Operations strategy at Compaq Computer Swaying from the ceiling at its Houston factory is a white banner that reads:

We at Compaq Computer are absolutely committed to provide defect free products and services to our customers. The message jibes with what one sees below: a sparking assembly line, surrounded by potted ficus trees and ferns, washed with light from vast skylight, that looks more like an expensive health club than a factory. Founded in 1982, the company has its ideal inscribed in its name, an amalgam of the words computer, compact, and quality. A maker of IBM-compatible PCs as well as ultrafast computers that manage data on office networks, Compaq has grown into an 11,800-employee business that in 1990 earned $455 million on $3.6 billion in sales. It commands 20% of the world PC market, compared with 25%each of IBM and Apple Computer, and has a almost no foreign rivals, except in the fast-growing field of laptop PCs. Still, competition in ferocious fighting for sales, Compaq cut prices on its computers this spring as much as 34 percent and warned that second-quarter earnings would drop 80 percent. Part of Compaqs success derivers from its speed at offering the latest processor chips, disk drivers, and display screens in its products. Yes, even faster than IBM. A Major challenge, says CEO and co-founder Rod Canion, is to keep a breakneck pace of innovation across burgeoning product lines-nine new ones last year alone. When the company was small, speeding products to market seemed a breeze. Today Compaq tries to maintain its entrepreneurial edge through small product-development teams that include marketers, designers, engineers, and manufacturing experts. Rather than moving a new computer step by step from drawing board to the factory, explains Canion, The secret is to do all things in parallel. Compaqs greatest advantage, Canion believes, is that it buys most components rather than making them itself: Vertical integration is the old way of doing things The way to succeed in the 1990s is to be open to technology from anywhere in the world. When Compaq needed a hard disk drive for is first laptop in 1986, it considered building one itself. Instead, it helped finance Conner Peripherals, a Silicon Valley startup with a disk drive already under way. We worked so closely with Conner that they were literally an extension of our design team, says Canion. We got all the benefits but werent tied down. If another company had come along with a better drive, wed have bought fr om them as well.

In March, Compaq began a nervy foray beyond the realm of PCs into the $7.5-billion-ayear market for powerful desktop workstations used primarily by scientists and engineering. Rather than attacking market leaders Sun Micro-systems and HewlettPackard head-on, Compaq assembled more than a dozen hardware and software companies, including Microsoft and Digital Equipment Corp., in an alliance. The group aims to win by defining a new technical standard for high-speed desktop computing, much like the IBM standards in PCs. Any workstation designed in accordance with the standard would work with any other. That would free customers to buy the latest, fastest machine without fear of being wedded to a single manufacturer. Industry experts think rivalry among participants may tear the alliance apart. Observes Dick Shaffer, editor of Computer Letter: All the participants are entrepreneurial companies with big egos, The groups prospects may not become clear until late next year, when Compaq and other members are due to roll out the new computers and software. If the products all work together, Compaqs workstation would be a winner. If not, says Stewart Alsop, Publisher of PC Letter, Compaq may have to lower its sights: As a $3.6 billion company, Compaq cant keep up a high rate of growth anymore just by building PCs.

A Framework for Make/Buy Decisions

Hierarchical Model to Decide Whether to Outsource or Not Customer Importance o How important is the component to the customer? o What is the impact of the component on customer experience? o Does the component affect customer choice? Component Clockspeed o How fast does the components technology change relative to other components in the system? Competitive Position o Does the firm have a competitive advantage producing this component? Capable Suppliers o How many capable suppliers exist? Architecture o How modular or integral is this element to the overall architecture of the system?

Kraljics Supply Matrix Firms supply strategy should depend on two dimensions o profit impact Volume purchased/ percentage of total purchased cost/ impact on product quality or business growth

o supply risk Availability/number of suppliers/competitive demand/ make-or-buy opportunities/ storage risks/ substitution opportunities

Top right quadrant: o Strategic items where supply risk and impact on profit are high o Highest impact on customer experience o Price is a large portion of the system cost o Typically have a single supplier o Focus on long-term partnerships with suppliers

Bottom right quadrant o Items with high impact on profit o Low supply risk (leverage items) o Many suppliers o Small percentage of cost savings will have a large impact on bottom line o Focus on cost reduction by competition between suppliers

Top left quadrant: o High supply risk but low profit impact items. o Bottleneck components o Do not contribute a large portion of the product cost o Suppliers have power position o Ensure continuous supply, even possibly at a premium cost o Focus on long-term contracts or by carrying stock (or both)

Bottom left quadrant: o Non-critical items o Simplify and automate the procurement process as much as possible o Use a decentralized procurement policy with no formal requisition and approval process

Sourcing Strategy for Components Fishers framework focuses on finished goods and demand side Kraljics framework focuses on supply side Combine Fishers and Kraljics frameworks to derive sourcing strategy

Component Forecast Accuracy Not necessarily the same forecast accuracy as for finished goods o Risk pooling concept implies higher accuracy for components Sourcing strategy may be minimizing total landed costs, lead time reduction, or increasing flexibility. Cost-based sourcing strategy o High component forecast accuracy/Low supply risk/High financial impact/Slow is appropriate. Lead time reduction strategy o Low component forecast accuracy/High financial risk/Fast clockspeed Flexibility and lead time strategy o Low component forecast accuracy/High financial risk/Fast clockspeed/High supply risk

Qualitative Approach to Sourcing Strategy