The encyclopedia · Engineering & Operations · Product decision · 2005–2010
HP tamed product variety with OR, adding more than $500m in profit since 2005.
HP used two OR tools — ROI screening plus a max-flow Revenue Coverage Optimizer — to cut product sprawl and the demand volatility it caused.
Hewlett-Packard (HP)
the move
HP's breadth of products brought reach but also matched it with significant costs: multiple similar products raised demand volatility, reduced forecast accuracy and pushed up inventory, order-cycle time and channel liabilities.
HP developed two OR-based solutions for managing variety: a framework of custom ROI calculators to screen proposed new products before launch, and the Revenue Coverage Optimization (RCO) tool based on a fast new maximum-flow algorithm to manage variety after launch.
These tools increased profits across HP's business units by more than $500 million since 2005, while streamlining offerings, improving execution, speeding delivery, lowering overhead and raising customer satisfaction and market share; the work won the 2009 INFORMS Edelman Award.
why it works
- Each added SKU raises forecast error and inventory
- Screening blocks products before they add complexity
- A max-flow core identifies what actually covers orders
- Measured: more than $500m in added profit since 2005
what transfers
Variety is a hidden cost: more SKUs mean worse forecasts and more inventory, so pruning the portfolio and focusing on a coverage-critical core can beat squeezing one production line.
what came after
The portfolio tools became part of how HP manages product variety, and the maximum-flow method behind RCO gave a reusable algorithmic building block for portfolio decisions that scale to a large product catalogue.
references
- HP Transforms Product Portfolio Management with Operations Research (record)
- HP Transforms Product Portfolio Management with Operations Research
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