How Does Cisco Manage Supply Chain Risk?

Cisco, the high-tech electronics manufacturer, has long been regarded by the business
community as having one of the best supply chains in the industry. Cisco regards supply chain
resilience as a core business challenge across the enterprise, not just a logistics problem. In its
efforts to improve its resilience, the company has gone from a ‘reactive approach’ in the mid-
2000s, through one which embraced ‘pro-activity’, to the position it is in today where resil-
ience is embedded in design and processes. This has involved establishing teams of dedicated
‘control tower’ staff whose job it is to continually monitor and respond to incidents around the
clock.

However, its response to the post-recession demand shocks in 2010 highlighted a number of
shortcomings which the company was forced to address. The crisis was caused by the emergence
of the global economy from recession, resulting in demand for ICT network products to increase
dramatically as companies made investments deferred from the period of the downturn. This
demand placed a huge stress on Cisco, and other manufacturers, as the market faced product
shortages. Cisco’s customers complained that the company could not deliver its products on time
or, in some cases, even deliver them at all. Engineers maintaining infrastructure such as data
centres faced a wait of up to 12 weeks for basic switching components.

The origin of the problem was with Cisco’s suppliers, many of them based in China.
According to a statement from Cisco itself, the issues were, ‘… attributable in
part to increasing demand driven by the improvement in our overall markets... the
longer than normal lead time extensions also stemmed from supplier constraints
based upon their labour and other actions taken during the global economic downturn’. In
other words, component suppliers laid off workers during the recession and reduced capacity.
There was then not enough production capacity to fulfill demand.

The need for Cisco to better collaborate with its suppliers was evident. It also illustrated the need
to mitigate risks within its supply chain. The company acknowledged the need for changes
and embarked on a mission to regain its status as a supply chain innovator. The company had
become bloated with over 8,000 products with 95 per cent of production out-sourced and with
more than 90 locations around the world. As such, the company’s Cisco
suppliers, manufacturing partners, and logistics providers with maps and real-time information.
Crisis response team members can log onto the dashboard and see where the problem is
occurring and how serious the risk may be. The team then takes appropriate actions.

After the crisis is over, Cisco undertakes a post-mortem to determine what worked, what
requires improvement, and what the early signs of crisis were. This information is presented in a
Cisco WebEx conference and then integrated into updated processes based on the post-mortem.
These changes are then added to training tools, which take the form of web-based classes, as
well as live virtual team meetings.

Dealing with the Japanese tsunami

In 2011, Cisco’s crisis collaboration plan was put to the test when Japan’s earthquake
and tsunami hit. Within 30 minutes of the initial alert of the earthquake, a dedicated supply
chain incident manager was made aware of the event, who in turn alerted the supply chain risk
management team leader, team members and the supply chain operations senior
leadership team.

Within 12 hours, the primary supply chain incident management team was activated.
This team consists of an extended group of operations functional
leaders that represent their functional organizations during an incident.

Utilizing business continuity data and processes, all direct suppliers, their associated sites
and components and other critical supply chain nodes in the impacted area were identified
within 12 hours of the initial earthquake.

Cisco established a Supply Chain Incident Management Team War Room within two days of
the initial earthquake to provide a central management point and decision-making forum for
all Supply Chain Operations personnel involved in the mitigation effort. In the first few days
following the inci- dent Cisco’s incident management team was able to:

● establish contact with suppliers to assess the impact of the incident on site capacity;
● develop a prognosis of their ability to continue to produce;
● identify their ability to distribute components.
The incident management team was then able to develop a snapshot of
the supplier impact and status over the entire region. This snapshot was refreshed on a
daily basis based on the evolution of the crisis circumstances (eg the addition of the nuclear
exclusion zone around the Fukushima nuclear facility,
changing electrical power capacity projections, etc) and facilitated faster, more informed
executive decision making on mitigation activities and prioritization.

Cisco managers were also able to profile each supplier site from various resiliency perspectives.
These included:

● the expected time-to-recover (TTR) for the site;

● back-up power generation capabilities; and
● whether the supplier’s components were single sourced or had alternate sites available

Cisco’s Supply Chain Incident Management Team War Room approach, structure
and operations
were based on their Supply Chain Risk Management (SCRM) Incident Management ‘pla
ybooks’. These playbooks
create a predefined reference for bringing together the Customer Value
Chain Management (CVCM) organizational leaders to assess, mitigate
and resolve a disruptive supply chain incident. The playbooks define a functional
track structure, key contacts related to various types of incidents, templates and other
collateral to assist in running and managing an incident response.
In a very short period, the crisis management system was able to assess more than 300 Tier 1–
Tier 5 suppliers – including site inspections and more than 7,000 part numbers – and
complete a risk-rating and mitigation plan. According to management, the
largest supply chain disruption in modern times created virtually no revenue impact for the
company.

Key to Cisco’s response was being able to identify the lack of visibility into sub-tier supply
chain (suppliers that supply Tier 1 component manufacturers). Having this as a
‘known unknown’ was critical to quickly resourcing a team to investigate key impacts and
ramifications in this area and to mitigate where possible.

The response team was given an ‘open checkbook’ by chairman and chief executive officer John
Chambers to seek out new sources of product. Additional teams were set up to locate
secondary sources for specific commodities and suppliers. In the end, the
company spent around $100 million on mitigation efforts in the wake of the incident.

Things didn’t go perfectly. Cisco had underestimated the importance of constantly revising its
parts site maps in line with the ever-changing landscape. It also needed to do a better job of
collaborating with manufacturing partners, a lesson that proved valuable in coping with the more
recent floods in Thailand.
To demonstrate the need for flexibility within a supply chain, in 2011, Cisco announced
a restructuring plan for the entire company. Over the years, Cisco had looked externally to
expand its innovative edge and made numerous acquisitions. However, this led the
company into varying product lines, thus moving it further away from its core competency –
networking and communications. As a result, new companies entered the market and
successfully took market share away from Cisco. With the restructuring plans, Cisco also
announced plans to simplify the number of products and to refocus on networking and
communications.

Cisco’s supply chain will once again undergo scrutiny with this latest change. Already
announced is the sale of its manufacturing facility in Juarez, Mexico to Foxconn and the
transfer of 5,000 employees to the contract manufacturing company.