The encyclopedia · Product & Design · Product decision · 2005–2010
HP applied OR to prune its product portfolio and added over $500 million in profit
HP's RCO tool and ROI calculators cut product complexity; profits rose more than $500M since 2005, and HP won the 2009 Edelman Award.
Hewlett-Packard
the move
HP offered so many similar products that the portfolio created its own costs: more demand volatility, worse forecasts, longer order cycles, channel liabilities, and confusion for customers and salespeople. Complexity, not competition, was eating margin.
HP's Strategy and Planning Modeling team built two OR tools. Complexity ROI calculators screen every proposed new product against a return threshold before launch. Revenue Coverage Optimization (RCO) uses a fast maximum-flow algorithm to find the smallest product set that still covers real customer orders, so HP can focus on the SKUs that matter.
The tools increased HP's profits across business units by more than $500 million since 2005 while streamlining the product line, improving delivery and lowering overhead. INFORMS awarded HP the 2009 Franz Edelman Prize, citing 'hundreds of millions of dollars in bottom line savings.'
why it works
- Order coverage measures variety in customer terms: a SKU that no order needs is pure cost.
- Screening products before launch stops bad complexity from entering the portfolio at all.
- The same math reduces inventory, cycle time and overhead, so the profit effect shows up across many lines.
what transfers
Variety is not free: measure it by order coverage, kill the SKUs that no order needs, and screen new ones against a return threshold before launch — pruning by math beats pruning by opinion.
what came after
RCO and the ROI calculators became standard portfolio practice at HP, and the company reported more than $500 million in added profits across business units since 2005. The 2009 Edelman Award recognized the work as one of the defining applications of OR to product portfolio management.
references
- HP Wins INFORMS Edelman Prize
- HP Transforms Product Portfolio Management with Operations Research (abstract, Princeton Research Portal)
- HP Transforms Product Portfolio Management with Operations Research (abstract, IFORS)
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