Case Study of Cisco: Transformation of Entire Supply Chain into an Extended Enterprise System

Cisco Systems of San Jose, California, is a company that develops networking devices such as switches, routers, network management software, and dial- up access servers. By the mid 1990s, realizing that growth depended on our ability to scale manufacturing, distribution and other supply chain processes quickly, Cisco managers decided to reinvent its business model and turn itself into a Web-enabled company. An ‘ecosystem’ which in fact transformed the entire supply chain into an extended enterprise system based on internet technology was created in order to links customers, prospects, partners, suppliers and employees in a multi-party, multi-location electronic network.

Case Study of Cisco: Transformation of Entire Supply Chain

E-Business can be defined as all electronically mediated information exchanges, both within an organisation and with external stakeholders supporting the range of business processes. It links internal employees with external customers, suppliers through technology like Internet, intranets, and extranets. E-commerce, conceived as a subset of e-business, can be categorized as buy-side e-commerce which are equivalent to upstream supply chain and sell-side e-commerce which equate to downstream supply chain. A ‘supply chain’ is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. An effective supply chain management can improve efficiency throughout e-business.

Cisco estimated that in financial year 2000, a total of US$695 million would be saved by adopting this interconnected supply chain. These solid figures prove the potential benefits e-business can bring into Cisco are enormous. Broadly speaking, it is argued that there are at least two primary ways in which the application of e-business technologies can improve the efficiency of a supply chain. First is known as disintermediation, which organisation eliminates the communication and coordination costs associated by eliminating links in the supply chain. The second way is by lowering the cost of communication and coordination among the various members of supply chain. In this case, Cisco adopted the second way by using information technology to communicate, which enable faster, more accurate, and lower cost information exchanges with its trading partners.

Upstream Issues (Buy-Side)

Upstream supply chain is the transactions between an organisation and its suppliers and intermediaries. In this particular case, Cisco outsourced most of the manufacturing and logistics activities as James Crowther, customer business solutions manager said, in order to increase production capacity enough to meet demand. Outsourcing is a business activity subcontracting a process,  product design or manufacturing, to a third-party company. Cisco’s suppliers not only make all of the components and perform 90 per cent of the sub-assembly work, but they also undertake 55 per cent of the final. By outsourcing production of 70 percent of its products, Cisco has quadrupled output without building new plants. Furthermore, through Cisco Manufacturing On-line, Cisco has created an extranet application that increases productivity and efficiency in the manufacturing, supply, and logistics functions among globally networked partners. The accomplishment not only increased the outputs but left Cisco free to concentrate on their real strengths: new product development, looking after customer needs and brand management.

Cisco Manufacturing Connection Online (MCO)

Since relationships with suppliers are especially critical in the E-conomy, Cisco has created an Extract application that leverages productivity and efficiency in the supply function through MCO, which can be viewed as supply chain portal that seamlessly connects Cisco to its contract manufacturers, distributors, and logistics partners. The core of MCO dealing with their supplier is centralizing the process control and as a consequence decentralizing actual execution. There is a three-part strategy to scale its upstream supply chain in a cost-effective manner in MCO:

  1. Auto test. To resolve the testing problem, Cisco has installed automated test cells on all Cisco-dedicated supplier production lines using Cisco-developed technology to automatically configure test procedures for each specific customer order so that the quality could be controlled and the cost of deploying a test engineer could be saved. However, although Cisco outsourced much of the physical test, the company retained the intelligence behind the testing.
  2. Direct Fulfillment. Cisco launched a global direct fulfillment model under which most of the company’s manufacturing partners can now ship directly to customers. This will reduced the distribution cost between Cisco and supply chain partners.
  3. Dynamic replenishment. By direct linking to the suppliers, Cisco could gain real-time access to supplier information so that delivery lead-times, errors and inventory will be cut and the productivity of its employees involved in purchasing will be improved. The purchasing teams can focus on more strategic activities such as partnership and business development.

The implication of increasing outsourcing of core activities is that companies will move towards the virtual organisation which leads to a more responsive and flexible company with great market orientation. As Pete Rukavina, Cisco’s director of global supply chain management, addressed: “For every Cisco manufacturing employee there are six virtual manufacturing employees who use Cisco processes, are measured against Cisco metrics, and are located around the world.”

Traditionally, a new product introduction had been a process in which engineering, procurement, manufacturing and marketing were performed sequentially in time-consuming steps. Cisco has networked these functions in order to extract real benefits with its partners. A perfect example could be car industry where car plants traditionally would be located nearby the raw material factory so that inputs directly from factory will be produced as a result of cars. However, there has been a trend to outsourcing more and more components such as lights, trim and even engine to third party. Just-in-time of Toyota was created base on the outsourcing strategy.

Downstream Issues (Sell-Side)

Downstream supply chain is the transactions between an organisation and its customers and intermediaries. There were some potential issues which Cisco has faced in the process of selling products in the past:

  • One-third of all faxed orders. Due to the nature of fax, orders will inevitable contain errors sometimes so that it will delay the processing. In addition, 15 per cent of the number of orders required reworking.
  • Sundry expenses. Delivering software purchases to its customers on CD by a freight forwarder will generate a cost of delivering.
  • New product introduction. Time-to-market of new products is counted in months or years.

Cisco Connection Online is introduced in order to deal with these issues.

Cisco Connection Online (CCO)

Customer Connection Online is essentially a web portal to information stored in Cisco’s enterprise resource planning [ERP] databases, legacy systems and client/server systems, and acts as a comprehensive resource for our customers, resellers, suppliers and partners. In fact, it used the Internet as the prime customer contact channel so that customer information and decision-making feeds directly into the supply chain. Technology is vital to supply chain management since managing relationships with customers, suppliers and intermediaries is based on the flow of information and the transactions between the parties. Customers rely on CCO to answer questions, diagnose net work problems, and provide solutions and expert assistance worldwide based on four components of CCO:

  1. Market-place. It is a virtual shopping center in which customers can purchase items online. It also offers users tools for configure, price, route and submit orders. This function can be used to solved the first problem mentioned above which is lots of errors contained in fax. With the introduction of Market-place, customers rarely make purchasing mistakes by ordering online. Only 2 percentages are required rework.
  2. Status Agent. It gives Cisco’s sales force, as well as direct customers and sales partners, immediate access to critical information about the status of customers’ order. The sales force can not only prevent possible billing or shipment problems by accessing order information but also save time such as tracking order status in order to devote to building relationships with customers and seeking new business opportunities.
  3. Customer Service. It provides nontechnical assistance on a self-help basis for customer requests. No one is better motivated to help the customer than the customers themselves. The self-service model which Cisco is committed is argued to know as raising the customer satisfactory overall.
  4. Technical Assistance and Software Library. It enables customers and business partners to get online answers to technical questions and download software updates and utilities for Cisco hardware, which saved over US$500,000 per year in freight forwarding charges.

Specifically, the Web gives Cisco both a vehicle through which customers can find out about products and buy them and an automated support system that can reach a larger audience. Modern marketing philosophy requires that organisation be committed to customer orientation. It is important that introduce a new product earlier than competitors because customers intend to accept the first new item. In the response of the third problem identified above, Cisco automated the process for gathering product data information, thereby reducing the amount of time required to less than 15 minutes. It is believed that this type of positive impact on time-to-market generated an extra US$388 million in income during 2000.

Furthermore, it is recognized that building strong customer relationships is the key driver to sustainable profitability. CRM is therefore considered to be the most important element within e-business context. Essentially, CRM is an approach to building and sustaining long-term business with customers. It is about customer acquisition, customer retention and customer extension. It is recommended that the first step is to retain existing customer because the costs of acquiring new customers are so high that repeat business is essential. The next step is to acquire new customers on a profitable basis. It is argued that by giving customers tools for self-configuration and turning its back office into the customer’s front office could be one of the best ways Cisco do.

Cisco Employee Connection (CEC)

Cisco’s ecosystem looks inward as well as outward. Whereas CCO addresses the needs of Cisco customers, partners, suppliers, and employees, Cisco Employee Connection (CEC) is limited to information and services that address the unique needs of individual Cisco employees. In order to improve employee satisfaction and scale its workforce without incurring unnecessary overhead, Cisco re-engineered all its internal and external employee services. Applying the CEC, the following benefits can be provided.

  • Ubiquitous communications. Every one of Cisco’s employees around the world is connected through the Cisco network.
  • Streamlined business. The interactive tools reduce the time that employees spend handling repetitive tasks and streamline routine business process.
  • Integrated business systems. The CEC home page serves as the launching pad, all of information sharing the same navigational tools and a common user interface.

E-Supply Chain (Both Upstream and Downstream Issue)

In today’s digital economy, flexibility, adaptation and responsiveness are critical to success. The Internet is the greatest ICT (information and communication technology) tool, and ‘integration’ is the key to efficiency and success. The company Cisco has opened up its internal information systems to suppliers and other supply chain partners, giving the employees the same access rights to information as Cisco employees, and as a result enabling the Cisco ecosystem to act as a distributed knowledge management network. This networked ecosystem that leverages the collective capabilities of all supply chain partners integrates all supply chain activities so that it achieved successful e-supply chain management. The reasons for that can be described as:

  • Firstly the ecosystem standardizes and streamlines internal processes. The successful ERP system associated with CEC implementation forces Cisco to standardize, restructure and streamline the ‘internal’ functions. ERP systems enable
    organisational standardization, including the standardization among different locations belonging to the same enterprise.
  • Secondly, the ecosystem streamlines external processes by seamless integration with suppliers and customers in terms of MCO and CCO. Materials and inventory position, product availability, price information, purchase orders and changes, vendor receipt/acceptance, Invoice payments and status reporting information are all visible among partners, including design-related information and sales forecasts
  • Thirdly, Cisco has formed strategic alliances and long-term partnerships with suppliers and customers, basing on mutual trust and win-win strategy. Lack of mutual trust and unwillingness to share information among the partners appear to be the greatest obstacles in the way of e-collaboration.

Comparing the Cisco ecosystem with SIMON (Shell Inventory Managed Order Network) which applied by Shell Chemicals, SIMON enables the transfer of responsibility for inventory management from customer to supplier. In other words, there is no need for customer to place an offer since vital inventory will be on customer. Customers pay only for what they consume. The SIMON is so successful in the downstream process that it was then applied to the upstream processes which are acquiring raw materials from supplier. Both Ecosystem and SIMON works in some extent due to the mutual trust and a belief that there are significant benefits to be realized on both side. The shared information between all parties in the supply chain is also critical to succeed. However, e-business does not always lead to organisation success. For instance, Webvan, a top internet grocer based in the US, went bankrupt in 2001, because of poorly implemented e-business and over depending on technology and missed out the customers and inter-organisation management.

To sum up, the ability to engage in collaborative planning and making joint decisions with both suppliers and customers are critical components of forming e-supply chain. Moreover, lack of integration between members of a supply chain results in operational inefficiencies that compromise the performance of the supply chain.