Startegy Dynamics

The

HBR

Spotlight

21st-Century Supply Chain

A supply chain stays tight only if every company on it

has reasons to pull in the same direction.

by V.G- Narayanan and Ananth Raman

Aligning

nee

in Supply Chains

W

all Street still remembers t he day it heard that Cisco's muchvaunted supply chain had snapped. On a mad Monday, April 16,

2001, t he world's largest network-equipment maker shocked investors when it warned them that it would soon scrap around $2.5 billion of surplus raw m aterials-one ofthe largest inventory write-offs in U.S. business history. The company reported in May a net loss of $2.69 billion for t he

quarter, and its share price tumbled by approximately 6% on the day it made that

announcement. Cisco was perhaps blindsided by the speed with which the United

States had advanced into recession, but how could this paragon of supply chain

management have misread demand by $2.5 billion, almost half as much as its sales

in the quarter? Experts blamed the company's new forecasting software, and analysts accused senior executives of burying their heads in sockets, but those experts

and analysts were mostly wrong.

In truth, Cisco ended up with a mountain of subassembly boards and semiconductors it didn't need because ofthe way its supply chain partners had behaved in

the previous 18 months. Cisco doesn't have production facilities, so it passes orders

to contract manufacturers. The contractors had stockpiled semifinished products

because demand for Cisco's products usually exceeded supply. They had an incentive to build buffer stocks: Cisco rewarded them when they delivered supplies

quickly. Many contractors also boosted their profit margins by buying large volumes from component suppliers at lower prices than Cisco had negotiated. Since

the contractors and component makers had everything to gain and nothing to lose

by building excess inventory, tbey worked overtime to do so without worrying

about Cisco's real needs....