As one of the fastest growing companies in the new business economy, Cisco Systems makes the data-networking equipment that powers the Internet. Based in Northern California, this firm has exploded from a start-up to a
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business worth over $100 billion in 14 years. Of Cisco’s products, 95% are built-to-order, making supply chain management a necessary core compe- tence. The firm works closely with partner suppliers to whom it outsources 55% of product fulfillment. Customers order through Cisco and the infor- mation is sent directly to suppliers who ship products directly to the cus- tomer, often bypassing much of Cisco’s organization. The company’s supplier relationships are so strong that 97% of the orders ship on the date promised. Cisco has reduced its cycle time on orders from 6–8 weeks to 1–3 weeks, due in part to its tight relations with suppliers.
For this firm, instant involvement is a keystone in the supply chain
vision, and it is more than an idealized concept. It is a part of the company’s basic strategy and operating philosophy. Cisco talks of its “extended enter- prise” as a network of customers, suppliers, and other partners that par- ticipate in collaboration, information exchange, and relationship building. The goal is to extend business processes across corporation boundaries to build a seamlessly integrated value chain. Linkages are in place to ensure a symbiotic relationship with strategic partners. For example, information linkages ensure timely product data are given to suppliers so they can build products for Cisco. According to Bob Spiegel, a director in the Information Systems Group,
The faster we communicate, the faster we bring product to market. For example, when an engineering change order is approved, all relevant documentation related to that change is automatically put in a ZIP file and sent to suppliers. We have a special channel on our extranet and we push this ZIP file to them. (Pearlson, 2001, p. 80)
Orders are shipped directly from these suppliers to customers. According to Spiegel, “Cisco pays for the parts and the work done by the partner, but we trust them to send the correct parts to the customers at the right time. That linkage itself means we are very closely tied to our subcontractors.” Cisco has created a well-balanced, networked enterprise geared to responding rapidly to customer orders. The network, driven by instant communications over the Internet, allows suppliers to post quotes and forecasts on Cisco’s Web site each quarter.
Mutual commitment is critical to Cisco’s vendor relationship manage- ment (a crucial element in its supply chain effort) procedures. Not every vendor decision is made solely on price. The company has a corporate phi- losophy of ensuring suppliers stay profitable and, thus, in business. To imple- ment this philosophy, the firm shares a wide variety of inventory and demand
24 The Supply Chain Manager’s Problem-Solver
information with suppliers to help them reduce inventories and respond instantly. Cisco also pays suppliers within days, rather than weeks, which enables suppliers to reduce the costs of collecting on accounts. The company also involves partners early in the product design process to ensure products can be manufactured and that parts will be available.
Mutual commitment at Cisco means mutual investment. Managers understand that its stringent requirements for partnering can place a heavy burden on supply partners. Cisco carries its portion of the burden by invest- ing in technology and infrastructure that benefits both Cisco and its partners. Cisco calls it the Global Networked Business Model and uses it to manage supply chain activities that integrate Cisco with its suppliers.
To make the extended enterprise a success, Cisco managers have to exam- ine the company’s capabilities before choosing supply chain partners. The selection process looks for partners with similar philosophies and comple- mentary skills to Cisco. There are 20 to 25 strategic partners linked to the firm through electronic tools, meetings, and strategy sessions. For example, the dynamic replenishment initiative links forecasting, inventory, and back- logs to help the suppliers forecast their own production and assist in man- aging Cisco’s overall cycle time.
The elements of this partnering are critical to Cisco’s success and are an integral part of the vision that guides supply chain management for this company. That vision starts at the top of the organization. According to John Chambers, CEO, “Partnership is our heritage. Very few people in this industry partner well, so it’s a huge competitive advantage.” This message is driven throughout the organization and is key to a successful supply chain execution process.
Cisco’s partnerships have four key characteristics:
1. Maintain the same overall vision of the industry trends and direction. 2. See short-term benefits in terms of real sales from the relationship. 3. Anticipate long-term advantages from the relationship.
4. Share similar values of being aggressive, technologically strong, and customer focused.
Instant involvement benefits Cisco and its extended enterprise in three major ways. First, Cisco senior managers are able to focus on the core competencies of product design and marketing, rather than spending time building and managing manufacturing facilities. Second, as demand increases, Cisco can ramp up production by either helping existing partners expand or by taking on new partners. This reduces the complexity of expan- sion to a simple task of finding appropriate partners, as opposed to investing in new plants and hiring new employees. Third, Cisco’s heavy reliance on information systems integrated across the supply chain results in an
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extended enterprise connectivity, which appears to customers as a single, instantly responsive organization (Pearlson, 2001, pp. 80–81).
Summary
Supply chain is a hot topic that can bring five to eight new points of profit to the bottom line of a P&L statement. That is an improvement that most senior executives would exert much effort to achieve. The effort should be focused on understanding the underlying concepts and the specific potential they hold for the firm. With a firm grasp of what can be accomplished and how the effort can be merged with existing improvement efforts and the potential of using external resources, a CEO and his or her senior team must articulate a compelling vision for what will be a major transformation exer- cise. That vision must spell out a view of the enhanced future state and be constantly reinforced through direct involvement and rewards. If the vision is sustained throughout the effort, the biggest mistake in supply chain man- agement will be eliminated.
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