary regarding the global supply chain impacts from the devastating monsoon floods that impacted Thailand in the fall of 2011. Our last early 2012 update in January reflected on the initial quantifiable impacts across industry supply chains. As the period of end of year earnings announcements concludes, we are getting a far more quantifiable picture of the cascading global supply chain impacts as a result of the floods.

We begin with the overall financial impacts.  According to a recent Insurance Journal posting, noted rating agency AM Best indicates that the insurance losses resulting from the floods in Thailand could be considered one of the five costliest insured loss events in the past 31 years.  Thai authorities now estimate that flood damage costs could be up to $15 billion, involving more than 400 manufacturers and households. A study from Aeon Benfield indicates that the amount of structural damage is actually “four times greater than what resulted from Japan’s earthquake and tsunami in March 2011, but only half of the total insured loss due to a low rate of insurance adoption.”  The implication is that many smaller suppliers or manufacturers may have self-insured.  The more sobering news for sourcing and procurement professionals to be concerned about is an indication by Best that the Thai commercial insurance industry “will likely face sharply contracted (coverage) capacity, higher pricing and tighter terms for coverage with the Sian and Japanese reinsurance renewals in April.” The takeaway, in our point-of-view, is that existing suppliers in these regions will probably face significant higher insurance or liability costs by virtue of their location in a disaster-prone region.

From an economic standpoint, the financial impact to the overall economy of Thailand was far larger than expected. That economy contracted at the annual rate of 9 percent in the final quarter of 2011 which is quite significant. According to the National Economic and Social Development Board of Thailand, the manufacturing sector alone declined 23 percent while net exports fell at an annual rate of 6.1 percent compared to a 17.3 growth rate in the previous quarter.  Beyond Thailand, the economy of Japan contracted a worse than expected 2.3 percent in the final quarter of 2011 and government authorities pointed to a strong yen, falling overseas demand and the impacts from the Thailand floods as hampering production and exports.

The financial impact among individual companies has also come to light.  Western Digital, initially the most impacted manufacturer with 60 percent of its global hard disk drive (HDD) manufacturing sourced in Thailand, indicated that in its fiscal second-quarter, earnings fell 36 percent while overall HDD shipments dropped a substantial 45 percent. That volume drop equates to a shipping shortfall of over 52 million hard drives from the year earlier quarter.  Overall revenues were down 20 percent from the previous quarter. The news from Western Digital was generally well received by Wall Street given the dour initial news immediately after the floods. Company officials noted that while manufacturing levels are on the increase, manufacturing capacity levels will not reach pre-flood levels until at least the September quarter, and that supply chain pipeline inventories are not expected to reach normal levels until the first-half of calendar year 2013.  Meanwhile, rival Seagate Technologies Inc. who had far more limited production presence in Thailand reported better than expected earnings, margins and shipments for the quarter ending in December.  Seagate shipped almost twice the volume of Western Digital, 47 million HDD’s in comparison to the 28.5 million for Western. Seagate’s gross margins increased nearly 12 percentage points from a year earlier as limited overall supply chain supply led to higher prices. According to IHS iSuppli, the average selling price for HDD’s increased on average 28 percent in Q4 of 2011 and will only decline slightly in the current quarter. In our January update, we noted reports of pricing spiking as much as 50 to 100 percent at the retail level in Asia.

Moving up the supply chain, computer providers Dell and Hewlett Packard has released each of their latest quarterly earnings with noted admissions to the financial impact from interruption of HDD supply.  Dell’s fourth quarter 2011 results indicated that while revenues rose 2 percent, earnings fell 18 percent. Dell CFO Brian Glidden acknowledged that the flooding in Thailand financially hurt the company during the quarter.  Not only were available hard drives expensive, Dell could not fulfill its desired needs for higher capacity drives. HP announced that for the quarter ending in January, PC related profits were down 31 percent, and server related profits declined 32 percent.  Overall profits declined 31 percent, and HP’s CFO in-turn acknowledged that the HDD shortage hurt both PC and server sales, and that the impact would continue through the first half of this year.  Readers should recall that both of these companies previously downplayed any significant disruption in supply or pricing.  This again brings credence to the concept of whether in times of significant supply chain disruption, it may be better to bring forward the worst and best case impacts, setting appropriate expectations, rather than waiting for the actual results to occur.  In the case of Western Digital, prior announcements of significant impact, followed by better than expected performance, was well received by Wall Street, in spite of not so positive financial news. Apple on the other hand, most likely from its huge influence in volume buying agreements, has publically indicated little supply impact and had stellar financial results in its latest quarter.  Interesting enough, both Western Digital and Seagate are listed suppliers on Apple’s supplier responsibility report.

Moving down the supply chain, a Forbes hosted article penned by semiconductor industry analyst Jim Handy noted the effects of the HDD supply disruption on the other components of global PC and server supply chains.  Handy notes that  about 40 percent of the total semiconductor market is made up of data processing applications, and because limited supplies of HDD restricted PC build schedules, other components such as LCD screens and DRAMS went into oversupply.  He predicts that other PC components will enter oversupply this quarter which will have a negative impact on semiconductor component prices both in the current quarter and perhaps the remainder of the year.  Supply Chain Matters would add that this may also reflect a situation where longer-term volume buying contracts could not be adjusted or that supply chain planners were challenged with maintaining current build plans while hoping for the best in HDD supply.

As more quantitative and other data attributed to this one significant major supply chain disruption becomes ever more visible, the consequences for re-examined strategic sourcing, supply chain risk mitigation and other planning become more obvious in the months to come.

We can all collectively hope for a less disruptive remaining 2012, but that may be wishful thinking.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog, all rights reserved.

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