An In-Depth Look at Cisco’s E-Supply Chain

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Table of Contents

Introduction
Main text
Upstream Issues
Downstream Issues
Recommendations
Conclusion
References

Introduction

Claiming to be a leader in the networking industry, Cisco Systems, Inc. is an outstanding company that manufactures networking and communications products and provides services associated with that equipment and its use. Presently, Cisco has optimally prioritized its networking prowess as this has become an essential part of business, education, government and home communications. Cisco’s Internet Protocol-based (IP) networking solutions are the foundation of these networks (Cisco Corporate Overview). As its headquarters is located in San Jose, California, Cisco provides a line of products for transporting data, voice and video within buildings and companies, across campuses and around the world.

Main text

According to Euromonitor International (1 October 2005), the networking hardware market in the United States is quite concentrated, with the top five players accounted for over 68% of market share. In 2004, Cisco Systems was the leader among this group, with 21% market share. Dell came in second with 18% market share, and IBM and Hewlett-Packard (HP) was head to head with almost 15% market share each. In the servers sector, IBM leads the pack with almost 30% market share, although it recently lost share to both HP and Dell. Meanwhile, in the router sector, Cisco slipped during the third quarter of 2004, but still remained the leader with market share above 50%.

As a widely global company, Cisco employs 63,050 employees worldwide (distributed in manufacturing and service, engineering, sales and marketing, and finance and administration). Cisco went public in 1990 and is listed on the NASDAQ. The company currently owns over 200 offices in more than 60 countries across the globe (Cisco Fact Sheet).

Cisco reported net sales worth $34.9 billion in the fiscal year 2007 (ending July 29, 2006). Last year, it earned $28.5 billion for the fiscal year ended July 31, 2006. The increase in net sales was primarily due to the recovery in the global economic environment and increase in IT spending by Cisco’s enterprise and consumer customers. Cisco primarily operates in five business segments categorized by products. These include switches, routers, advanced technologies, services and other products. In 2005, switches accounted for 40.7% ($10,104 million) of Cisco’s net sales. Sale of routers contributed 22.2% ($5.5 billion), followed by advanced technologies (17.8%), while other products and services contributed for the remaining 3.4% and 15.9%, respectively.

As part of their strategy, Cisco has segmented its operations geographically into five regions, namely the Americas, Europe, Middle East and Africa (EMEA), Asia-Pacific and Japan. The Americas region (North, South and Central America) accounted for a major share of Cisco’s net sales. In 2005, the company derived nearly 56% ($13.9 billion) of its net sales from this region. EMEA accounted for around 28% ($6.8 billion), Asia-Pacific accounted for 10% ($2.5 billion), and Japan accounted for the remaining 6% ($1.5 billion). In 2005, the Americas region also witnessed the maximum increase in net sales over 2004 at around 14%, followed by EMEA (12%), Asia-Pacific (11.5%) and Japan at around 4.4% (Datamonitor International. (17 June 2006).

According to Cisco’s customer business solutions manager James Crowther, a huge factor in their success throughout the years depending on their “ability to scale manufacturing, distribution and other supply chain processes quickly” (Business Intelligence 2001, p. 11). What are Cisco’s secrets in achieving a successful e-supply chain? What are the issues hide behind Cisco’s management of their upstream supply chain and how they deal with their suppliers? Did they encounter any problem in selling their products through their e-supply chain? What other options could be appropriate to improve the e-supply chain in Cisco? Why did the solutions Cisco has implemented have been successful? These are just some of the questions this paper would try to unravel in analyzing intently Cisco’s “scalable business model” that empowered the company to supersede the obstacles and triumph to become one of the world’s most admired companies as they enjoyed continued explosive business growth.

Upstream Issues

On its supply side, the Manufacturing Connection Online (MCO) is the foundation of Cisco’s Internet commerce initiative. As Cisco’s company vision is to create nothing less than a globally networked manufacturing environment, the company devised a mechanism where employees, suppliers, and other authorized logistics partners access MCO as “a central point of access to manufacturing applications, reports, tools, and information”.

Although MCO cuts costs, compresses cycle times, and promotes scalability, it adds the most value by enabling unprecedented levels of customer service. This is because MCO is designed aptly to save Cisco staff time in serving customers than to expose the possibilities of additional revenue streams. MCO enticed new classes of customers to imagine new ways of applying Cisco solutions to new classes of requirements. Ultimately, by virtualizing much of the manufacturing logistics process, MCO enabled Cisco to provide the infrastructure for identifying and exploiting new business opportunities (Sifonis 1999, p. 259).

The major benefit of the MCO is that it empowered Cisco to directly link the company to the suppliers and streamlining the procurement process. According to Business Intelligence (2001), Cisco’s suppliers have been conditioned not only to manufacture the necessary components of the product, but they also perform 90 percent of the sub-assembly work. Finally, they also perform 55 percent of the final assembly. In this case, “suppliers regularly ship finished Cisco hardware to Cisco customers without a Cisco employee even touching the product” (p. 12-13). This means that there are no more paper purchase orders and no need to beat the delivery deadline. Cisco’s purchasing teams have been empowered to focus more on strategic activities such as partnership and business development.

Grosvenor and Austin (2001) explained that MCO is an ideal system because it is “an Internet framework for various manufacturing applications”. As it is a novel and flexible framework, Cisco strived to make MCO’s design as a simple and secure as possible. It serves as a “central point of access” to virtually every need of “Cisco employees, manufacturing suppliers, original equipment manufacturer (OEM) vendors, distributors, and authorized logistics partners”.

In its fully functional form, “the MCO portal will be instrumental in scaling manufacturing information and functionality beyond tier-one manufacturing supply chain partners to tier two and three partners”. This innovation will be a major portal within the MCO environment, “driving deeper process integration between Cisco and all of its key manufacturing trading partners”. Since MCO was established, Cisco gained significant value from the manufacturing supply chain initiatives that they incorporated to enhance their supply side. These benefits include:

Inventory reductions of 45 percent.
Order cycle time reductions of 70 percent.
Time to volume–the time required by production lines to scale for mass manufacturing–cut by 25 percent.
Increased productivity across the entire manufacturing supply chain.

Cisco chose to outsource almost all its manufacturing processes to selected suppliers, because they wanted to focus on its core competence and new product design. To resolve the testing problem, Cisco undertook a three-step process: First, it created test cells on its supplier’s line that embodied Cisco’s standard test procedures. Second, it ensured that the test cells automatically configure test procedures when an order arrives. Third, it developed strong supplier partnerships so that suppliers shoulder greater responsibility for quality. Testing processes were made routine and were embodied in the software test programs that ran the test cells.

Once testing had been automated and standardized, it was outsourced entirely to the suppliers, allowing quality issues to be detected at the source. However, although Cisco outsourced much of the physical testing, the company retained the intelligence behind the testing (Sifonis 1999, p. 262).

Indeed, the MCO is definitely a “global virtual manufacturing strategy”. As John Chambers explained, the company first had to establish manufacturing plants all over the world. This is why they developed close arrangements with major suppliers. So when Cisco works together with our suppliers, and if the company does its job right, the customer cannot tell the difference between Cisco’s plants or their suppliers in Taiwan and elsewhere (Lakenan, Boyd & Frey, 2001).

This approach was enabled by Cisco’s single-enterprise system, which provides the backbone for all activities in the company and connects not only customers and employees but also chip manufacturers, component distributors, contract manufacturers, logistics companies and systems integrators. These participants can perform like one company because they all rely on the same Web-based data sources. All its suppliers see the same demand and do not rely on their own forecasts based on information flowing from multiple points in the supply chain. Together with this, Cisco also built a dynamic replenishment system to help reduce supplier inventory (Simchi-Levi, Kaminsky and Simchi-Levi 2004, p. 216).

MCO allowed Cisco to build up an integrated manufacturing system that comprises “34 plants globally, of which only two are owned by the company”. This method allowed Cisco to improve its bottom line. This is the reason why, in 2000, Cisco managed to save up to “US$800 million compared to what it would have cost to own and operate all 34 manufacturing plants” (Business Intelligence 2001, p. 12).

Downstream Issues

If Cisco has the MCO for its suppliers, it also instigated the Cisco Connection Online (CCO) to serve up to the needs of its customers. It is thought that the best known of Cisco’s Internet business solutions is its suite of networked commerce agents that enables users to configure, price, route, and submit electronic orders directly to Cisco. The pricing and configuration agents allow more than 10,000 authorized representatives of direct customers and partners to configure and price Cisco products online. Customers are able to walk through an intuitive series of steps to pick the product they want and all the related accessories for that product, such as memory, power supply, and cable.

Customers are prompted to modify orders until they specify a workable configuration. Order placement permits customers to drop their selections into a “shopping cart” in Cisco’s virtual marketplace. Order status lets users check on an order using a purchase order or sales order number. This application even connects users directly to Federal Express’s tracking services to determine in real-time exactly where their order is in the shipping process (Kalakota 2001, p. 59). It is the Service Order Agents that allow users find information about specific service orders. Invoice Agent provides controllers, finance officers, and accounts payable staff with rapid, easy, online access to track their invoices with Cisco.

Primarily, the Cisco Connection Online (CCO) acts up as Cisco’s Internet storefront. It is the company’s comprehensive resource for customers, suppliers, resellers, and business partners. CCO is essentially a portal to the information stored in Cisco’s ERP (enterprise resource planning) databases, legacy systems, and client-server systems around the world, a storehouse of more than 1.5 million Web pages (Sifonis 1999, p. 255). To make virtual environment a common element of its entire value chain, Cisco is making it possible for its largest customers and resellers to integrate their enterprise applications directly into Cisco’s own back-end systems, using the Web as the bridge.

The new strategy takes hold just as the staggering success and bottom-line benefits of CCO are beginning to sink in. The site, which automates product ordering and customer support activities, is on track to “save the company a little more than $350 million per year in operating expenses” (Sifonis 1999, p. 255). Cisco dedicates most of its efforts to make better customers out of its existing customers, but it also has its sights set on customers who have not yet purchased products online because of the lack of back-end integration. Taking the strategy a step further, Cisco is encouraging also its suppliers to adapt their virtual supply-chain processes to further integrate the value chain on behalf of Cisco’s customers.

In terms of marketing, Cisco has resorted to traditional ways of promoting its brand by focusing on the human side of networking. They changed from the “Powered by Cisco” campaign by positioning a platform for their customers’ life experiences via the “Welcome to the Human Network”’ campaign that debuted in October 2006. This campaign is intended to educate enterprise companies and consumers “about the ways Cisco makes it easier for people to connect with one another via the Web”.

Their marketing included a microsite and features several print ads. One print ad featured TelePresence, a teleconferencing tool that combines audio, high-definition video and interactivity. The first phase of the campaign included ads in publications such as The New York Times and The Wall Street Journal. The second and current phase forgoes print in favor of online (with ads running on sites such as BusinessWeek.com and Forbes.com) and network TV spots. The TV spots are augmented by product placements in such popular programs as “24”’ and “The Office”. In this way, as a company that sells virtual lifestyles, “Cisco is taking the lead among technology companies that want to humanize their marketing message” (Schwartz, 22 October 2007).

In the area of customer service management (CRM), the company has a customer service hotline for non-technical information, technical assistance and a software library to help customers with their products and services. Fact is that Cisco is also cashing in on CRM software solutions as they created the CRM Express Solution Specialization exclusively for Microsoft Business Solutions CRM. This product was developed for their channel partners who sell into the small and medium-sized business (SMB) market.

The specialization is designed to help channel partners grow IP communications revenue while differentiating themselves from competitors and, perhaps most important, is a tangible sign that convergence has become a reality. The new CRM solution lets partners integrate Cisco CallManager Express with the Microsoft CRM application, providing the IP telephony interface for Microsoft CRM users based on the Cisco CRM Communications Connector.

SMBs can improve customer service and reduce operational costs using the Communications Connector to link Cisco IP communications platforms with Microsoft CRM. The tool automatically triggers screen pops with customer account information and contact history, allowing account managers and engineers to more quickly and effectively respond to customers’ needs (Hatlestad, 11 October 2004).

In the aspect of legal requirements, Cisco is dependent on the communications sector for nearly 15-20% of its net sales. In economies across the globe, the telecommunication industry operates in a highly regulated environment. In the past, the regulatory environment has been relatively unstable and unpredictable, thereby presenting significant challenges to both communication service providers and their infrastructure suppliers such as Cisco. Such regulations increase the cost of compliance for the company and affect the company’s flexibility in conducting its business (eWeek, 22 March 2004).

One improvement that Cisco can do to improve its business-to-customer (B2C) function is trying to adopt a reverse auction strategy, where customers can take advantage of obtaining products that have the lowest cost. However, the downside of this reverse auction process is that it takes a longer time because a third-party intermediary may take part in the electronic bidding, as well as forward auctions (Turban et al., 2002).

Another improvement that Cisco can benefit more in its business is the application of collaborative commerce (c-commerce) where a Web-based system is used for communication, design, planning, information sharing, and information discovery. In this, Cisco can use their products and collaborate with other companies producing another product and combine them into a better or more useful product for the customer. However, this process can be a little complicated but it can be possible if this method is formally deliberated by collaborating companies.

Although Cisco has been successful in shaping its e-supply chain, Cisco’s inventory levels have been increasing over the past few years, from $880 million in 2002 to $1,297 million in 2005. Maintaining a high inventory requires huge investments, which have a zero rate of return for the company. Moreover, due to this, the company is also exposed to the risk of falling prices and rapidly changing trends in the market.

In addition, Cisco’s inventory turnover decreased from 7.7 in 2001 to 6.5 in fiscal 2005. Inventory turnover ratio measures the number of times a company sells its inventory during the year. A low inventory turnover indicates low sales. Inventory management remains an area of concern for Cisco as it needs to maintain optimal inventory levels to ensure competitive lead times as it faces the risk of inventory obsolescence, because of changing technology and customer requirements. Cisco system also has the capacity to ignore or misread crucial warning signs that their sales forecasts were too ambitious. Because of duplicate orders, Cisco executives overestimated demand and therefore “continued to expand capacity aggressively, even after business slowed” (Thurm 2001, p. A1).

Recommendations

Cisco should further improve their inventory because they suffered much in the summer of 2000, where the company experienced shortages of several key components. Customers had to wait for two and even three months for some of Cisco’s most popular products. Some frustrated customers chose to cancel their orders and buy equipment from Cisco’s competitors (Juniper Networks, Nortel Networks).

Customers and resellers also began to order from multiple distributors with the intention of canceling duplicate orders as soon as one distributor shipped the product. Cisco’s current system failed to recognize the extent of the double orders and therefore, although the tech economy had already begun to slow down, Cisco maintained its ambitious sales forecasts. To avoid long lead times and lost sales, Cisco added workers and stockpiled components. Cisco also loaned $600M without interest to contract manufacturers to buy even more parts. This expanded capacity did indeed serve to reduce production lead times throughout the fall of 2000.

The order backlog disappeared as customers canceled duplicate orders, and new orders anticipated by Cisco failed to materialize. Cisco was saddled with excess capacity. Despite the write-off of $2.2 billion in component inventory in April of 2001, Cisco carried $1.68 billion in parts and unsold equipment on its books at the end of the fiscal year 2001. According to Cisco Chief Strategy Officer Michelangelo Volpi, they were not aware of the magnitude [of duplication in the order backlog]. If not for the misleading inventory, the management might have seen better and made better decisions (Armony and Plambeck, October 2005).

Also, mergers and acquisitions form an integral part of Cisco’s overall growth strategy. The company had made 17 acquisitions during 2005 that are yet to be effectively integrated into the company’s existing business model. In addition, Cisco could face difficulties in terms of integrating the operations, technologies, products, and personnel of the acquired companies. The failure to manage and successfully integrate acquisitions could harm Cisco’s business and financial condition in the future.

Conclusion

However, Cisco is in the right path in its endeavor to humanize their technology for people. Cisco is known to offer high technology products and it can alienate people from really getting the full advantage of their products. This is why Cisco should try their hand at cashing in on traditional methods of advertising to hold them closer to less tech-savvy consumers. Also, Cisco can adopt forward and reverse auctions because the benefits are substantial and the implementation is relatively simple. All these solutions can be good for e-commerce because integration, marketing, inventory and auctions are vital concepts in that can make e-business ventures succeed (O’Brien, 2003).

Currently, Cisco is increasingly facing price competition from vendors in the Asian region, especially from China. Vendors, such as Huawei, ZTE, and Harbour Networks are investing heavily in research and development. Huawei reported an increase of 45% in net sales, reaching $5.6 billion in 2004 (National Business Daily, 23 November 2005). In the recent past, the company has been specifically targeting Cisco’s product range and key markets to increase its market share.

The impact of aggressive pricing strategies adopted by Asian vendors has been further boosted by an inexpensive pool of engineering talent and substantial funding from the Chinese government, which is passed on in the form of cheaper equipment to the end consumer. The Chinese vendors are able to manufacture products at a lower cost, thus posing stiff competition to the company. Cisco should try to penetrate the Asian markets because the potential of gaining advantage in this region can be a great opportunity for the company. The advantage of Cisco lies within its strategic alliances with other companies in areas where collaboration can produce company advancement and growth in new markets.

The main objectives of a strategic alliance include technology exchange, product and solution development, joint sales and marketing efforts and new-market development. Cisco has alliances with large global players, such as AT&T, BearingPoint, Bell South, Cap Gemini/Ernst & Young, EDS, HP, IBM, Intel, Italtel, Microsoft, Motorola, SBC and Sprint, etc. These partnerships have not only helped Cisco in reducing R&D costs, but also in leveraging its partner’s knowledge of products and markets in areas where it has less exposure.

Cisco’s current Cisco’s supply chain model is already being looked up as a scalable and agile system that allowed the company to be successful in achieving its goals. Further polishing this system would make it flawless as technology is predicted to improve in the near future.

References

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Business Intelligence. 2001. Case Study: Cisco Systems. Managing the e-Supply Chain.

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Euromonitor International. 2006. Networking Hardware in the USA. UK: Global Marketing Information Database. Web.

EWeek. 2004. Powell, Chambers Look to the Future.

Grosvenor, F. & Austin, T.A. 2001. Cisco’s eHub Initiative, Supply Chain ManagementReview 5(4): 28.

Hatlestad, L. 2004. Specialization — Cisco, Microsoft Converge On IP, VARbusiness, p. 24.

Kalakota, R. 2001. M-Business: The Race to Mobility. OH: McGraw-Hill Companies.

Lakenan, B., Boyd, D. & Frey E. 2001. Why Outsourcing and Its Perils? Strategy Business, no. 24.

National Business Daily. 2005. Cisco-ZTE vs. Huawei-3Com.

O’Brien, J.A. 2003. Management Information Systems: Managing Information Technology in the Business Enterprise, 6th ed. OH: The McGraw-Hill Companies.

Schwartz, A. 2007. Cisco Systems (Brands), B to B 92(14): 24.

Sifnos, J.G. 1999. Net Ready: Strategies for Success in the E-conomy. Blacklick, OH: McGraw-Hill Professional Book Group.

Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E. 2004. Managing the Supply Chain: The Definitive Guide for the Business Professional, 1st ed. OH: McGraw-Hill Companies.

Thurm, S. 2001. Missed signals: Behind Cisco’s woes are some wounds of its own making. Wall Street Journal.

Turban, E., King, D., Lee, J., Warkentin, M., & Chung, M. 2002. Electronic Commerce 2002: A Managerial Perspective, NJ: Prentice-Hall, Inc.

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