HP and Strategic Management Solutions, Founded by Chris Fry '94, Team Up to Win Top Prize in the Practice of OR
|Kathy Chou of HP's Personal Systems Group holds the Edelman Award plaque, with of Julie Ward of HP Labs and Chris Fry. At left, INFORMS President Don Kleinmuntz.
According to the New York Times, CEO Mark Hurd of Hewlett Packard (HP) has introduced a culture of measurement to the company. This culture extends to the development, by HP Labs and HP's Strategic Planning and Modeling Team in collaboration with Strategic Management Solutions, of decision support tools that saved more than $500 million between 2005 and 2008. The work won the 2009 Edelman prize of the Institute for Operations Research and the Management Sciences (INFORMS), widely recognized as the top prize in the practice of Operations Research (OR). Strategic Management Solutions was founded by Chris Fry '94.
HP's business offerings include tens of thousands of products and millions of product configurations, with new products entering the pipeline continually. In the past, decisions about which products to include or retain in the product portfolio "were often made based on a product's individual revenue" rather than on its overall return on investment (ROI) or the breadth of customer orders to which it contributed, according to a paper by the prize-winning authors, Fry among them.
Proposed New Products
Although HP had routinely carried out accounting-based ROI analysis for new products, "many product line complexity costs are hidden, i.e. not captured in standard accounting systems and difficult to measure systematically and fairly," according to the paper. Fry and his HP counterparts developed a framework, a set of processes, and business line-specific calculators to evaluate a complexity-adjusted ROI for each proposed product.
According to the paper, evaluating the ROI for a proposed new product at HP now requires a careful analysis of the costs of complexity, including those stemming from its contribution to the anticipated sales volume of the product being offered (including supply chain costs that are a consequence of demand variability) and those stemming from its contribution to the variety of products being offered (including R&D, tooling, manufacturing overheads, and cost of returns). This analysis goes well beyond standard accounting and requires a "journey together" by groups from across the organization, including OR professionals.
As an external consultant on this aspect of the project, Fry "brought a fresh pair of eyes to the topic, and because I was doing similar work for other clients at the time, I was able to bring an external perspective," he says. Strategic Management Solutions has been collaborating with HP since 2002. The collaboration also resulted in publication of several papers in professional and academic journals.
Pruning the Portfolio
While the Complexity ROI approach imposes a hurdle for the introduction of new products, it does not deal with products already in the marketplace. For these products, "some of the costs of variety become sunk... and the focus shifts from screening new products to maximizing value from the active portfolio." To accomplish this optimization, HP Labs developed a "Revenue Coverage Optimization (RCO) Tool" that finds the "smallest portfolio of products that covers any given percentage of historical revenue" (or margin). The required revenue (or margin) is yielded from the set of orders that could be completely fulfilled from the selected portfolio. By varying the required percentage from 0 to 100% , the tool can develop a kind of 'efficient frontier' of order-revenue (or order-margin) coverage versus portfolio size. In one example, 80% of order-revenue could be covered with less than 27 percent of the total product portfolio.
Computing any one portfolio along the efficient frontier requires solution of a very large integer programming problem, "too big to solve by standard methods." To solve this problem in a practical time period (less than two minutes) the team developed a new method to solve this as well as a broader class of problems in which it is contained. They reformulated the problem in terms of network flows (a model pioneered by L. R. Ford and the late ORIE professor D. R. Fulkerson), and devised a way to rapidly compute the (nested) sequence of solutions that correspond to points along the efficient frontier.
Implementing The Solutions
Implementing both complexity-adjusted ROI and RCO required extensive interaction with business groups within Hewlett Packard. The team noted that "many organizational and informational hurdles hindered implementation of the intiatives," including shifts in mindset, disseminating and gaining agreement on process changes, and developing new information links. The result is ongoing savings estimated at $180 million per year. For example HP's enterprise server business runs RCO quarterly to evaluate the product portfolio, enabling the elimination of more than 3,300 products from the portfolio of over 10,000 products.
The Edelman Award
The Franz Edelman award, named after the late founder of the OR group at RCA, has been recognizing and rewarding outstanding OR work throughout the world annually since it was established in 1972. Finalists present their projects at the annual INFORMS Conference on the Practice of OR and Management Science. HP was named the winner at the conference banquet, at which ORIE Ph.D. alumnus Bob Bixby gave the keynote address. Runners-up in the 2009 competition included CSX Railway, IBM, Marriott, global paper maker Norske Skog and fashion retailer Zara.
"It was a great honor to be part of the award-winning team," says Fry. "We collaborated extremely well, and there were a lot of very strong contenders." He notes that "the courses I took in OR at Cornell inspired a passion in me for the subject which has kept me in the field for most of my career. I remember being introduced to network flows by Professor Robert Bland, being on the edge of my chair in almost every one of his lectures." Fry recalls "I even got my start in INFORMS as an officer of the Cornell student chapter."
Authors of Edelman finalist papers were designated as Franz Edelman Laureates and the organizations making significant contributions to the work, in this case Hewlett Packard and Strategic Management Solutions, were inducted into the Franz Edelman Academy. Both Hewlett Packard and Strategic Management Solutions are leaders in applying Operations Research, and both recruit and employ Cornell graduates. Descriptions of past Edelman finalist projects form the nucleus of the success stories chronicled at the Science of Better website maintained by INFORMS.
In the conference blog, Carnegie Mellon Professor and former INFORMS President Michael Trick wrote that "As a judge, I don’t want to say anything beyond saying I think the [winning] team makes an outstanding Edelman Award winner." Prior to forming Strategic Management Solutions, Chris Fry was employed at McKinsey & Co. and Booz & Co., both pioneering analytical and strategy consulting companies.
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