Chapter 4. Tuning and Transforming: Optimization and Reinvention
Two billion dollars.
That’s how much value was lost in one of the costliest supply-chain snafus in business history. The company behind the mess: Cisco. That’s right, we were responsible for one of the biggest fiascos in the history of manufacturing and logistics. Eight years later, it still serves as a powerful lesson worth studying. Here’s why.
In the annals of “supply chain disasters”—yes, there are accounts of such things—several business mishaps stand out. There’s the 1999 Hershey Foods meltdown that occurred after a new warehouse and inventory management system went awry. It thwarted Hershey from delivering Halloween candy on time and cost the chocolate giant more than $150 million in lost revenue. There’s also the Aris Isotoner glove snafu of 1994, which led to a 50 percent drop in sales after the company switched factories in an ill-fated attempt to save on production costs.1
Each of these mistakes offers lessons in what to do and what not to do when it comes to implementing and organizing your supply chain. But the Cisco debacle of 2001 is hard to top when it comes to illustrating the cost of an operational nightmare. Cisco’s blunder cost it a staggering sum of money. But at least the company could address its shortcomings. Others haven’t been so lucky.
Take the famed German fashion house Escada, for example, which has dressed some of Europe’s most wealthy women and Hollywood’s most fashionable stars since its founding in 1976. In recent years, the likes of actresses Katherine Heigl and Oscar-winner Hilary Swank have been seen wearing Escada at red carpet events.
Known for its aggressive styles, trademark animal prints and exquisite embroidery work, Escada established itself as a fashion trendsetter in the 1980s. Then in the 1990s, the company pioneered “seasonal fragrances” for women. With the help of acquisitions, it also expanded into eyewear, shoes, jewelry, scarves, and neckwear.2
Despite Escada’s hefty prices, the company charmed critics with its unique mix of fabrics and colors and built a devoted following among savvy, upwardly mobile shoppers. Season after season, it dressed celebrities, garnered magazine covers, and grew its fan base. At its zenith, the Munich-based company boasted thousands of employees, hundreds of boutiques, and more than 500,000 customers worldwide.3
Despite the popularity of its alluring haute couture line, trendy sportswear, and chic fragrances, Escada struggled financially in recent years. The reason: It never could instill enough discipline in its operations. As a result, Escada spent much of the 2000s trying to get a handle on its finances after years of acquisitions, unsuccessful product launches, and ill-timed geographic expansions. Among other things, the company decided to drop beauty care products and abandon its lingerie line.4 Then it moved to undo many of the deals that it had previously completed. At one point, it announced plans to sell its Primera division, which is responsible for its apriori, BiBA, cavita, and Laurél products.5 Later still, Escada pulled back from opening new stores, including one in New York that had reportedly been under development for two years.6
No matter what it tried, Escada could not lift its operational competency anywhere near the level of its design excellence. The company could change consistently with new styles, new merchandise, and new advertising. When it expanded into categories such as jewelry, handbags, and fragrances, customers followed willingly. But it could not operationalize this grand vision, nor perfect its execution. As a result, the company’s financial fortunes suffered. In 2008, Escada posted a net loss of €70 million on depressed sales that slumped 15 percent over 2007. Rather than blame the economy solely for the company’s foibles, Escada’s management team provided a frank summary of challenges when explaining the company’s misfortunes in the 2008 Letter to the Shareholders: “These results are not only attributable to adverse conditions, but they are also a consequence of internal deficits in organizational processes and market operations.”
Unable to optimize the basic mechanics of their business in time to save the company, Escada’s leaders declared their company insolvent in August 2009. Just as Escada was about to go under in late 2009, Megha Mittal, a member of the ArcelorMittal steel family, stepped in and acquired the company, vowing to reduce its debt, restore profits, and expand sales into Asia.7
Escada’s woes underscore how important it is for a company not to over-emphasize the reinvention of its product line at the expense of the optimization of its operations.
Other companies have experienced the express opposite.
Take Dell Computer, for example.
Few companies in history have exceeded—or even met—the level of operational excellence that Dell achieved in the 1990s and early 2000s. And it did so against notable companies like IBM, HP, and Compaq. None was a match for Dell’s relentless drive for operational excellence. Year after year, Dell reduced costs, improved manufacturing efficiencies, and streamlined product delivery. That unbeatable combination proved successful for Dell, which overtook Compaq as the world’s leading PC supplier in 2001.8 Throughout the early part of the decade, rivals and onlookers alike lamented and marveled at how Dell could set the pace for the industry.
In 2005, Fortune magazine placed Dell at the top of its “Most Admired Companies” list. But the March 7, 2005, issue hinted at the troubles that would soon haunt the company: “Dell’s peers see it as a brilliantly managed brand—but no innovator in raw computing.”9
Indeed, the computer maker from Round Rock, Texas, fell out of favor after a series of management changes, product disappointments, and market blunders.10 The company learned a painful lesson in consumer electronics, for example, after it launched a line of portable MP3 players designed to compete with the Apple iPod. Deemed inferior by consumers, the products turned out to be market duds, and Dell pulled the plug on them in 2006. The company also had high hopes for its flat-screen TVs, which were featured on a Fortune magazine cover along with company founder Michael Dell. But they, too, failed to attract much in the way of customer interest. Dell discontinued them in 2007.
Dell’s inability to reinvent itself, especially on the product front, soon led to other humbling setbacks, including the departure of then-CEO Kevin Rollins and the failure to meet earnings projections for several quarters.11
Suddenly the one-time operations giant looked flustered. Experts began looking beyond the company’s operations and instead pointed their fingers at its inventiveness. At the time of Rollins’ 2007 exit, for example, many of Dell’s top managers were business experts or management gurus, not technologists. That, in addition to management priorities and company strategy, may explain why Dell’s innovation slipped behind that of HP and others, who typically plough 3 percent or more of revenue into research and development—triple what Dell invests.12
The billions of dollars that HP, for example, invested translated into a significant edge once the PC market bifurcated in the middle of the decade. Up to that point, Dell’s aggressive prices and product quality seemed to hit squarely in the sweet spot of customer demands. But then customer buying patterns shifted. Customers wanted either high-end devices packed with new features and plenty of innovation or bare-bones products stripped of frills but capable of running businesses and consumer households just the same. Dell found itself caught in the middle of this market evolution, unable to match the inventiveness of Apple, the operational execution of HP, or the aggressive prices of Asian manufacturers.
A 2008 article in Forbes magazine zeroed in on Dell’s situation, pinpointing why the company was adrift: “Dell is missing the biggest element in the turnaround at Apple: deep product design teams. Both Apple and HP appealed to consumers to claw their way out of slumps. Apple, under Chief Executive Steve Jobs, launched catchy new products ranging from all-in-one iMacs to the iPod line of digital music players. Hewlett-Packard, likewise, poured resources into designing slick, retail-friendly PCs to compete on crowded store shelves even as it was slashing jobs and shuttering excess manufacturing capacity. That was good enough to move HP past Dell to the top spot in the PC business.”13
The stories of Escada and Dell illustrate what can happen when a company emphasizes either optimization or reinvention to the exclusion of the other. Escada’s over-reliance on creativity brought the company to its knees. Dell’s obsession with operational excellence, meanwhile, prevented the company from delivering innovations that the market wanted, costing it a great deal of goodwill and prestige. When Fortune announced its list of “Most Admired Companies” in 2009, Dell, the leader from just four years prior, wasn’t even mentioned in the top 50.14
With the return of founder and CEO Michael Dell, Dell is attempting to remedy its past mistakes with a renewed focus on innovation. Likewise, Mittal is trying to optimize financial and operational discipline at Escada.
Over the years, Cisco, too, has struggled with doing both tuning and transforming simultaneously. Its own supply chain debacle epitomizes what can happen when a company prioritizes one discipline over another.
Could a company that endured one of the worst supply chain debacles in business history realistically become one of the best practitioners in business? In the years that followed the $2 billion write-off, Cisco set out in search of the answer. To do so, it would have to optimize and reinvent. Tune and transform. At the same time.
Waking Up to the New Reality
If your company manufactures something or relies on partners that do, chances are you’re already familiar with a supply chain. For the uninitiated, supply chain is the term used to describe the design and development of products and solutions and the combination of companies, facilities, and processes required for building and moving a good or service from a point of production to an end user. The more complicated the product, the more complex the supply chain required. High-tech goods, which often include microchips, circuit boards, disk drives, power supplies, and other components too numerous to mention, require very sophisticated supply chains. That’s certainly true of the products Cisco develops.
Today, Cisco’s supply chain team oversees more than 300 product families, representing 23,500 products, including high-end switches, mid-range networking products, IP phones, routers, and set-top cable TV boxes. Cisco custom-configures most of these products through a series of regional logistics hubs and ships them to virtually every country on earth from facilities located on three continents. Most products are built to order, and most get delivered to a customer without any Cisco employee ever touching them.
As capable as it is today, Cisco’s supply chain wasn’t always so accomplished. In fact, there was a time that it almost upended the company. The aforementioned calamity took place in the aftermath of the 2001 dot-com collapse. To understand it fully, you must first think about the dot-com boom. In the late 1990s, dot-com companies were forming almost overnight in what can only be described as a gold rush. Business plans thrown together in a matter of weeks or even days attracted funding from venture capitalists, who advised their clients to spend whatever they needed on branding and equipment to establish themselves on the Internet as fast as possible.
That, of course, played right into Cisco’s hands. At the peak of the boom, Cisco was the supplier of choice for Internet gear and expertise. In 2000, for example, sales jumped 55 percent to $19 billion. That was good enough to lift the company to number 107 on the Fortune 500 list from number 146 in the previous year. And Wall Street rewarded Cisco handsomely by driving its stock to record heights. In October of 1998, a Cisco share traded for $15.75. By March 2000, it was trading at more than $80.
With success, however, came new challenges. In 1999, the company was struggling to make equipment fast enough to keep up with demand. The time between orders and delivery (lead time) on the company’s hot-selling Catalyst 6000 Series stretched out to three months at one point—an eternity for startups desperate to get their businesses up and running. Many companies resorted to placing double and triple orders with the hopes that one of their requests would come through on time. That only exacerbated Cisco’s supply challenges.
Inside the company, for example, product groups began to compete against one another for third-party components. T.S. Khurana, Cisco’s director of global supply chain management, remembers groups of employees actually arguing over shipments of much-needed tantalum capacitors (a device that helps manage electricity inside sophisticated electronic equipment). “We were at competition with each other and with the cell phone market over individual piece parts,” says Khurana. “It was a crazy time.”
Faced with a growing demand problem, Cisco leaders considered building more factories. But they knew the company’s core differentiation lay elsewhere—not in the realm of manufacturing, but in product innovation and customer relationships. So they began to overhaul the company’s supply chain capabilities. For starters, Cisco began outsourcing more of its manufacturing to third-party vendors. Then it began to connect their different IT systems and business operations with Cisco’s own enterprise resource planning (ERP) system and data standards. Finally, in an attempt to manage production costs and to prevent piracy and gray marketing, Cisco took control of the inventory that its third-party partners produced. The company essentially embraced a consignment model.
While all these creative moves helped Cisco regain some control over its supply chain, they left the company in a vulnerable position. That was especially true of the decision to embrace the consignment model. What if the market ever turns sour, some wondered? Would it find itself with a lot of product on its books?
In theory, yes. But few at the time thought Cisco would ever find itself in such a position. Then, of course, the unthinkable happened: The bubble burst.
The euphoria investors had for backing companies promising to sell pet supplies, groceries, and toys over the Internet evaporated. When this happened, the Cisco customers who had placed multiple orders at the height of the frenzy disappeared overnight. As a result, Cisco’s sales trajectory did a 180-degree turn. In less than 100 days, Cisco’s year-over-year growth-rate went from 66 percent positive to 45 percent negative.
Despite the slowdown in demand, Cisco’s contract manufacturing plants kept churning out products. They did so to catch up with the backlog of orders, thinking the downturn was a momentary pause. Unfortunately, many of those orders, the company soon learned, were either desperate attempts to overcome allocation backlogs or wishful dreams placed by companies that soon found themselves with no means to pay. Regardless, Cisco quickly found itself with billions of dollars worth of routers, switches, and other gear that no one wanted. Worse yet, much of it was custom-configured for companies that had gone out of business or were in serious financial jeopardy. The bottom line: There was no way Cisco could sell a sizable percent of its excess inventory within six months, so, the company had to do the unthinkable: scrap the products for parts. In the end, Cisco wrote off more than $2 billion in inventory.
At the time, company watchers were anything but kind to Cisco, a company they believed had come to epitomize the high-tech manufacturer that rode the dot-com market exuberance to unsustainable heights. When the collapse occurred, more than a few were glad to see Cisco tumble from its lofty perch. In an article posted on the industry news site CNET in 2001, market watcher and financial analyst Tad LaFountain from Needham & Co. said, “As a result of what has transpired, network equipment management might consider looking beyond the car in front of them as they speed down the information superhighway.”15
Since 2001, Cisco has been the subject of innumerable postmortems about the dot-com phenomenon. Most experts understand how Cisco got caught up in the euphoric atmosphere that resulted from runaway sales growth and unprecedented market capitalization appreciation. But the inventory write-off remains another story. How could the company have built so much unwanted product, supply chain experts wonder? Many at Cisco have asked no less.
Though several factors contributed to the problem, the underlying issue was fairly simple: In an attempt to keep up with demand, Cisco reinvented at the expense of optimization. As a result, the company became blind to flaws that would eventually contribute to the setback it sustained.
Cisco had developed a very capable supply chain in the late 1990s. But it was originally built to do one thing: keep up with demand. At the time, demand was so great that Cisco, in some instances, chartered private aircraft to transport goods to customers. It also provided working capital to component manufacturers, who could then get established quickly and start supplying much-needed products to Cisco. That kind of entrepreneurial zeal and process innovation propelled the company when the market was zooming, but not after it began to freefall.
In the end, Cisco was upended by a dramatic reversal in market demand, which was further exacerbated by additional failings. Among other things, the company failed to factor into its forecasts the double and triple orders customers placed in the hopes of avoiding delayed shipments. That deluded the company into thinking that it should gear up for annual growth rates of more than 40 percent. Cisco also invested too much faith in the promise of the new Internet economy, which did not ultimately nullify the need for good, old-fashioned operational excellence. Finally, Cisco should have anticipated that its consignment inventory model would be problematic in an economic downturn. But it did not.
So how did this happen? Amid the dot-com euphoria, Cisco leaders forgot that boom times are typically followed by busts. Experience may also have played a factor. The company had a young, albeit energetic, manufacturing team. But who could blame them for their unbridled optimism? With so many outsiders heaping praise on the company, Cisco leaders didn’t see much reason to change their practices or believe that the days of unrestricted growth would come to an end anytime soon. But that optimism blinded them to the fact that their supply chain, which was designed around a few basic product lines, lacked flexibility. As the company’s product portfolio expanded, Cisco needed a supply chain that could accommodate everything from high-volume consumer products to one-off, specialized products for very large institutional buyers. In the early part of the 2000s, Cisco’s supply chain was simply not built to handle this type of complexity because the company failed to plan for anything but growth.
Fixing the problem, however, would require significant effort. One reason: complexity. Cisco found itself with a mix of internal organizational silos, external manufacturing partners, and third-party logistics specialists. The company recognized that it would need to coordinate the activities of different business units and entities, disparate technologies, and multiple time zones. Short of this, Cisco knew it could not take advantage of market transitions or prepare for shifting economic conditions the way that companies with world-class supply chains could. At these organizations, supply chain management has evolved from a back-office specialty into a boardroom priority. In fact, many of the most successful companies in today’s global, interconnected marketplace are focusing on supply chain management as a source of competitive advantage.
Despite—or perhaps because of—its past problems, Cisco decided to prioritize its supply chain management. To that end, the company has invested millions of dollars in its supply chain operations, especially in the areas of logistics, technology, and training. But fixing a supply chain requires more than money, the company has learned. Changes in business processes and culture in particular also figure into the equation.
The steps Cisco needed to take would have significant ramifications for the company.
Picking Up the Pieces
After the write-off, Cisco examined virtually every aspect of its supply chain. It quickly identified 45 different parts of the company that had a direct impact on manufacturing and distribution—too many. The company also discovered that more than 120 different spreadsheets were used to influence decisions pertaining to the supply chain. There were different methods for looking at key metrics such as bookings, backlogs, and inventory. And nearly every organization in the company used its own automation tool. These tools were supposed to work together but often didn’t because they were built during a bygone era—an era when business units, flush with cash, invested in their own tools, with little concern for other departments.
Khurana describes the way that the pre-recession mentality was impacting the company after the bubble burst. “Before the dot-com crash, budgets meant nothing,” he says. “You had a budget but knew you could blow past it because your sales growth would cover any overage. At that time, you could do things like ask IT to build you a specific tool to support your growth. And in the environment of the day, that was ok because it supported growth. It seemed like a perfect system until the bottom fell out of the market.”
Cisco’s supply chain operations improved sharply when the company began to optimize. That included overhauling its organizational structure, rationalizing its partnering strategy, and streamlining its product inventory. The changes impacted everything from tools to business models to operational procedures. Suddenly inventory turns mattered a lot more. So did returns on investments and product quality, as well as lead times and life cycles.
After a concerted effort, the company rationalized its parts inventory and eliminated literally thousands of SKUs. It also reduced the number of component companies and third-party manufacturers it worked with and rededicated itself to getting close to a smaller number of partners. Instead of negotiating with more than 1,300 component suppliers, for example, Cisco instituted a Preferred Supplier Program that took the number down to less than 300 in just four years. It also reduced the number of contract manufacturers that it worked with from 20 to 4.
Then Cisco worked to equip its suppliers with the latest in electronic tools and processes to gain visibility throughout its entire supply chain. It began working closely with suppliers to share best practices and implement consistent processes. Afterward, Cisco reassessed its own technological capabilities. Instead of spreadsheets and email messages, the company implemented a state-of-the-art manufacturing system to drive alignment between, and improve forecasting accuracy across, various business units, sales teams, and manufacturing organizations.
Cisco also changed its organizational structure. Take the company’s “master schedulers,” for example—the people responsible for day-to-day output of products and for long-term inventory planning. Given the nature of their jobs, master schedulers rarely had an opportunity to consider the long-term outlook of the supply chain. To address this, the company divided the role into two distinct jobs: long-term planner and short-term specialist. With dedicated long-term planners in place, Cisco could better plan for changing buying patterns and business conditions.
More than mere process or technology changes, the work Cisco undertook between 2000 and 2005 represented a significant cultural shift for Cisco and marked the end of the company’s “cowboy” days.
No longer whiz kids who could conceal operational inefficiencies with record sales, Cisco supply chain managers saw their shortcomings—in real time. They had to pull together as a team.
As a result, business metrics began to improve. Inventory turns, for example, increased by more than 50 percent between 2001 and 2005. Finally, Cisco improved on its forecasting accuracy.
By then, however, these optimization efforts started to generate diminishing returns. Inventory turns, which had increased by 50 percent, flattened. Improvements in key metrics continued, but changes were incremental, not transformative. Cisco realized that optimization, while necessary, wasn’t sufficient. It also needed to reinvent.
“We were better, but we didn’t really know what we wanted to be,” says Khurana.
The answer to that dilemma would come from a new leader who energized the manufacturing team by focusing it, once again, on reinvention. Only this time, the company was keen on not doing it at the expense of optimization.
From Tuning to Transforming
Enter Angel Mendez, Cisco’s senior vice president of Global Supply Chain Management.
As a young man, Mendez studied to become an engineer. But when he got a summer job working at GE in one of its manufacturing facilities, he became hooked on operations and logistics. After a successful stint at GE, Mendez moved on to Allied Signal, Citibank, and Palm Computing, helping to lift operational performance at every step.
“Once a factory guy, always a factory guy,” he says.
When he joined Cisco in 2005, the deficiencies and weaknesses that had led to the 2001 problems were largely a thing of the past. Cisco had strong operational processes and greater flexibility. But Mendez, nonetheless, saw room for improvement. More than anything, he worried that the company’s supply chain wasn’t structured to keep pace with global growth or to respond to rapidly changing customer needs. He also worried about overall cohesiveness; while individual groups made improvements, there was no focus on overall team improvement.
His efforts would transform Cisco’s supply chain once more.
Shortly after taking over the helm of Cisco’s manufacturing arm, Mendez and his leadership team recognized that the transformation Cisco needed would require a more unified, holistic approach to the many different capabilities that comprised the company’s supply chain operations—from forecasting and demand planning through manufacturing, quality management, delivery, and product reuse and recycling. So he quickly mobilized his team. After some analysis, the team realized that the Cisco supply chain was optimized for a bygone era. The team feared that if it didn’t move quickly, Cisco could miss out on the next major wave of change in the IT and telecommunications marketplace.
Cisco’s supply chain, they reckoned, was set up to handle upgrades and enhancements to existing product lines and to make it easy for partners to engage with Cisco. What the supply chain wasn’t prepared to do was configure and deliver solutions that met exacting customer needs, including the unique requirements of diverse global markets. The supply chain was also not ready to take on new, disruptive innovations that could change the way businesses bought, deployed, and used technology. Considering that these were the very areas that Cisco was pursuing, this was a significant problem. For Mendez and his boss, Executive Vice President Randy Pond, the situation called for change.
It was time to reinvent.
One of their first decisions was to evolve Cisco from a supply-push model to a demand-pull model. In simple terms, that meant no longer building products based on dreams or expectations, but instead on actual customer orders. Because it frees manufacturers from filling their warehouses with goods that may never sell, the demand-pull model is more efficient and less risky than its predecessor. But it does require a high level of systems responsiveness.
Cisco did not have the necessary systems then. But Mendez was determined that it soon would. To get a better understanding of what was needed, his team studied 30 leading manufacturers from technology, consumer products, and even pharmaceuticals. In particular, Cisco benchmarked the perceived supply chain management leaders, including Dell, Walmart, and Procter & Gamble. These companies handled sophisticated products, global suppliers, and changing technology. They could also forecast effectively, address changing supply costs efficiently, and tailor deliverables to customer needs quickly. Why not Cisco, Mendez wondered?
“I want us to set a goal to become the world leader in supply chain management in three years,” he announced to his team.
That pricked up more than a few ears. After all, Cisco wasn’t even an afterthought in the annual contest that mattered to manufacturing experts and operational gurus: the annual AMR Research ranking of the world’s top 25 leaders in supply chain excellence—a list featuring companies like Walmart and Dell. Over the years, AMR has established a numerical index for judging excellence, which includes a combination of hard and soft metrics. Some things were straightforward: How many inventory turns did your company complete this year? What financial results did it drive? The softer points came from a poll of manufacturers, leading researchers, academics, and AMR’s own research experts. To land on the AMR list, a company has to not only perform brilliantly, but also attract peer recognition. Being on the list is correlated with company performance. Companies on the AMR list, for example, have outperformed the Dow Jones and S&P 500 indices by as much as 15 percent in both up years and down.
Prior to 2005, Cisco never even earned a mention on the list. Yet Mendez had the audacity to suggest that Cisco had the will, talent, and global resources to win this “Miss Universe Crown” of manufacturing excellence in just three years. It was a bold goal to say the least.
To embrace a demand-pull model, achieve greater efficiencies, and win the hearts and minds of the experts at AMR, Mendez knew that his organization faced a daunting challenge. Most importantly, his top leaders would need to look beyond their immediate spheres of responsibility and work together across functions. To help focus the team’s attention around a common mission, Mendez launched a new plan called Manufacturing Excellence, or Mx. This was a plan for delivering an agile, innovative, and collaborative supply chain that could translate Cisco innovation into high-quality products and scale across technologies, customer segments, geographies, and partners.
At first, some members of the team questioned the plan. Undaunted, Mendez persevered and launched the program. Shortly thereafter, nearly half of the people in his 1,900-person organization found themselves in new roles with new job descriptions. Groups doing “A”-level work within functional silos were suddenly asked to move out of their comfort zones and work more collaboratively with teams from other areas. Product and manufacturing engineers were thrust together to resolve quality issues, while demand planners had to start conversations with Cisco colleagues, suppliers, and contract manufacturers that they hardly knew. Everyone was expected to consider the bigger picture and view the supply chain as a whole. Some employees loved the change, but others, including some senior leaders, were skeptical.
“Culture and mindset, not complexity, were a large part of the challenge,” says Mendez.
Some in Mendez’ team equated his determination to transform as another exercise in operational efficiency. They didn’t see the need to improve what they had because they weren’t feeling any pain; they were fulfilling orders and making efficient use of existing systems. But they weren’t seeing the value that was trapped in their ways of doing business or the opportunities just beyond their operations. Put bluntly, they saw no need for wholesale changes.
The united team, however, did. And so it pressed on with Mx, which it believed would give Cisco the flexibility and capability it needed to compete in an era where extracting efficiencies from a physical flow of goods was not as important as unleashing value for customers. That meant viewing every supply chain function—from collaborative planning to monitoring circuit yields at remote factories—as part of the same effort to drive innovation and increase relevance to customers.
To make sure that Mx took root, the leadership team tasked individuals from supply chain, sales, and engineering to address specific challenges. They were told to shed their functional hats and work collectively to solve common problems. “No one could say ‘the problem is in your end of the boat.’ We were all in this together,” says Mendez. Another change: Job roles were no longer categorized by product, but instead by process and logistics. No longer were employees product experts; they were supply chain experts. That forced managers to collaborate more than ever before and to take responsibility for a broader set of issues. It was initially daunting to some because it represented a landmark change in just about every aspect of the organization.
In a follow-up program, launched in 2007, Cisco looked for ways to streamline inventory for distribution partners, recover value from used and returned products, and listen directly to customers. That led to the creation of a new manufacturing model, involving supply chain partners like Hon Hai Precision Industry (Foxconn), one of the world’s largest contract manufacturers.
“Moving to a pull manufacturing model was very ambitious, but the right business decision,” says Michael Ling, general manager of Hon Hai’s Communications & Networking Solution Business Group. “On the one hand, Cisco is a tough and demanding customer. On the other hand, we work together to set challenging and rewarding goals. When we achieve the goals, there is recognition for our teams, down to the individual engineer on the floor.”
Despite all the gains made, both inside and outside the company, some Cisco leaders resisted the changes. Several asked for transfers, and a few even left the company. One reason: The new organizational culture put an end to the “blame game.” If there was a problem, it had to be fixed by Mendez’s team. No more blaming a vendor, another Cisco department, or some outside force; if it impacted the supply chain team, it had to be fixed by the supply chain, Mendez insisted. As much as anything, the mindset and culture of the organization had to change. Employees had to accept accountability, anticipate and embrace change, and work together as a cohesive unit.
Cisco can now forecast appropriately, enabling the company to operate with just a fraction of the inventory it once carried—manufacturing inventory turns, for example, are now almost twice what they were. Furthermore, the company can more quickly respond to customer requests and deliver more reliably. In addition, the quality of the components and assembled products leaving partner factories has increased, and the entire supply chain has been enhanced to serve China, India, and many emerging countries in ways the old system simply could not support.
From Jeers to Cheers
By tuning and transforming simultaneously, Cisco realized significant gains. Today, its supply chain handles twice the volume of revenue that it did back when the dot-com bubble burst, with less than half the people.
“Cisco has stayed in front of all these changes by building a value chain that employs more than 8,000 people at 50 locations in 17 countries,” says Mendez. “It would not have been possible had we not done three key things: establish a radical goal that everyone had to notice, look at our partners and systems from an end-to-end basis, and, finally, take the customer’s concerns into consideration.”
So how have the experts at AMR Research, who rank the world leaders in supply excellence, responded to Cisco’s strategy of optimizing and reinventing simultaneously? Suffice to say that they have taken notice: Cisco first made their Top 25 list three years ago and has moved up every year since. In the latest ranking, Cisco was number three.
It’s not Miss Universe yet, but it is in contention.