Cisco Systems - The Supply Chain Story

The Cco & Ics Initiatives Contd...

At the same time, as the server was integrated into the customers' and resellers' back-end ERP systems, the end users needed to enter the order information only once; this order was simultaneously distributed to both resellers and Cisco's back-end systems, eliminating the need for double entry. With these new Internet initiatives and sound financials for fiscal 2000 (Refer Exhibit I), Cisco seemed all set to register even higher growth figures. However in early 2001, the global IT business slowdown and the dotcom bust altered the situation. Reportedly, Cisco failed to foresee the changing trends in the industry and by mid 2001 had to cope with the problems of excess inventory. As a result, the company had to write off inventory worth $ 2.2 billion in May 2001. Cisco blamed the problems on the 'plunge in technology spending', which Chambers called as unforeseeable as 'a 100-year flood.' Company sources revealed that if its forecasters had been able to see the downturn, the supply chain system would have worked perfectly.

The Problem and the Remedy

Analysts felt that the flaws in Cisco's systems had contributed significantly to the breakdown. During the late 1990s, Cisco had become famous for 'being the hardware maker that did not make hardware.'

Its products were manufactured only by contract manufacturers and the company shipped fully assembled machines directly from the factory to buyers. This arrangement led to major troubles later on. According to analysts, Cisco's supply chain was structured like a pyramid, with the company at the central point. On the second tier, there were a handful of contract manufacturers who were responsible for final assembly.

These manufacturers were dependent on large sub-tier companies for components such as processor chips and optical gear. Those companies in turn were dependent on an even larger base of commodity suppliers who were scattered all over the globe. The communication gaps between these tiers created problems for Cisco. In order to lock-in supplies of scarce components during the boom period, Cisco ordered large quantities in advance on the basis of demand projections made by the company's sales force.

To make sure that it got components when it needed them, Cisco entered into long-term commitments with its manufacturing partners and certain key component makers. These arrangements led to an inventory pile-up since Cisco's forecasters had failed to notice that their projections were artificially inflated. Many of Cisco's customers had ordered similar equipment from Cisco's competitors, planning to eventually close the deal with the party that delivered the goods first. This resulted in double and triple ordering, which artificially inflated Cisco's demand forecasts.

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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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