Buyers link hands with designers

At networking equipment manufacturer Cisco Systems, buyers get in on product development early, determining what technology the company will use in future products.

By James Carbone -- Purchasing, 3/16/2006

It's not uncommon for electronics OEMs to involve purchasers in new product introduction when design engineers begin work on a new product. However, networking equipment company Cisco Systems in San Jose, Calif. is taking purchasing involvement in design to a new level.

Commodity managers are not only involved in new product introduction, they often influence what technology will be used before design on a new Cisco router, switch or other product begins. They work with engineers to determine which technology is the best fit for future networking products.

Steve Darendinger, vice president of worldwide supply chain management, says commodity management involvement with engineering is especially strong with application specific integrated circuits (ASICs), microprocessors and memory ICs.

For instance, commodity managers working with engineering helped determine when Cisco's switch from synchronous DRAM to double data-rate DRAMs should occur and which suppliers should be used. They also helped determine Cisco's switch from ASICs made on .13 micron technology to 90 nm process technology and are now monitoring when it makes sense to move to 65 nm technology.

Commodity managers also help determine which suppliers would be included in new product development efforts and carefully monitor technology roadmaps to make sure suppliers are investing in the technologies that Cisco will need in the future.

Such up-front early involvement by commodity management in design is having far-reaching impact on Cisco's products and overall business, says John Kern, senior director for global supply commodity management.

"Engaging with engineering, understanding technology roadmaps and getting lined up with the right suppliers allows us to make the right decisions to meet the requirements for our products," he says. "At the same time, we can make decisions that really mitigate potential issues downstream. If you do a good job up front you have fewer quality issues, pricing related problems and delivery problems. You can focus on prevention vs. chasing issues," says Kern.

That's what happened with the 2005 launch of Cisco's CRS-1 router. The CRS-1 is the industry's first router to provide single connections up to 40 gigabits per second (Gbps), while scaling to an overall capacity of 92 terabytes per second (Tbps). It has 100 times more overall capacity than any existing router and is four times faster.

"This product is one of the most sophisticated and powerful routing technology products we have developed here at Cisco," says Darendinger.

Commodity management was involved with design and engineering in its successful on-time launch. The CRS-1 router met cost targets and there were no leadtime or quality issues. Darendinger attributes the successful launch to the joint activity of supplier management, manufacturing and design and the use of preferred suppliers.

"Commodity management worked closely with engineering to select the supply base and technologies for the product design, as well as supply chain requirements," he says. Those products and technologies included ASICs, memory, printed circuit boards, electromechanical devices and standard components.

Darendinger says efforts to involve commodity managers in design began about five years ago. Since then, involving commodity management in design has had measurable results, including a dramatic reduction in the number of suppliers, better quality and lower inventory levels and increased inventory turns.

For example, in early 2001 Cisco had close to 1,500 suppliers, and 80% of its spend was with about 200 suppliers. "Now, based on the engagement we had with engineering and the right-sizing of our supply base within these commodity areas, we have about 650 total suppliers and spend 90% of our overall spend with 93 suppliers," says Darendinger.

In some areas, the reduction has been dramatic. In ASICs, Cisco went from 20 suppliers to three. Those three now are working closely with Cisco on a broad range of ASIC products.

For standard products, including passives and low-end semiconductors, Cisco reduced its number of suppliers from more than 300 to about 150.

Angel Mendez, senior vice president of worldwide manufacturing, says involvement in design by commodity management is key to supplier-base reduction.

"The discipline that the sourcing team brought to the engineering development process has been the main reason why the top third of the 1,500 enjoy the bulk of our spend," he says. "Commodity leaders have done a great job."

With fewer suppliers, Cisco can leverage its purchases, which results in lower materials cost. "In addition, our cost to manage suppliers becomes more efficient as we have fewer suppliers," says Darendinger. "Suppliers become more intimate with our needs, and therefore communication is more efficient and more frequent."

The remaining suppliers are also more likely to invest in Cisco's future technology needs because they know they will get a "sufficient return for that investment," says Darendinger. "Suppliers can get a better understanding of our technology roadmaps and what we are looking for," he says. "They can align their investments with our technology investment so we get the technology when we need it when we launch the product."

Cisco can also be comfortable about the risk involved with a new technology because it uses a risk rating process for products and suppliers.

"We design for the supply chain—for manufacturability, quality and reliability. But we also design for risk," says Darendinger. He says commodity management has developed a risk rating process to help engineers avoid designing in parts that may have availability problems.

"The process allows engineering to understand the product risk of designing in a certain component," says Darendinger. So if the component was to go end-of-life over the next six months to a year, the rating would reflect that. A different part or technology would be chosen.

"Our risk rating process is an integral part of our new product introduction (NPI). It allows an engineer and an NPI program manager to see if a part is at risk before they add it into the product design," he says.

Commodity management is responsible for supplying the risk ratings.

Besides assessing the risk of a product, commodity management at Cisco also assesses the risk of a new technology and makes the call when the benefit of the new technology outweighs the potential risk. An example is the transition from .13-micron process technology for ASICs to 90 nm.

"We didn't want to jump to 90 nm too quickly where we took undue risk," says Kern. Often with a new process technology, yield rates can be low and defect levels high.

In addition, there are time-to-market and life cycle considerations, says John McCool, vice president and general manager of Cisco's Gigabit Systems Business Unit. Much of Cisco's equipment has life cycles of five to 10 years so the selection of technology like 90 nm is important because Cisco wants to maximize its use.

"We don't want to get in too early and impact time to market, but we do want to get in on the leading technologies early enough so we get the longest run possible," says McCool.

"We analyze the risk and recommend when we should make the transition," he says.

The transition occurred about 20 months ago and went smoothly, he says. However, now analysis is being done by commodity management when it makes sense to transition to 60 nm technology.

Commodity management is involved in design on an ongoing basis. In fact, engineering-facing commodity managers are co-located with engineering.

The engineering-facing commodity managers work with engineering continuously on defining what the technology requirements and business requirements are that Cisco needs, says Darendinger. "However, it's more than just that. They look at what investments over the next three years need to be made. How do roadmaps align? Is the industry changing? What are our business requirements at the product level? What are our supply chain requirements? Is it leadtime that is important for the customer?"

Commodity management and engineering strategize together to determine if Cisco's current supply base meets those technology and business requirements or whether they have to bring new technology on board, he says.

"Engineering looks to us to find out who our preferred suppliers are, what technology they have, what technology we should be looking at for certain solutions or applications, and what the industry trend in that area is," says Darendinger.

As a result of those requirements, commodity management spends a lot of effort on technology roadmaps.

"We have a consolidated roadmap for each one of our products. Of those products, from an architecture standpoint we try to re-use technology where we can. Other times we need to customize technology for that individual product set," he says.

He says commodity management reviews all the technology requirements of current Cisco products and products on the drawing board. Those requirements are compared to the technologies available from the company's suppliers.

"We determine if there is a match or mismatch and whether we need to engage new suppliers or work with current suppliers to fulfill that gap if there is one," he says.

If suppliers have to be added, there is a stringent qualification process. While Cisco has been reducing its supplier base, it adds a handful of suppliers each year, often for technology reasons. (See story, electronics trends, p. 24).

While technology is important, it is not the only focus. Cost of the technology and its impact on the cost of Cisco's products is also important. For each of its products, Cisco has a product requirements document (PRD), which includes a number of considerations, including a cost target.

"Commodity management's role is to make sure we have appropriate technology and cost structure to meet that cost target goal," says Darendinger. "If we don't have the right cost, we go back with our engineering partners and look at alternative technologies in order to meet the same objective."

While much of the commodity management's involvement in design has centered on ASICs, memory and microprocessors, its efforts will be expanded to other product families such as interconnect and power.

"We have focused on commodities that have the longest leadtimes in terms of development and architectures," says McCool. "They are the ones most critical to networking devices. But we are evolving this to other commodities."

Cisco believes it will realize even more benefits by including more commodities even if the technologies aren't as leading edge as ASICs and microprocessors.

Through vendor-managed inventory programs resulting from supplier base reduction, Cisco has been able to improve its on-time delivery to the high 90% range, from the low 90% range of four years ago.

It has also realized a 15-20% improvement in component quality from suppliers depending on the commodity.

Darendinger says commodity management's up-front involvement in design contributed to all of those improvements and more.

"One of the things we have learned over the years is that decisions made in sourcing at the design phase today have a big impact in the success of the supply chain, he says.

"That's why we believe partnering up front to make the right sourcing decisions is critical to our overall success in our supply chain."