CISCO SYSTEMS - THE SUPPLY CHAIN STORY
CISCO - A COMPANY IN TROUBLE
THE CCO & ICS INITIATIVES
In order to address the above problems, Cisco revamped its supply chain
management to reduce the long ordering cycles. The company launched Cisco
Connection Online (CCO), which connected Cisco with all its suppliers and
contract manufacturers online. As a result, when a customer placed an order, it
was instantly communicated to all its suppliers and manufacturers. In most
cases, a third party logistics company shipped the product to the customer.
CCO ensured increased co-ordination and connectivity between supply partners,
thus reducing the operating costs of all constituents. Automated processes
within the supply chain removed redundant steps and added efficiencies. For
instance, changes in market demand were communicated automatically throughout
the supply chain. This enabled the networked supply chain suppliers to respond
appropriately.
CCO reduced payment cycles for suppliers and eliminated paper based purchasing.
As a result, suppliers agreed to charge lower product markups. Consequently,
Cisco saved more than $ 24 million in material costs and $ 51 million in labor
costs annually.
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CCO enabled Cisco's contract manufacturers to find out
the exact position of demand and inventory at any given point of time. As
a result, they could manage replenishment of inventory with ease. This
resulted in a 45% reduction in inventory (Refer Figure II) and a doubling
of the inventory turnover. Cisco slashed the inventory holding of its
suppliers and manufacturers and brought it down from 13,000 units (approx)
to 6,000 units within 3 months.
To get the most out of CCO, Cisco used intranets and extranets
extensively. The extranet was used for communicating with suppliers,
manufacturers, customers and resellers, while employees used the intranet
for communicating about the status of orders. Thus, through an online
information and communication system, Cisco linked suppliers,
manufacturers, customers, resellers and employees seamlessly. |
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However, some of Cisco's large customers were not able to
access CCO because it did not connect seamlessly to their back-end or
electronic data interchange systems. These firms, typically telecom equipment
distributors or network operators, lacked the time to visit the supplier
websites to order the equipment they needed.
Cisco introduced the Integrated Commerce Solution (ICS) for these customers.
ICS provided a dedicated server fully integrated into the customers' or
resellers' Intranet and back end ERP systems. It facilitated information
exchange between Cisco and them, besides speeding up transactions. It had all
the e-commerce applications of CCO, with the additional capability of pulling
order related data directly from Cisco's back end ERP systems online. 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.
CISCO - THE PROBLEM AND THE REMEDY
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