CISCO SYSTEMS - THE SUPPLY CHAIN STORY
CISCO - A COMPANY IN TROUBLE
CISCO - THE CCO & ICS INITIATIVES
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.
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.
QUESTIONS FOR DISCUSSION:1. 'Few companies have grasped the far-reaching importance of the new
technologies for management better than Cisco Systems. Cisco could well provide
one of the best road maps to a new model of management.' Study the networked
supply chain concept as implemented by Cisco and critically comment on its
efficacy.
2. Analyze why Cisco landed in financial trouble in the early 21st century.
Would you agree that Cisco's problems were largely caused by inherent defects in
the company's systems? Give reasons to justify your stand.
ADDITIONAL READINGS & REFERENCES:
1. Weiss Phil, Cisco-systems: what keeps this
networking giant on top? Motley Fool research report (web edition), March 6, 2000.
2. Weiss Phil, The Cisco kid, Motley Fool (web edition), March 7, 2000.
3. Serwer Andy, There's something about Cisco, Fortune, May 22, 2000.
4. Shinal John, Cisco systems: A web profit prophet spread the word,
BusinessWeek e biz, September 18, 2000.
5. Viswanathan, Vidya & Gupta, Indrajit, The network is the company,
Businessworld,April 2, 2001.
6. Kaihla Paul, Inside Cisco's $ 2 billion Blunder, www.business2.com,
March 2002.
7. www.cisco.com
Back to : Free Resources Home Page
|
More Classifications...