Cisco Systems - The Supply Chain Story

The Problem and the Remedy Contd...

Cisco's supply chain management system failed to show the increase in demand, which represented overlapping orders. For instance, if three manufacturers competed to build 10,000 routers, to chipmakers it looked like a sudden demand for 30,000 machines. As Cisco was committed to honor its deals with its suppliers, it was caught in a vicious cycle of artificially inflated demand for key components, higher costs, and bad communication throughout the supply chain. Cisco's inventory cycle reportedly rose from 53.9 days to around 88.3 days.

According to analysts, Cisco's systems failed to model what would happen if one critical assumption – growth – was removed from their forecasts. They felt that if Cisco had tried to run modest declining demand models, then it might have seen the consequences of betting on more inventory. They felt that Cisco should not have assumed that there would be continuous growth. Having realized these problems, Cisco began taking steps, to set things right. The company formed a group of executives and engineers to work on a 'e-Hub' remedial program. Work on eHub began in late 2000. The project was intended to help eliminate bidding wars for scarce components. According to Cisco sources, eHub was expected to eliminate the need for human intervention and automate the flow of information between Cisco, its contract manufacturers and its component suppliers.

eHub used a technology called Partner Interface Process (PIP) that indicated whether a document required a response or not. For instance, a PIP purchase order could stipulate that the recipient's system must send a confirmation two hours after receipt and a confirmed acceptance within 24 hours. If the recipient's system failed to meet those deadlines, the purchase order would be considered null. This would help Cisco to find out the exact number of manufacturers who would be bidding for the order. According to the eHub setup, Cisco's production cycle began when a demand forecast PIP was sent out, showing cumulative orders. The forecast went not only to contract manufacturers but also to chipmakers like Philips semiconductors and Altera Corp.

Thus, overlapping orders were avoided and chipmakers knew the exact demand figure. eHub searched for inventory shortfalls and production blackouts almost as fast as they occurred. However, work on eHub fell behind schedule due to its complexity and the costs involved. According to Cisco sources, the company originally planned to connect 250 contractors and suppliers by the end of 2001, but it could link only 60. It was reported that the number might rise to around 150 by mid 2002. Company sources said that eHub was just the first stage of its plans for automating the whole process of ordering and purchasing. Meanwhile, the company's poor financial performance prompted analysts to comment that if the inputs were wrong, even the world's best supply chain could fail. They added that only the next boom phase in the IT business would prove the efficiency of eHub.

Exhibits

Exhibit I: Cisco – Income Statements

Case Details

Case Code : ITSY001
Themes: EVA Financial concepts
Case Length : 5 Pages
Period : 1997-2001
Organization : L&T
Pub Date : 2002
Teaching Note : Available
Countries : India
Industry : Construction - Building Materials & Equipment, Financial Services

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