At today's Cisco Systems, the fewer suppliers the better
Staff -- Purchasing, 4/20/2006 2:00:00 AM
In the 1990s when cisco systems was enjoying 25% quarter-over-quarter revenue growth, it seemed the company could not add suppliers fast enough.
It needed component suppliers as well as manufacturing partners so it could meet skyrocketing demand for its routers, hubs and other networking equipment. Consider: In 1990 Cisco's sales were $69 million. By 2000, its revenue increased to $18.93 billion. At the same time its number of suppliers grew to more than 1,300.
While Cisco continues to grow, it is not at the same breakneck pace as the 1990s. As a result, its supply base needs have changed. Cisco has developed purchasing strategies that have reduced its number of suppliers while making sure the company is aligned with the suppliers who can meet Cisco's technology, manufacturing, volume, quality and delivery needs.
Those strategies were developed by Cisco's supplier management group headed by Steve Darendinger, vice president of supply chain management for Cisco. "Our supplier management system includes strategy development, new supplier introduction, business reviews and scorecards, continuous improvement programs and ongoing supply base classification processes," says Darendinger.
Darendinger does not like to say that supplier management has changed over the past five years. Rather, he says there have been "refinements" made to the organization that have helped Cisco be more competitive at a time of slower growth for the networking equipment industry.
"We had a supplier management organization, but it was focused more around growth and optimization for that growth and to get more capacity that we needed," says Darendinger.
"Now we are much more focused on not only scaling for our growth, but we have looked at other factors," he says. Those factors include how Cisco can leverage its spend, involve suppliers in new product development to tap into their expertise, improve time to volume, cut cost and improve supplier quality.
It's the job of Cisco's 15 commodity teams to develop the strategies that address those concerns and goals. Cisco has teams for applications specific integrated circuits (ASICs), microprocessors, programmable logic devices, broadband chips, memory ICs, electromechanical devices and standard logic, among others.
Commodity strategy. Cisco develops a strategy for each commodity which details how many suppliers will be needed, what the volume of parts is expected to be, how much flexibility is needed and which suppliers are going in the same direction as Cisco from a technology standpoint.
"We look at the industry and determine which suppliers are investing in it and which are the leaders," says Darendinger. Cisco wants suppliers that can supply the whole range of products instead of a single product. That strategy has helped Cisco reduce its supply base from about 1,300 in 2001 to about 300 in 2006. With commodity semiconductors and passives, the number has been reduced from about 300 to 150 and about 90% of Cisco's spend is with just 93 suppliers, says Darendinger.
ASICs are a good example of deployment of the strategy of using one supplier for multiple products. "With ASICs we have gone from more than 20 suppliers to three suppliers," says Darendinger. "The three have a broader level of ASIC leverage and they are making investment in both the low-end and high-end parts and optimizing that capability across the board."
With ASIC suppliers, willingness to invest in the technologies that Cisco needs is crucial, according to Angel Mendez, senior vice president of worldwide manufacturing for Cisco.
"We buy a broad portfolio of ASICs because of the broad portfolio of products that we have. To supply Cisco, you have to invest in technology development and that involves millions of dollars," he says.
Cisco has formed close partnerships with ASICs suppliers. "To have people come to the table with that willingness to invest in our future, a willingness to be partners, is extremely important from a technology and market perspective. ASICs are the brains of our boards and we are spending a lot of money with a small number of partners," says Mendez.
Cisco's strategy for dealing with electronics manufacturing services providers has also changed. It has reduced the number of its outsource manufacturing partners from 11 to four, says Mendez.
Cisco chose the four outsourcing partners which have comprehensive manufacturing and design for manufacturing capabilities and are strategically located around the globe. The four have 14 different sites in Asia, Europe and North America.
"We want to be judicious on how we spread that work around the world using our partners. We are not married to one geography," he says.
Mendez says Cisco has outsourced for a long time and it has been a competitive advantage. "We still are very much outsourced. Our virtual manufacturing model has been critical to our success. We have limited internal manufacturing," he says.
A key challenge is having a supply chain that can support manufacturing in various global locations. "Given our globality, we do design our supply chain around each product area and take advantage of local sourcing opportunities when it makes sense," says Mendez. He adds that Cisco positions its factory and assembly points as well as its logistics hubs, strategically to meet lowest landed cost requirements.
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