Applied Information Technology Project - Research Proposal Example

?Proposal The rationale of risk management is to improve the growth and ensure the survival of businesses. Companies often pounce when opportunities are available and try to become more conservative when risks are observed. The response of companies in challenging environments solely rests on the people involved in formulating strategies. Maughan (2010) posited that risks are linked to events and circumstances that can affect the outcome of certain projects. In technical terms, risk management involves logical and systematic methods of identification, analysis, mitigation, monitoring and communication of risks. The goal is for companies to minimize the potential for losses and maximize the use of limited resources for improvement. Risks are inherent and managing them will allow decision makers to provide sound strategies. Technological risks lead to a non?completion, under?performance the acquired product or service which likely is traced from supplier. Technological risks happen when suppliers fail to fulfill their promise of providing top notch product or service. Often suppliers encounter internal problems which include substandard technology, obsolete process or ineffective workforce. Companies often experience difficulty in shifting trajectories once a certain technology is used. This may create problems if the procurement takes place before competing technologies have been explored adequately. This risk should presumably be of particular relevance in procurement of products in the fluid phase (Utterback, 1994). Business Problem Statement This proposal explores on Hewlett-Packard’s method of addressing supply chain issues using Procurement Risk Management (PRM). General Benefits Cost savings. The intention of developing a system such as PRM is to reduce cost of materials and other related costs. PRM is designed to provide flexible schemes that improve the planning and production processes. Moreover, PRM addresses pricing mechanisms that involve pricing and emphasizing value to the materials obtained from the suppliers. HP is involved in the production of materials to ensure that returns are reduced and quality is maintained. Supply availability. The level of supply needs to be maintained at levels that will sustain continuous business. The lack of supply is a big problem especially with firms that rely on such components. For technology manufacturers, memory chips are considered as the most volatile component in terms of supply. Most strategies involve signing long-term deals with suppliers including requirements such as marking clients as priority when supply decreases. Cost prediction. Companies succeed because their cost forecasts are accurate hence cost planning is implemented. The proposed system aims to identify cost sources. Most important, unexpected costs are prevented and the results are met within the agreed budget. High Level Approaches Enterprise Risk Management (ERM) developed as a structured mechanism combining strategies, resources, technology, and knowledge to assess and manage the uncertainties that various enterprises face as value is being generated encounter (Hoffman, 2009). ERM facilitates effective management of risks that organizations encounter, and the management of potential opportunities entrenched in those risks. The main objectives of the Enterprise Risk Management approach can be summarized through these steps: measurable organizational goals have to be specified; organization has to determine the risks that can adversely affect the goals; methods need to be established to mitigate the risks (Francis and Richards, 2007). Stebbing (1994) suggests some elements to be emphasized in creating quality manuals. These aspects include policy statement, authorities and responsibilities, organization, system element outlines, and list of procedures. To further ensure quality, the company has some lofty targets. By the time wherein the system has been deemed to be effective, the company will apply for an ISO certification. The recognition is concrete proof of the company’s dedication to quality. In addition, a third-party auditor is needed to ensure the integrity of the company. The quality plan also includes future upgrades and projects that support the current initiative. The balanced scorecard is another tool that can provide the Company an accurate assessment of the project (Kaplan and Norton, 1996). The process involves looking into the customer perspective of the company. The internal process of the business reveals the potentials of the company and the areas where improvements have to be made. The ability of the company to innovate and provide learning experiences among the entities is vital. The financial perspective defines the capacity of the project to satisfy stakeholders. Audience The system proposed intends to improve procurement processes in companies involved in manufacturing technology products. These include makers of computers, mobile phones, game consoles and other related electronic gadgets. Milestone 1 This section provides the initial phase of the project which identifies the problem and outlines the needed action to address the issue. Background and Issues In 1999-2000, HP was faced with large price spike and an availability issues for flash memory used in HP’s highly profitable printer lines. Demand for flash memory increased exponentially because of massive demand from mobile phone manufacturers coupled with the shortfall in flash memory threatened printer shipments (Nagali, et. al., 2008). HP decided to venture into a binding long term contract with a top flash memory maker. This was decided to ensure flash memory availability and stabilize the Company’s printer business (Nagali et. al, 2008). The agreement appears to be risky due to the uncertainty in the future price and availability of flash memory, including HP’s internal demand uncertainty for flash memory. HP had to evaluate the following to avoid a risky and imprudent long-term commitment: the payment to be made for the flash memory and the mode of payment to be implemented; the quantity of flash memory to be purchased and the delivery terms; the extent to which the contract period is determined and the commencement of the agreement; and provisions to be augmented to ensure security compliance (Nagali et. al., 2008). Business Approach The PRM program was initiated at HP to develop and standardize methods for addressing procurement related risks. Through the successful implementation of the project ingrained in HP’s strategic commodities and business units, risk management has emerged as a fundamental strategy for procurement at HP. Procurement and supply chain professionals at HP are taking lessons from the industry to manage uncertainty in component markets (Nagali et. al., 2008). Hewlett Packard’s procurement risk management program involves measuring uncertainties related with buying commodities, and managing these risks through structured contracts. The initial step in this scheme is projecting uncertainties. Part demand, price and availability unpredictability in a specified are recorded using forecast scenarios. Each scenario is classified as high, base or low. Existing forecasting approaches implemented in other firms emphasize ‘point’ projection, which in the PRM method is represented by the base scenario. An estimate of the correlation between demand, price and availability uncertainties is also captured. Once the procurement uncertainties are modeled, the current procurement strategy can be analyzed to determine the procurements risks involved (Nagali, et al., 2008). After the demand, cost and availability uncertainties are quantified using scenarios, the risks associated with these uncertainties are managed using structured contracts with suppliers (Nagali et al, 2008). Structured contracts are binding commitments between HP and the supplier, with complex combination of quantity and pricing terms. Quantity terms include fixed and flexible quantity contracts, and percent of total-available-market (TAM); pricing terms include discount-off of market price, fixed price, price-caps and price-floors. Expected Benefits The management of inventory is one of the most important benefits of the proposed system. PRM allows companies to forge flexible supply contracts. Since productions are done in cycles, supply should also follow the trend. The supply contract stipulates specific quantity needed to be supplied for a certain period. Changes can be made when demand uncertainty arises of sudden shift in consumer behavior occurs. Risk sharing between the company and the supplier is important. In most instances, supply risks affect the client significantly. When a supplier fails to achieve the needed components, the final effect is wrested to the customer. PRM attempts to include the supplier in the risk process to ensure that accountability is maintained. Moreover, suppliers become part of the value proposition and in the long-term improve their respective brands. HP maintains a reputation that values of being an industry-leading innovator. The Company has introduces cutting-edge products that have positive impact in the market. PRM is a system that allows for further development. The flexibility of PRM ensures that changes can be made without any major issues. Most important, the system can be adopted in other companies. Several suppliers have reached out to HP for the full integration of the PRM system. Even HP’s competitors have attempted designing similar systems for their disposal. Other Requirements The implementation of PRM requires several form of infrastructure. HP houses all of the needed resource for this initiative. The creation of software is a major need for the PRM. HP has developed several suites intended for different purposes. Training is another important requirement for the project. The personnel in-charge of developing, implementing and maintaining the system have to be rigorously trained. Dissemination of the system also needs to be done in all departments seamlessly. Achieving this requires planning and effective communications. Milestone 2 This section discusses the technical aspect of the project. This involves actual processes and the step-by-step approach of successfully integrating PRM in business systems. There are several ways in which the process is implemented. PRM tries to address all procurement risk issues in different levels. PRM Application Estimating demand uncertainty illustrates the PRM approach and has significant benefits of its own. Most forecast process has consistent error. By quantifying the uncertainty, we can segment demand according to its uncertainty or risk. Put simply, any company who has been successfully selling products and services is reasonably certain that next month they will sell at least one product or sell to one client. However the certainty associated with selling 100 products or to 100 clients is less, perhaps much less, certain. This difference in uncertainty, or risk, is used to segment demand according to the probability it will occur. Once completed, management teams look for low cost, efficient means to satisfy “certain” demand, and more flexible methods to satisfy likely, but “less certain” demand. Approached this way, the risk and cost to supply products and services is reduced (Nagali et. al., 2008). For buyers and commodity managers, segmenting demand increases opportunities for creative contracting with suppliers. For certain demand, minimum quantity forward contracts assure supply at very low prices. Suppliers are often willing to discount for firm quantity commitments because it allows them to manage capacity more efficiently. Committed volumes can be scheduled during non-peak times, and inventory carries no risk. On high volume deals, supplies can modify fabrication lines to significantly reduce costs. One printer product team secured more than 15% discount on committed forward contract in addition to volume discounts! The supplier modified a conventional process based on HP’s binding, forward commitment. The resulting cost reductions yielded an additional 15% savings to HP (Nagali et. al, 2008). Less certain demand is satisfied through flexible quantity agreements. Flexible agreements are the most common supplier arrangement in our industry, so creative modifications of these agreements are usually easy to pull together with suppliers. Fabrication suppliers provide pricing discounts for committed “upside volumes,” especially when the volumes are high with potential to grow. Discounts often increase as more volume is purchased. Making these commitments binding eliminates supply risk and provides further cost savings. A significant percent of HP’s memory requirements are met through these binding but flexible agreements. Contract horizons generally match HP’s product lifecycles time and/or supplier capacity lead-times. The longer the horizon, the deeper the price discounts and the more binding the supply commitments. Demand that is least likely to materialize can often be satisfied through the open or spot market. As these sources dry up, secondary-sourcing options can be used such as brokers, auctions and product recycling programs. These approaches mean higher prices, but are often a better solution than carrying inventory. And, the supply risk associated with these approaches is often less than expected. HP’s customer support teams realized significant inventory savings by recovering critical parts from unsold products. They also found consistent supply for low volume microprocessor demand through auctions, saving on inventories subject to severe price erosion (Nagali et. al., 2008). Setting Strategic Objectives Demand forecast scenario generation begins the process of building a procurement portfolio. Constructing price and component availability scenarios using a similar approach completes the measurement of risks associated with securing supply for critical components. Once these risks are measured and known, procurement objectives for managing the risks can be set quickly and easily. HP manages to these objectives with binding commitments are tailored structured contracts between HP and its suppliers (Nagali et. al., 2008). Choosing the appropriate quantity and pricing term to meet specific procurement objective results in a tailored structured contract. A portfolio of several such tailored structured contracts can be executed to meet different procurement objectives. These contracts are evaluated by different groups from the technical perspective to the department tasked to implement the process. The success of the system is dependent of the output of entities involved with the project. The incremental value of the procurement risk management approach is through the sharing of risks between HP and the supplier. This is driven by the need for the party bearing the risk to be rewarded for it. Risks that HP can better manage are borne by HP. For example, HP can better manage risks due to uncertain demand for HP’s products than a supplier can. By entering into a quantity commitment with a supplier, this demand risk is borne by HP and in turn the supplier rewards HP through better pricing terms. In cases where supplier explicitly manages quantity and especially pricing risks, HP rewards the supplier through better quantity and/or pricing commitments. This contrasts with traditional industry practices where buyers do not make quantity commitments thereby imposing all demand risk on the supplier (Nagali et. al., 2008). Procurement Risk Management Process Source: (Nagali, et.al. 2008) Technical Challenges The supply chain management (SCM) method centers on the management of demand and availability volatilities through inventory buffering schemes. The process, however, provides minimal focus on managing cost uncertainties. Financial engineering mechanisms enable the management of cost uncertainty though not demand and availability uncertainties. Moreover, such cost uncertainty supervision techniques require the presence of traded risk management tools such as call and put options. For components used in high technology products such as memory and flat-panel displays, demand, cost and availability uncertainties are significant and the management of cost uncertainties has to be done collectively. The PRM designed has to address the simultaneous management of demand, availability and cost uncertainties and ensure that focus is distributed evenly (Nagali et. al., 2008). Milestone 3 This section provides the specific infrastructure needed to implement the PRM system. In addition, a summary will be provided including recommendations that are related to the project. PRM Software The HPHorizon Software is designed to calculate demand uncertainties. This is demand-planning software that gets and accounts point forecasts for products and parts. The HPHorizon Software is embedded with analytics that perform regression analysis of previous shipments to determine demand bias and uncertainties. The software also takes into account the current demand to predict future movement by providing low, high and media scenarios. The software, in addition, provides a precise forecast of point biases. This software is regularly used by the HP team to determine demand uncertainties of products and components. The HPRisk Software is another customized innovation that measures the uncertainties of component cost. Managing component cost is critical in the profitability of the company. The trend on component costs usually show high prices during the early stages of the parts in the market. Then the decline starts when technologies are developed and the components become obsolete. The HPRisk Software also makes use of regression analysis of historical costs of components to know the non-Markovian price schemes though scenario history to create models of cost dynamics. These components are often used in parts such as LCD and flash drives that are used in most HP products. Similar processes could be adopted when identifying component costs in commodities such as steel and chemicals. Procurement Metrics Procurement metrics currently used across the industry are mostly backward looking, focusing mainly on measuring past performance such as material price per-unit paid and its reduction over time, inventory levels and costs over time and shortage costs over time, etc. This measurement approach constrains procurement professionals and their organizations from anticipating and responding to significant changes in supplies and customer markets. The few metrics that are future looking are typically limited to specifying target material price reductions and maximum inventory levels (Nagali et al., 2008). HP’s future procurement metrics account for the impact of procurement uncertainties, and the interplay between various dimensions of uncertainty. The combined impact of demand, price and availability uncertainties is captured as the average and standard deviation in material, inventory and shortage costs. The need to capture the interplay between the competing dimensions of price, inventory and shortage cost is important for making effective short term trade-offs.. Using the total cost measure defined as the sum of material price, inventory and shortage cost at any future point in time is useful for determining such interaction between the different dimensions (Nagali, et. al., 2008). Conclusion and Recommendations The evolution of risk management is an event that most companies need to take into account. From mitigating, companies have shifted in optimizing risky situations. Although risks are generally considered as negative, there are instance when positive gains are obtained from them. For instance a company deals with a supplier which turns to be risky due to the supplier’ unreliability could provide some gains. Instead of cutting ties, the company can reinvigorate the supplier by investing on its capabilities which could eventually provide consistent supply in the future. Companies these days see the glass half full despite the presence of risks. Effective frameworks and proper execution are necessary to turn a potential disaster into a gain. The PRM process used by HP has consistently promoted the value of forecasting. Projections are necessary to determine possible spots that the company can take when risks emerge. Some companies invest heavily on determining what lies in the future. In doing so, firms can also include risks calculation in their projection tasks. Having an idea the nature of risk is critical in the success of procurement risk management processes. Companies can prepare either they become aggressive or remain passive with their strategies. Instead of panicking firms have the arsenal and ammunition to combat all forms of risks ahead when working on projects. HP has developed a process that addresses this issue. The company can make use of their procurement processes in other business units without issues. Having different policies on risk management in one company can be problematic. Auditing becomes hard and recording of milestones is difficult. Common languages should also be installed. This helps in the execution part as all entities firms are expected to be aware of the risks. When people understand what is at stake then it is easy to communicate what needs to be done. The use of HP PRM has also allowed the company to improve relationships with the suppliers. This is important in sustaining the supply chain and further adding value to HP products and solutions. References Francis, S. and Richards, T. (2007), Why ERM Matters ... and How to Accelerate Progress?, Risk Management, 10, Pp.28 Hoffman, M. (2009) Interest in enterprise risk management is growing?, Business Insurance, Pp. 14 Kaplan and Norton, (1996), The Balanced Scorecard – Translating Strategy into Action, Boston, Massachusetts: Harvard Business School Press, Pp. 10-13 Maughan C., (2010) “Risk Management in Defence Procurement” MOD and the Defence Industry Nagali, V. et. al., (2008), Procurement Risk Management (PRM) at Hewlett?Packard Company. Interfaces. Vol. 38, No. 1, January?February, Pp. 51?60 Stebbing, L. (1994), Project quality management, Gower handbook of project management, Gower, Aldershot, UK, Pp. 550–559 Shah, J.B. (2002), “HP wrestles risk” Retrieved, 30 October 2011, from Utterback, J.M. (1994). Mastering the dynamics of innovation: How companies can seize opportunities in the face of technological change. Boston, Massachusetts: MIT Press Read More