News flash: Cost isn't always Number One
Sometimes, especially with a new product to serve new markets, buyers used to focusing closely on price find they are analyzing other supplier attributes. That was the case with Cisco Systems' $340,000 TelePresence meeting system.
By James Carbone -- Purchasing, 3/12/2009 2:00:00 AM
Sourcing for leading-edge products is nothing new at Cisco Systems. After all, the San Jose, Calif.-based electronics industry powerhouse builds a lot of the equipment—routers, hubs, switches—that run the Internet and give companies access to the Web.
However, when the company's Emerging Markets Technology Group came up with the idea of a state-of-the-art video conferencing system, supply managers involved in design faced challenges they never had before. The system requires technologies and products that Cisco had never sourced in the past, such as high-definition displays, cameras and projectors.
The good news was while cost is always an issue with any new product, it was not the top priority. Instead supply managers had to find suppliers with the right technology and expertise that built high quality products.
To find them, the Global Supply Management team assigned buyers accustomed to working with suppliers of components for networking equipment to investigate new markets and technologies. Those buyers had to become quick studies who could understand the new markets and technologies, analyze suppliers' technology roadmaps and integrate them into a new supply base. Oh yes, they also looked at costs.
The system was a challenge for Cisco's entire supply chain management organization because the group had to not only factor in technologies, but the end customer experience. After all, TelePresence would not just be a piece of equipment tucked away in a room, but a system that people use and interact with.
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With the TelePresence system, users sit in chairs facing high-definition monitors and cameras in a conference room or in an office to meet with folks in other cities, countries or continents with similar equipment.
The system gives users the virtual experience that they are meeting across the table from each other because of the high quality of the video and audio and the positioning of the equipment. The images are sharp and life like and the sound is crystal clear.
TelePresence is purchased by businesses so they can hold virtual meetings with other company offices, suppliers or customers without having to travel. The top of the line TelePresence system, the 3200, can seat 12 or 18 people. It costs $340,000. Cisco offers other systems that seat fewer users and cost less. Last year, Cisco came out with the TelePresence 500, for individual offices and one-on-one meetings. The cost: $33,900.
New products, new suppliers
As with more traditional products, Cisco involved members of its Global Supply Management (GSM) team in the design of the system along with engineering, product operations and marketing. Their challenge was to source products they have never purchased before from suppliers they had never done business with. Such products as the high-definition plasma displays, cameras, speakers, microphones, projectors and even furniture because the system includes chairs and a tabletop.
There was little expertise at Cisco in many of those product categories, says John Kern, the former vice president of global supplier management during the development of TelePresence. He is now vice president of product operations, the group that manages Cisco's value engineering process.
While supply managers have been involved in design at Cisco for years, they often provided supplier or product recommendations concerning semiconductors, connectors and other components.
"We have core teams around application-specific integrated circuits, memory, interconnects, and printed circuit boards, among others," says Kern. "But three years ago we had no one in the business that knew how to source furniture or high-definition flat panel displays or high-definition cameras or projector technology," he says.
GSM had to develop the expertise, find the suppliers and make recommendations. It was challenging because in some cases products needed for TelePresence couldn't just be standard of-the-shelf products.
"Most of the elements of TelePresence had to be custom- or purpose-designed for our use," says Kern. "The cameras, displays, microphone, table and mechanical items were all customized, either designed from the ground up for us or modified for our application," he says. Suppliers were brought in to help design the system.
No fiddling, please
Chuck Stucki, vice president and general manager of TelePresence Systems, says cameras had to be customized to adapt to lighting issues in a room. "We didn't want the user to have to fiddle with the camera. The idea was to push a button and have a meeting," says Stucki.
Plasma displays had to operate as a system, "not just as a passive display hanging there," he says.
"We invented a different type of microphone, at least different for us, which is an array microphone," says Stucki. It is built into the bezel of the unit instead of using a table microphone.
"GSM had to figure out what we can buy, and how much it is going to cost. They had to verify that the vendor can deliver what is called for in the design at the not-to-exceed cost," he says.
In some cases, there was only one supplier that could be immediately qualified. In those instances. GSM would then work to find and qualify second and third sources.
Kern says because TelePresence is a unique product compared to its traditional business of routers, switches and hubs, the kind of involvement of the supply chain management organization was different.
"With more traditional equipment such as switches and routers, buyer-planners were often involved in a new product launch," says Kern. "For this technology it was more vital to have supply chain design expertise that would look from the customer experience point of view."
In fact, with TelePresence customer expectations were given more weight in terms of how Cisco measured its success concerning the product. "We have to connect closer to customer expectations," says Kern. "We are in the process of shifting our internal metrics so they align more with customer expectations vs. the traditional supply chain metrics around inventory turns, leadtimes and internal factory yield," he says.
Customer careabouts
With TelePresence, buyers had to address customer "careabouts." A careabout could include a user not having to make any adjustments to the equipment.
Another careabout is quality. Cisco's traditional products have a reputation of high quality, says Kern. "The focus was to make sure there was no give on quality. A customer receiving a high-end switch from us, or a TelePresence system or an IP security camera has the same the same quality expectations from Cisco," he says.
The challenge was how "do we hit our time-to-market goals and achieve the same quality standards with bleeding edge technology," says Kern. The answer was selecting suppliers that not only met technology requirements, but had strong quality systems in place.
He says managing suppliers of those technologies was crucial, but challenging.
Kern says with Cisco's traditional business, the company may spend $100 million with a certain semiconductor supplier. Having someone manage that supplier relationship is affordable because of the amount of the spend.
"But with TelePresence, we have a lot of new supplier relationships where we buy one thing from a supplier and provide the same level of support to them" because quality performance of the low-volume supplier is just as important as the higher-volume chip supplier.
While quality is always important, cost in this case was not. "In this space cost was a factor but it was more the adoption of the bleeding edge technology, getting the technology and then scaling it" so the system can be manufactured to meet demand.
Kern says emerging products such as TelePresence are changing how Cisco's value chain (supply chain) organization operates.
"Part of where we are evolving to as a value chain organization is really trying to develop a DNA that is adaptable to new business models," says Kern. "Normal supply chain works for traditional business, but it is not necessarily applicable to emerging areas."
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