There were several interrelated issues that Cisco’s supply chain faced.
Inaccurate Demand Forecasts
Firstly, the demand forecast accuracy on which decisions were based was low. Customers at the time were placing the same order with several suppliers and closing the deal with the supplier that delivered the order first. As noted in the Cisco Systems Case Study, due to this practice, an order for 10,000 routers simulated demand for 30,000 machines. Cisco’s sales force failed to account for this artificially inflated demand and for the trend in reduced technology spending, which was a major catalyst for the losses realized in 2001. The company continued to order large quantities in advance on the basis of demand projections that did not materialize.
Communication Problems Across the Supply Chain
Secondly, Cisco’s supply chain experienced communication problems. The supply chain was structured as a pyramid, in the centre of which was Cisco. Since a large part of the operations were outsourced, each supplier dealt directly with its own suppliers, hindering communication across the entire supply chain. Additionally, since contract manufacturers produced the equipment and shipped directly to Cisco’s customers, Cisco lost view and full understanding of customers’ needs. It would appear changes in demand conditions were not communicated across the supply chain and mixed messages may have interfered with accurate demand forecasts.
Failure to Identify Ground Level Problems
Lastly, it would appear Cisco was not monitoring key metrics for early warning signs. Due to the inaccurate demand forecasts and lack of communication across the supply chain, Cisco had begun accumulating large inventories as of 2001. This issue could have been detected early had the company noticed that the inventory cycle rose from 53.9 days to 88.3 days. This issue was not present prior to 2001 as evidenced by Cisco’s income statement – no other years had Excess...
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