30/06/2011

MBA 13 :
SUPPLY CHAIN MANAGEMENT:
EHTP-
ENPC CASE OF CISCO SYSTEMS

Pr. K. Matthew Wong | Abdelilah Lamhazet

Supply Chain Management: Cisco Systems Page 2
 Executive Summary

The contemporary business landscape is characterized by dynamic environmental changes with intense
competition. Therefore, enterprises compete on multiple competitive bases like time, cost, responsiveness and
quality. Continuously changing demand pattern, short product life cycles, dynamic market, presence of
multiple competitors, customer demand for customized product etc. are some of the characteristics of this
business landscape. Since a business environment is characterized by continuous changes, enterprise matrix
and processes must be able to respond effectively to these environmental changes. Thus, enterprises require
capability to quickly adapt to the changing needs and hence, enterprise resource, systems and processes must
be change proficient. Further, change pro-activity of the enterprise acts as a potent weapon against dynamic
environmental changes. The enterprise matrix and processes must have flexibility as its inherent property.

Cisco Systems is one of the most successful companies that have seized the strategic opportunity of rebuilding
its entire supply chain to support and meet its ambitious business strategies and worldwide expansions, Cisco
Systems is today a potential leader of its market and is planning to enter other segments as consequence of
te h ologi al o erge e, Cis o s “C stru ture is re og ized i ter atio al bodies that describes it as it
o i es a far-reaching supply chain vision, strong execution and deep collaboration with customers and
suppliers (AMR Research Report 2009).

Supply Chain Management: Cisco Systems Page 3

INTRODUCTION:

Cisco is one of a small handful of companies whose importance in business looms even larger than its market
cap which was, for a while, the world's largest at the height of the dot-com boom and currently totals a hefty
$159 billion. Renowned as a manufacturer of advanced routing and switching technology that provides the
foundation for the Internet, Cisco is also a business case study example of growth through acquisition, its
adeptness at integrating acquisitions is legendary.

Broadly Recognized Supply Chain:

 The 2010 AMR Supply Chain Top 25:

Cisco Systems has climbed steadily for five straight years, moving up two slots to No. 3 this year. Many areas
of supply chain innovation have borne Cisco's mark, including supply chain risk management, multilevel
demand-planning excellence and regionalized supply network architecture. The most prominent feature of
Cisco's leadership, though, is probably its explicit championing of the term "value chain" as an organizational
construct. By bringing together not only sourcing, production and logistics but also customer service, quality
and new product launch as hard-line reporting functions, Cisco's Customer Value Chain Management
organization may be a model for supply chain organizations of the future Gart er s top 5 “C ‘eport .

AM‘ s a ual list does offer o e ethod for deter i i g superior suppl hai s. The resear h fir hooses its
list via a methodology that includes polling of a peer opinion panel, an AMR Research opinion and three
financial metrics (three-year weighted average for return on assets and revenue growth, as well as inventory
turns).

Supply Chain Management: Cisco Systems Page 4

  Supply Chain Overview:

Like other tech companies, Cisco's stock and business suffered when the bubble deflated(see bullwhip effect
section later in this report): the stock declining from a high of near 100 (adjusted for splits) to its present range
in the mid-twenties. Times were tough. But unlike many of its Silicon Valley neighbors, Cisco now finds itself
well-positioned for the coming wave of Internet growth that analysts foresee with the explosion of video and
voice.

As a key differentiator for both its products and its enterprise, Cisco has embarked in the past several years on
ground-breaking supply chain initiatives intended to make it the industry supply chain leader as they had little
alternatives.

In Cisco's case, the effort becomes particularly noteworthy because the bulk of the company's production,
approaching 90%, is conducted by independent, globally diffused contract manufacturers. Approximately 2000
Cisco people are involved directly in manufacturing; the contract manufacturers employ six to seven times as
many, at that level the core function where the Cisco manufacturing people add value is in supply chain
management World Trade Magazine; Mar 2007; P34).

To sustain current growth and accomplish future plans, Cisco's strategy is to focus investments in proprietary
technologies, move into new areas and aggressively market the brand as 'best in class' to give the products
the kind of image that sustains maximum pricing power (World Trade Magazine; Mar 2007; P34).

At the heart of this strategy, as it unfolds in future product generations, is Manufacturing Excellence (MX). And
at the heart of Manufacturing Excellence is a new approach to the supply chain; a revised approach to product
development designed to enable new generation products while simultaneously cutting cost out of
production (Eugenia Corrales, Cisco's Vice President, Product Operations, World Trade Magazine March
2007). For example: the design for a product intended to provide high performance at high speeds was
prohibitively costly; Through the Mx approach, CISCO was able to isolate those elements which needed to run
on high performance and those which could run on standard tech, thereby allowing it to cut the price by using
more ordinary tech components.

Being able to do this very much depends on what Cisco management call "a proactive" supply chain
(www.cisco.com). This began with procurement and a dramatically reduced number of approved vendors that
the entire company uses. The impact of reduction in the supply base has been incredibly powerful. "We're able
to look at mutual technology roadmaps with our suppliers. That gives us more bandwidth to concentrate on
our core functions while the suppliers provide the context functionality." (Eugenia Corrales, Cisco's Vice
President, Product Operations, World Trade Magazine March 2007).

Supply Chain Management: Cisco Systems Page 5

Technology roadmaps, the future direction of Cisco's products, are jointly developed in Commodity Councils
that include engineering teams from both the company and these outside vendors. Cisco tells them what it is
going to want, and they revert back with what they're going to be able to deliver. From that Cisco proceeds
ith a 'gap a al sis . A huge gap becomes a problem that could mean the use of bleeding edge technology
which is not compliant with MX approach in terms of proven reliability. The more we call do with the lowest
risk technology, the better." (Eugenia Corrales, Cisco's Vice President, Product Operations, World Trade
Magazine March 2007)

MX o sists of t o ai guideli es , We want to benefit from the designs and the disciplines that We
currently run, but we want to invent a few new ones and deploy new tactics and get smarter in some areas
here e thi k e a i pro e A gel Me dez, “e ior Vi e Preside t, World ide Ma ufa turi g, World
Trade Magazine, Mar2007).

In refining this process, it turned out that there were no standardized sets of measurements to evaluate
product development processes over time and across the breadth of the company. To rectify this, Cisco set up
a system of New Product Introduction (NPI) metrics, a home-grown tool that affords real-time monitoring and
the a ilit to see e er thi g that is u der de elop e t i o e s ste . Cis o s approach is to manage product
development against standards. To this end, company-wide implementation is merging NPI with project
management software. The ultimate goal is to build project management into the tool so that people have to
fill out only one data set and are tracking same data. Then monitor where a project is in its life cycle
management (Eugenia Corrales, Cisco's Vice President, Product Operations, World Trade Magazine March
2007).

Using our IT infrastructure we were able to bolt on lots and lots of different configurations of manufacturing
nodes or supply chain nodes in order to scale at a very high rate of capacity Angel Mendez, Senior Vice
President, Worldwide Manufacturing, World Trade Magazine, Mar2007).

Another Mx initiative, Value Engineering, incorporates lifecycle management into the product at the earliest
stage. Products can be designed so that cost reductions can be easily introduced during the last phases of
product lifecycle.

Product innovation is the nexus of what makes the Cisco model work, the company doesn't scale without new
products. But, unlike companies in industries where change moves slower, there is little margin for Cisco to
miss an opportunity in the introduction of new product. "What makes the situation so challenging for us is that,
where the clock speed for Aerospace, say, might be 15 years, for us it's 18-20 months." (Jim Miller, Vice
President, Advanced Manufacturing Technology, World Trade Magazine March 2007).

Supply Chain Management: Cisco Systems Page 6

Mx is conceived to provide an underpinning to help respond to such time pressures. The industry norm is to
focus on bringing the idea from concept to market but not looking at the full lifecycle of the product." This is
most definitely not the Cisco approach (Cisco VP).

More than 90 percent of the cost of the product is locked in at the end of the design phase. In many
companies, engineers don't speak to manufacturing; the question for Cisco is how to integrate them, how to
get people out of functional silos and to think holistically.

The supply chain for these products assumes added complexity since Cisco relies almost entirely on contract
manufacturers. In order to oversee these processes, operating 24x7 throughout the world, an innovative
management system called Autotest was developed. It captures real-time data from facilities, globally
disparate manufacturers with disparate operating systems, to provide a 'one window' view of the state of
global production lines. Intelligent agents built into the system can even trigger corrective actions long-distance
when required.

The priorities Mx poses to the supply chain fall into several areas, in terms of lean implementation, it is holistic
optimization and expansion of leveraging partner capabilities. In logistics and transportation, it is how to
leverage information across networks to optimize delivery. In product costing, is to make the request-for-quote
process more efficient and integrated with total product cost management.

Since 1994, Cisco has initiated a 'lean' transformation when it switched from doing its own manufacturing,
warehousing and shipping to employing contract manufacturers. The challenge of Mx is supply chain visibility,
real ti e o itori g, o trol a d e e utio . The halle gi g pie e for Cis o s a age e t is to u dersta d
the kind of interaction to resolve with customers and with supply chain partners (See bullwhip effect section
later in this report).

Maintaining alignment with partners depends on standardized processes rather than directives. Standards-
based partner interfaces can be leveraged and are scalable. Implementing such interfaces, however, requires a
sharing of common goals, common processes and a common vision K.C. Wu, Senior Director, SCM World
Trade Magazine March 2007).

As Cisco has entered new geographies, consolidating and controlling the supply chain became even more
critical, the importance of supply chain innovations in infrastructure and technology was to help provide faster
lead time and delivery to customers.

Supply Chain Management: Cisco Systems Page 7

Aiding Partners, Guarding the Supply Chain Ecosystem:

When the economy tanked in 2008, Cisco Systems set out to aid its key channel partners and prevent the
permanent damage to its intricate supply chain that would occur if key partners cut back orders or went out of
business. Most of Cisco's sales are made through distributors, system integrators and resellers.
The issio , du ed Na igate to A elerate , e te ded usto er pa e t ter s fro to 9 da s. It used
three lenders—GE Commercial Distribution Finance, Castle Pines Capital and Deutsche Bank-to fund the
difference, keeping Cisco's AR terms at 30 days, and optimizing working capital across the entire value chain.
That meant liquidity for Cisco customers and a transfer of $700 million of credit risk to lenders. Cisco retained a
$15 million first-loss guarantee and paid interest on the 60 days of lender credit. Because the lenders pay Cisco
a discounted amount after 30 days, its days sales outstanding, which had been running between 35 and 50
days and deteriorating, fell to an even 30 days for participating partners Treasury & Risk Magazine P37,
November 2010).

"Navigate to accelerate successfully maintained Cisco's sales momentum and margins in a very difficult market
environment, the program also mitigated the impact of extended payment terms and built invaluable loyalty
among channel partners, Cis o s part eri g odel a e des ri ed as highl lose Colla orati e.

Risk Management & Bullwhip Effect:

 Bullwhip Effect : The largest inventory write-down in history

It led to a $2.2 billion inventory write-down by Cisco Systems in May 2001. Cisco relies on contract
manufacturers for final assembly (that is, tier-1 suppliers). Contract manufacturers are supplied by component
producers (that is, tier-2 suppliers), who in turn are supplied by commodity suppliers (that is, tier-3 suppliers).
Cis o s suppl hai is ele tro i all li ked, ut i May 2001, these linkages were limited to adjacent levels so
that visibility of end consumer demand was limited.

Supply Chain Management: Cisco Systems Page 8

Around the beginning of the 21st century, the Internet surge was booming and routers were in short
suppl . Custo ers ould pla e dupli ate orders ith Cis o a d Cis o s o petitors, ith the idea that
once an order was received, the remaining orders would be canceled. Fro Cis o s perspe ti e, de a d
appeared much greater than it actually was, and this perception became further distorted at higher tiers
in the supply chain. The reason was that contract manufacturers, who were competing for business from
Cisco and other router firms, were placing large orders with component providers in an attempt to lock
in a supply of scarce components. In short, an imbalance between supply and demand caused router
customers to over-order, which created a greater sense of scarce supply and further over-ordering at
higher tiers in the supply chain. By the time Cisco discovered that actual demand was much lower, it
was too late. The firm was left with $2.2 billion of overvalued inventory. Things have evolved since then after
MX implementation.

 RISK MANAGEMENT:

Cis o s atte tio to risk a age e t is o prehe si e given that the company has almost 200 product
families that require more than 35,000 component parts, and supply chain partners dispersed around the
globe.
Resilient supply chain is an ultimate attribute of Cis o s approa h. It starts from sourcing, development of
manufacturing network and development of logistics network. In the event of any type of disruption—be it an
earthquake in China, a supplier bankruptcy or a fire at a facility—Cisco is able to identify in real time the parts
or products that are coming out of that node . The detail of that information is incredibly granular John
O Co or, Cis o s dire tor of GSCM, Industry Week Magazine, August 2009).

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 Cis o “ ste s ha e do e so e detailed o ti ge pla i g a d thought through If the orst ere to
happe , ho do e respo d, (John O Co or, IW Magazine), It needs to be, given that the company has
almost 200 product families that require more than 35,000 component parts, and supply chain partners
dispersed around the globe.

The other thing is that Cisco is applying risk analytics, it uses the maximum revenue exposure to understand the
potential impact of a disruption, «We want to use the maximum exposure so that we take the most
conservative action possible. An example would be, if we understand that there is a probability of an event, the
impact we attach is that there will be a total disruption of capability from that node. And that forces us to think
about how to recover in that worst- ase s e ario. (Joh O Co or, IW Magazine).

Cisco may have 8,500 products across 200 product "families," but the company still depends on just 100
products for 50 percent of its revenue. The company builds its efforts to the scale of financial exposure the
company and its customers face.

Supply Chain Management: Cisco Systems Page 10

The next step to risk assessment is what Cisco calls its TTR: Time to Recover. "When there is an event that takes
productivity down to zero, we want to know what the TTR is," (John O'Connor, Shipping Digest Magazine
November 17, 2008).

For each part the company uses, it creates a "part-site mapping" program to figure out what impact any
disruptions will have across the supply chain. For all the detailed, and largely proprietary, parts of the Cisco risk
program, some basic supporting systems include very commonly available tools. "We take every node in the
supply chain and then map it to Google Earth. Then we link that to our risk analysis matrix," (John O'Connor,
Shipping Digest Magazine November 17, 2008).

Risk management can be painful to companies long focused on lean strategies and on driving margin
improvements through the logistics department. Although companies certainly won't want to turn from just-in
time to just-in-case, inventory management cannot mean simply cutting all stock down to the lowest level
possible to keep operations moving on a day with no clouds in the sky. Cisco deploys inventory up and down
the supply chain for resiliency (John O'Connor, director of risk management at Cisco Systems, Shipping Digest
Magazine November 17, 2008) which could be classified as a push-pull system.

“upporti g Cis o s risk a age e t efforts is a set of largel ho e-grown technology tools. It includes, for
example, a crisis dashboard, a business continuity dashboard that incorporates all the data Cisco collects from
its supply chain partners on a semiannual basis, as well as something called a global component risk manager.
This toolset looks at our component suppliers that may be single- or sole-sourced, what is the highest revenue
e posure fro a o po e t perspe ti e a d hat are the itigatio pla s e re deli eri g ith those
component suppliers and even into the details of what are the milestones and what are the project plans for
deli eri g that resilie a d aki g sure e ai tai it. (John O'Connor, Shipping Digest Magazine
November 17, 2008).

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Supply Chain Management: Cisco Systems Page 12
 Conclusion

Thanks to its management team awareness of the strategic importance of supply chain as competitive
differentiator; Cisco has developed a dynamic and sophisticated system trough which it can compete and lead
for several years . Gi e the te h olog o erge e to ards All IP , oi e, data as ell as ideo are all toda
transported trough Cisco routers and switches; that means new opportunities are looming on the horizon for
the company to form new alliances with new value chain players that are content and service providers, these
new prominent ecosystems will not wait longer to appear.

Cisco Systems seems fully prepared to face future challenges given its current positioning and capabilities
achieved after several years of design, planning and adjustment of business strategies with competent
management team in the driving seat.

Supply Chain Management: Cisco Systems Page 13

EXIBITS (Information Sources)