HP Chooses the Lesser of Two Evils

From the supply chain standpoint, {complink 2376|Hewlett-Packard Co.} is making a smart move on the last-run production of its TouchPad. It might be the only move in a series of HP blunders that makes sense. (See: Bumbling HP Strikes Again.)

The purpose of the production run, analysts say, is to use up pre-purchased components. Even though the company will be taking a loss on the lot, HP is actually going with the lesser of two evils.

Consider HP's options: at the component level, it could try to return products to its suppliers. With semiconductor and display inventories building up in the supply chain, suppliers don't want the stuff. Even if they did, the inventory's value will be nowhere near its original cost. The difference would show up on suppliers' books, not HP's.

HP could try to sell components into the open market. Although suppliers frown upon this practice — their brands are now being sold through unauthorized channels — there's nothing stopping HP from doing this. But the company still faces a bookkeeping dilemma.

Component inventories of all products — semiconductor, interconnect, passive, and electromechanical — are no longer in short supply as they were after the Japan earthquake. As a result, component prices in the open market have taken a dive. HP would be selling its components below what it paid, and this loss would show up on HP's books.

So instead, HP will take a loss on the end product. According to the Wall Street Journal, a 16GB TouchPad costs HP $306 to manufacture. At $99 — the price HP charged for its last batch of TouchPads — that's a loss of $207. That doesn't make sense from the consumer standpoint, but it might make sense from the supply chain standpoint. HP already knows customers are willing to pay $99 for the TouchPad. It has no idea how much the open market is willing to pay for the components. The component-related losses could be higher than the $207 HP knows it's losing. Better to go with the known than the unknown.

Another option for HP would be to consume those components within another business unit, but the options are limited. PC and enterprise products have some overlap in components, but the highest-cost parts — semiconductors and displays — aren't easily swapped. So HP is back to square one.

A final option would be to look at the distribution channel, depending on how much product is sourced through distributors. Distributors are permitted to return unused parts to suppliers under certain circumstances with no impact on the distributors' bottom line. However, this practice is mostly applied to commodity parts that are used over a wide range of end products. Anything proprietary, such as semiconductors, FPGAs, or displays, is non-returnable. Distributors would be reluctant to take this stuff back because they can't return it to suppliers or resell it to other customers.

So finally, HP is doing something right — although choosing the lesser of two evils isn't a good long-term business strategy.

12 comments on “HP Chooses the Lesser of Two Evils

  1. t.alex
    September 3, 2011

    Barbara, how could that make sense from the business viewpoint when the loss per unit is upto 207 dollars?

  2. _hm
    September 3, 2011

    Did HP offer their employee choice for this $99 touch pad? If HP wanted to make loss, let it be gain to its employee. But I think this was decision in hurry and person respocible should be reprimanded for the same.


  3. mfbertozzi
    September 4, 2011

    Good point. Speaking in terms of business, it could happen vendors lose revenues, for instance, as initial strategy to achieve market quota in areas not traditional or to break barriers to entry. But it seems this is not the picture and as per your question is suggesting, a clear strategy (home computer? tablet? new OS tablet for breaking MS/Google/Apple leasdership? mobility? green?) for them is still away to come.

  4. elctrnx_lyf
    September 4, 2011

    atlast hp chose the simple and a best way to actually get rid of all the component inventory rathar than going back to suppliers or distributors or open market. This might do a little share of helep to good will of hp among the customers and the brand name. By the way, is there any other hp products are sold at throw away price.

  5. Daniel
    September 5, 2011

    Barbara, here I would like to point out about the buyback policy, to be introduced in supply chain. In most of the cases, only one way of trading is happening and the suppliers are not interested in taking back the sold product, unless and until it’s a defected one. The absence of such policy made HP to sell the product with a throw away price.

    September 5, 2011

    I can only imagine buyers of the $99 Touchpad are hoping to sell them on for a profit on Ebay etc.  or that buyers think “it must be worth $99….it's an HP for goodness sakes”.  Regardless HP should so whatever it takes to recoup the most cash for its shareholders and so selling at $99 is probably a good deal.

  7. prabhakar_deosthali
    September 6, 2011

    I am just wondering as to what warranty and support policies are applied to these $99 tablets. Hp is soon going to wash its hands off the PC and tablets business. The buyers of such low cost products may be left high and dry for warranty and support.

  8. Anna Young
    September 6, 2011


    @ Jacobs, I agree with you on the “buyback policy”, it must have been a tough decision to make for HP, at least a viable and a sensible business option route was decided upon. Although at a huge loss.

  9. Anand
    September 6, 2011

    So finally, HP is doing something right — although choosing the lesser of two evils isn't a good long-term business strategy.

    @Barbara, thanks for the post. Though I agree with you that HP has chosen lesser of two evils but I fail to understand if it was  necessary for HP to close its tablet business. Many people feel Apple will not be as strong it was when Steve Jobs was its CEO. There was good chance for HP to compete with other tablet manufacturers.

  10. Anand
    September 6, 2011

    I am just wondering as to what warranty and support policies are applied to these $99 tablets.

    @prabhakar_deosthali, I dont think buyers will get any warranty and support. I feel nobody will care for warranty and support when they are getting 70% discount on the product. Moreover its not a chinese product which will stop working after 6 months. People trust HP brand.

  11. Eldredge
    September 6, 2011

    I'm not sure I believe that the losses HP would incur for scrapping the components would be greater than the estimated $207 losses estimated for the completed product. But, using up the inventory does allow HP to keep the manufacturing line operating, and include it's own labor expenses in the loss calculation.

  12. Barbara Jorgensen
    September 7, 2011

    Great debate on the buyback policy. I agree that is unlikely to happen–chip makers already outsource the destruction of defective products from their fabs and are unlikely to take on more of this through a buyback. The one way it could happen is if they are forced to for some reason, such as environmental considerations.

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