© 2006 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice Procurement Risk Management (PRM) at Hewlett-Packard Company Venu Nagali, Ph.D. Distinguished Technologist Procurement Risk Management Group Stanford Risk Management Roundtable November 13, 2006

page 2 Venu Nagali – ESCA Sep 06 HP has the largest IT supply chain #1 in Material Spend -$43B – Memory - #1 – Microprocessors (Intel & AMD) - #1 – Windows Software (Microsoft) - #1 – Hard Disk Drives - #1 – Laser Engines- #1 – Optical Disk Drives - #1 – Chipsets (Intel) - #1 – LCD Panels & many more - #1 #1 in CM/ODM Spend #1 in Electronics Industry Logistics Procurement - $1.7B Provide spare parts for 1M Service interactions per month HP Supply Chain actively manages $51B of company spend (80% of total) Material Cost (67%) Non-SC cost (20%) $64B Total Spend SC Cost (13%)

page 3 Venu Nagali – ESCA Sep 06 HP’s Supply Chain Strategy: Adaptive Supply Chain Customers demand more. Supply chains must be agile enough to adapt to constant changes in their markets. Speed-up introduction of new products and services to market Design and provide anything anywhere Manage change and global operations more easily Enable profitable growth improve agility managec osts increase quality mitigate risk

page 4 Venu Nagali – ESCA Sep 06 Lack of risk mgmt processes has resulted in billions of dollars in losses for OEMs … Agilent Technologies July 1999: Stock price drops 26% after an inability to obtain key components cause revenue shortfall Availability risk Ford Motor Company December 2001: Ford posted $1B loss on palladium & other precious metals contracts. Shareholder files suit alleging mistake in company’s hedging Price risk Cisco Systems April 2001: $2.5B inventory write-off due to rapidly weakening demand coupled with locked-in supply agreements Demand risk Dell Computer May 14, 2004: Stock drops 3% as earnings are held back by memory prices Oct 18, 1999: Stock drops 13% as higher memory prices result in a $470M earnings shortfall Price risk

page 5 Venu Nagali – ESCA Sep 06 … and cause pain throughout the supply chain March 20, 2001 JDS Uniphase Announced global realignment due to reduced demand - includes a 20% staff reduction and a $425 million restructuring charge. March 19, 2001 Solectron Announced 8,200 layoffs and a $400 million restructuring charge to realign capacity to meet decreased demand.

page 6 Venu Nagali – ESCA Sep 06 Objectives of HP: Measure & Manage Procurement Uncertainties Procurement Planning & Mfg Sales Customer Supplier Margin Risk Shortage & Inventory Obs. Costs Hidden Material Costs Uncertain Product Prices Uncertain Component Prices Uncertain Product Demand Uncertain Component Supply UncertaintySymptomsPRM Solutions Price-Cost Matching Problem Supply- Demand Matching Problem

page 7 Venu Nagali – ESCA Sep 06 PRM at HP addresses risks due to high probability events high low highlow earthquake fire hurricane theft of parts or products shipping accident demand risk price risk availability risk transit delays customs delays quality supplier bankruptcy HP Impact Probability of Adverse Event Other processe s

page 8 Venu Nagali – ESCA Sep 06 Organizational challenges in implementing PRM Strategy Currently, risk management is not a core part of the supply chain strategy Metrics & Processes Current supply chain metrics do not address risks Current processes do not support risk management Skills & Toolsets Poor understanding of techniques to measure and manage of risks Current ERP and supply chain mgmt systems do not address uncertainties

page 9 Venu Nagali – ESCA Sep 06 Components for PRM framework 1.Measure Risk: Forecast scenarios for product demand, component cost and availability 2.Manage Risk: Use a portfolio of structured contracts for different segments of demand 3.PRM Process: Cross-functional process Periodically reassess risks & manage them

page 10 Venu Nagali – ESCA Sep 06 PRM Approach: Manage risks using structured contracts with suppliers HP Confidential Flexible quantity contract Demand forecast (units) Time Fixed quantity contract Uncommitted Hi scenario Base scenario Lo Scenario

page 11 Venu Nagali – ESCA Sep 06 Re-engineering business processes to implement PRM Contract Origination Contract Execution Contract EvaluationContract Monitoring Strategy & Governance 1.New metrics put in place to track supply chain risks 2.Risk mgmt is now a core part of commodity strategy 3.Cross-functional process involving procurement, planning, finance & marketing

page 12 Venu Nagali – ESCA Sep 06 HP PRM implementation methodology HPRisk Suite of PRM software HPRisk contract valuation HPHorizon demand forecast scenario software Price forecast software Inventory buffer calibration software Consulting Commodity- specific Business process Deal structuring and valuation Change management Training Core concepts Forecast scenario generation TrainingConsulting Software

page 13 Venu Nagali – ESCA Sep 06 PRM enables a combination of objectives Assurance of supply Protect against shortage risk Portfolio cost savings Lower material & inventory costs Earnings & Cost Predictability Protect product margin against volatile component prices Cost uncertainty Availability uncertainty Demand uncertainty

page 14 Venu Nagali – ESCA Sep 06 Printing Pers. Syst Enterprise Services PRM implemented for a range of commodities & across all HP businesses Relative size of annual impact Year1 Memory Packaging Energy Year2 Memory Direct Indirect Procurement TFT Panels ASICs & custom assembly Lenses Optical drives MPUs Scanner & Camera Sensors ASICs Spare parts Plastics HDD Chipsets Network Asics Year3+ Ad Media Standard Components Custom Component s

page 15 Venu Nagali – ESCA Sep 06 Commitments across the supply chain have reduced the “bull-whip” effect Tier-1SupplierTier-2 Supplier  Conventional approach  Non-binding nature of the forecasts significantly increases demand, cost & availability uncertainty  PRM approach  In certain cases at HP, demand and order volatility across 2 tiers in the supply chain decreased by 50%  Essentially, the PRM approach can substantially reduce the bull-whip effect Demand forecasts Cost forecasts Conventional Approach Quantity Commits Cost Commits PRM Approach Buyer

page 16 Venu Nagali – ESCA Sep 06 PRM Accomplishments: HP has obtained significant financial benefits from implementing PRM HP Spend Impacted by PRM Process Incremental Savings Enabled About $7 billion in HP spend using the PRM process in FY’06 Significant AoS benefits to enable revenue & customer satisfaction Over $300M in incremental savings enabled over the past 6 years PRM considered a competitive advantage by HP senior management Estd. Incremental savings from material, inventory & AoS costs

page 17 Venu Nagali – ESCA Sep 06