Cisco Systems: Failure in Supply Chain Management Real World Case 3 – Chapter 12 – P. 454

1. Cisco Systems: Failure in Supply Chain Management Real World Case 3 – Chapter 12 – P. 454 Instructor: Dr. Ahmad Syamil, CPIM, CIRM Team 4:

2. Case Summary • Situation: In May 2001 Cisco Systems had to write off $2.2 billion in inventory. • Cisco blamed the situation on an unforeseeable plunge in technology spendings. • Actually, the fiasco was caused by information gaps between the different tiers of Cisco´s supply chain (more detailed with the questions at the end). • Generally speaking, Cisco´s and also their suppliers´ inventory were bloated by artificially inflated demand projections. Thilo Grabo

3. Case Summary (cont.) • To prevent of such a fiasco, Cisco implemented a new system, eHub. • This system connects all stages of the supply chain, and thus makes information more transparent and available for all participants. • “eHub supposedly ferrets out inventory shortfalls, production black-outs, and other screw-ups as fast as they occur.” • Timeless software limitation also for eHub: • “Garbage in, garbage out.” Thilo Grabo

4. 1984-Cisco Systems is founded by two computer scientists: Len Bosack and Sandy Lerner. Cisco Systems is named for the city of San Francisco. 1985-The first corporate logo is developed and first system, Massbus-Ethernet, is shipped. 1986-Cisco forever changed the network communications industry and Internet by launching its first routing innovation, the AGS multi-protocol router. Feb 1990-Cisco goes public listed as “CSCO” on the NASDAQ and the first stock split in 1991. Cisco Systems History Reanetta Walker

5. 1994-Cisco becomes first major supplier of multi-protocol internetworking products to be awarded the ISO 9001 certification. 1997-Cisco makes first appearance on Fortune 500 list at number 332. 1998-Cisco becomes first company in history to achieve market capitalization of $100 billion in just 14 years and became the most valuable company in 2000. 2002-Cisco shipped its one millionth IP telephone. Cisco’s History cont… Reanetta Walker

6. Cisco Systems, Inc. is the worldwide leader in networking for the Internet. Cisco hardware, software, and service offerings are used to create Internet solutions so that individuals, companies, and countries have easy access to information—regardless of differences in time and place. In addition, the company is recognized as a pioneer in using the Internet for its own business practices, offering consulting services to help other organizations around the world. Today, networks are an essential part of business, education, government, and home communications. Cisco Systems, Inc Crystal Crockett

7. CEO—John Chambers "In today's environment, it's all about getting back to the basics in terms of focusing on the areas that a company can influence and control: cash generation, available market share gains, productivity increases, profitability and technology innovation. These factors will ultimately determine who will survive in this challenging economy." Crystal Crockett

8. Extreme Networks, Inc. is a provider of network infrastructure equipment for corporate, government, education and healthcare enterprises and metropolitan service providers. The Company's principal hardware and software products are the Summit Stackable Product Family, BlackDiamond Modular Chassis, Alpine Modular Chassis and ExtremeWare Software. Juniper Networks, Inc. is a provider of network infrastructure solutions that transform the business of networking by converting bandwidth into a dependable and secure corporate asset. The Company's products, services and solutions enable service providers and other network-intensive businesses to support and deliver services and applications on an efficient and low-cost integrated network. Nortel Networks Corporation supplies products and services that support the Internet and other public and private data, voice and multimedia communications networks using wireline and wireless technologies, which the Company refers to as networking solutions. The Company's networking solutions generally bring together diverse networking products from its various product families, and related services, to create either a customized or off-the-shelf solution for its customers. The Company's business consists of the design, development, manufacture, assembly, marketing, sale, licensing, installation, servicing and support of these networking solutions. Competitors Crystal Crockett

9. Competitor Comparison Crystal Crockett

10. What caused Cisco’s $2.2 billion loss in unneeded inventory? Could this situation have been avoided? Why?

11. Cisco’s Supply Chain CISCO Concentration on marketing and product innovation. Contract Manufacturers Here Celestica, Flextronics, Solectron… are doing final assembly. Parts Suppliers Intel and Xiliox… providing components, such as processor chips Stacy Adkins

12. Cisco ordered large quantities well in advance of the need based on sales projections in order to lock in supplies of scarce components- These forecasts were actually inflated due to the products being hard to come by. Cisco’s customers ordered from several companies with the intention to buy from only one company. A missing link in Cisco’s supply-chain management system then magnified this problem. If Cisco projected sales of 10,000 routers, it transmitted this information to say 3 of the manufacturers who then would try to locked-up scarce components and fill the entire order. This would then translate back through Cisco’s system as a need for 30,000 routers. Stacy Adkins

13. The situation could have been avoided with better integration of information. It could have been avoided if the parts were assigned to one supplier. It could have been avoided if Cisco’s system had communicated cumulative. Stacy Adkins

14. How is eHub supposed to avoid such losses in the future?What problems might arise with this new system?

15. Avoidance of such losses through higher transparency and a broader approach: • Old System: • Only tied in the contract manufacturers. • Overlapping of orders. • Artificially inflated demand for components. • Cisco ordered large amounts of scarce components; demand increases, thus price increases. • New System (eHub): • Ties in one more stage of SC. • Total aggregated demand is transparent; no overlapping of orders. • Purchasing prices along the SC will be kept down. • Problem of artificially inflated customer demand is not solved. Christian Gasse

16. Possible problems with the new system: Common software limitations, like “garbage in, garbage out”. Here: If the demand projections will not improved, Cisco will still order too much and have inventory they are never able to market. Effects on the competition due to more transparency of information. Here: Eventual collusive behavior of contract manufacturers because they know, they can´t fill the whole order alone because their supplier will only serve the total aggregated demand. Contract Manufacturers might set higher prices to increase their profit margin. Christian Gasse

17. What can be done in the supply chain management process of any company to avoid situations like CISCO’s?

18. Mario Mazzola Mario Mazzola Mario Mazzola is the Chief Development Officer at CISCO SYSTEMS. He is responsible for leading CISCO's overall R&D strategy and managing CISCO's entire engineering organization which is comprised of eleven technology groups: IOS Technologies, Internet Switching & Services, Core Routing, Network Management Services, Optical, Storage,Voice, Aggregation, Access, Ethernet Access and Wireless. Johnny van Horn Mario Mazzola is the Chief Development Officer at Cisco Systems. He is responsible for leading Cisco's overall R&D strategy and managing Cisco's entire engineering organization which is comprised of eleven technology groups: IOS Technologies, Internet Switching & Services, Core Routing, Network Management Services, Optical, Storage,Voice, Aggregation, Access, Ethernet Access and Wireless

19. Mario Mazzola previously held the positions of Senior Vice President of New Business Ventures and Senior Vice President of the Enterprise Line of Business at Cisco Systems. As the senior VP of New Business Ventures, Mario was responsible for heading the incubation effort to explore new technologies that align and promote Cisco's business strategies. As the senior VP of the Enterprise Line of Business Mario helped to guide Cisco's strategies for providing global, end-to-end solutions and the convergence of data, voice, and video since the formation of the group in 1997. Johnny van Horn

20. The answers lie in discovering the management executives who were responsible for the problem and why their failure went on so long, $2.2 billion loss. I reviewed the 2001 financial reports on their website and no information was available about the inventory write-off from the accounting audit staff. There should have been a detailed explanation about what happened. Fire those responsible from the top down both internally and cancel contracts with outside manufacturers-purpose is to send a message that those that expect rewards for success should expect equal treatment for failure. Johnny Van Horn Johnny van Horn

21. Institute procedures to insure other major problems are not hidden. • The textbook cites CISCO on page 425 as “The Ultimate Networked Organization”; appears to be a contradictory as later in a case the author discloses CISCO as committing a major error which in a smaller company would have bankrupted it. Johnny van Horn