Executive Briefings

At Cisco, 'The Customer Is Everything.' No, Really

Certain things automatically set off alarm bells in my brain. E-mails from Nigerian princes. No-risk investment schemes. Companies calling themselves "customer-centric."

Is there anything in the business world more hackneyed than the CEO who claims to put the customer first? As a top executive, the first constituency you answer to is your shareholders. After that comes a hodgepodge of interests: The board of directors. The CFO. Banks. Wall Street analysts. The big-box retailer who stocks your product. The supplier who can't deliver the parts you need. The cost of fuel and raw materials. Your compensation agreement. And somewhere in there, the customer.

Occasionally, though, a company that talks about its "laser-like" customer focus really means it - or at least it's trying to make good on that vow. Cisco Systems, Inc. might be one of those.

Cisco's determination stems from a traumatic incident - that time back in 2001 when it was forced to write off $2.25bn in inventory because it misread market demand just prior to the bursting of the dot-com bubble. Plenty of companies failed to prepare for the crisis, but none judged the situation quite so poorly as Cisco. The high-tech powerhouse, which had briefly enjoyed the highest market capitalization in Wall Street history, found itself racking up another record: the highest single-quarter inventory charge of any IT company. It scrapped chips, boards, equipment, raw materials, work in progress - all purchased to satisfy a supposedly insatiable demand that suddenly evaporated.

Clearly, Cisco didn't have its eye on the customer in 2000. What mattered to the company back then was hewing to forecasts that were nothing more than a continuation of an unsustainable trend. (I propose that as a definition of the word "forecast.") To its credit, Cisco seems to have learned its lesson from the experience. It has vowed never again to be caught holding so much unwanted inventory. But it's living in a very different world today.

For one thing, the stakes are much higher. At $40bn, Cisco's fiscal 2010 revenues are twice the level of 2005. The company has labored to expand its footprint, transforming itself into a dominant maker of routing and switching equipment to a player on many stages - "market adjacencies," in the words of Angel L. Mendez, senior vice president of customer value chain management. Today, he told the San Francisco Roundtable of the Council of Supply Chain Management Professionals, Cisco has a presence in 31 distinct sectors. And it manages some 20,000 active SKUs.

All of which serves to complicate the "customer-focus" mission many times over. Add in the fact that 95 percent of Cisco's manufacturing is outsourced, and you have a recipe that's as treacherous to execute as the most delicate souffle.

Cisco has almost no finished product on the shelf; it configures to order virtually everything it ships. Mendez rides herd over an army of more than 1,000 suppliers, the top 100 of which have changed little over the past seven years. ("Our CEO [John T. Chambers] likes to say that we partner for life," Mendez said - not without a trace of skepticism in his voice.) What has changed is the way the company is organized. Multi-disciplinary teams - including representatives from planning, supplier management, manufacturing, corporate quality and the like - reside within the engineering groups to create a single thread of end-to-end accountability to the customer.

The trick lies in making that structure responsive to market realities. "We are still in a period of pretty high uncertainty," said Mendez, and he doesn't expect the scenario to change anytime soon. New high-tech products are appearing at blinding speed - witness the recent flood of iPads, smartphones and electronic readers - and manufacturers must keep pace with precious little intelligence on which to rely.

The problem extends well beyond consumer behavior to unforeseen geopolitical trends. Two years ago, said Mendez, Cisco was immensely proud of its call center in Cairo, Egypt. As a side-effect of that country's astonishing revolution, the facility "went down two days before the end of my quarter." Such is the lot of a supply chain manager who must constantly grapple with issues that dwarf his circumscribed universe.

It's no surprise, then, that companies do such a lousy job today of forecasting demand. One of Cisco's biggest customers has a forecast accuracy of just 12 percent, and the number isn't atypical. "It's naive to think that we could get back to the pre-2008 standard [of accuracy]," said Mendez. "It's not because we got stupider. It's because customers have a tougher time predicting demand."

The answer isn't crafting better forecasts - it's achieving a greater level of supply-chain agility, to deal with what actually happens. Cisco's notion of "customer intimacy" is supposed to achieve this very goal, with the establishment of cross-functional "customer value teams" that service the biggest accounts. The idea is to build flexibility into every stage of a product's lifecycle, with constant customer input and strict performance metrics for suppliers. To make that work, said Mendez, Cisco needs to obtain accurate data. "Ninety percent of the friction we deal with is about information latency - either late or not right."

There's still work to be done. Cisco needs faster access to data wherever it resides - in the enterprise resource planning system, in the demand-planning tool, in buyer-supplier exchanges. But the company seems sincere in its determination not to repeat the debacle of 2001. "Customers are everything," Mendez said. For once, that phrase just might mean something.

- Robert J. Bowman, SupplyChainBrain

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Certain things automatically set off alarm bells in my brain. E-mails from Nigerian princes. No-risk investment schemes. Companies calling themselves "customer-centric."

Is there anything in the business world more hackneyed than the CEO who claims to put the customer first? As a top executive, the first constituency you answer to is your shareholders. After that comes a hodgepodge of interests: The board of directors. The CFO. Banks. Wall Street analysts. The big-box retailer who stocks your product. The supplier who can't deliver the parts you need. The cost of fuel and raw materials. Your compensation agreement. And somewhere in there, the customer.

Occasionally, though, a company that talks about its "laser-like" customer focus really means it - or at least it's trying to make good on that vow. Cisco Systems, Inc. might be one of those.

Cisco's determination stems from a traumatic incident - that time back in 2001 when it was forced to write off $2.25bn in inventory because it misread market demand just prior to the bursting of the dot-com bubble. Plenty of companies failed to prepare for the crisis, but none judged the situation quite so poorly as Cisco. The high-tech powerhouse, which had briefly enjoyed the highest market capitalization in Wall Street history, found itself racking up another record: the highest single-quarter inventory charge of any IT company. It scrapped chips, boards, equipment, raw materials, work in progress - all purchased to satisfy a supposedly insatiable demand that suddenly evaporated.

Clearly, Cisco didn't have its eye on the customer in 2000. What mattered to the company back then was hewing to forecasts that were nothing more than a continuation of an unsustainable trend. (I propose that as a definition of the word "forecast.") To its credit, Cisco seems to have learned its lesson from the experience. It has vowed never again to be caught holding so much unwanted inventory. But it's living in a very different world today.

For one thing, the stakes are much higher. At $40bn, Cisco's fiscal 2010 revenues are twice the level of 2005. The company has labored to expand its footprint, transforming itself into a dominant maker of routing and switching equipment to a player on many stages - "market adjacencies," in the words of Angel L. Mendez, senior vice president of customer value chain management. Today, he told the San Francisco Roundtable of the Council of Supply Chain Management Professionals, Cisco has a presence in 31 distinct sectors. And it manages some 20,000 active SKUs.

All of which serves to complicate the "customer-focus" mission many times over. Add in the fact that 95 percent of Cisco's manufacturing is outsourced, and you have a recipe that's as treacherous to execute as the most delicate souffle.

Cisco has almost no finished product on the shelf; it configures to order virtually everything it ships. Mendez rides herd over an army of more than 1,000 suppliers, the top 100 of which have changed little over the past seven years. ("Our CEO [John T. Chambers] likes to say that we partner for life," Mendez said - not without a trace of skepticism in his voice.) What has changed is the way the company is organized. Multi-disciplinary teams - including representatives from planning, supplier management, manufacturing, corporate quality and the like - reside within the engineering groups to create a single thread of end-to-end accountability to the customer.

The trick lies in making that structure responsive to market realities. "We are still in a period of pretty high uncertainty," said Mendez, and he doesn't expect the scenario to change anytime soon. New high-tech products are appearing at blinding speed - witness the recent flood of iPads, smartphones and electronic readers - and manufacturers must keep pace with precious little intelligence on which to rely.

The problem extends well beyond consumer behavior to unforeseen geopolitical trends. Two years ago, said Mendez, Cisco was immensely proud of its call center in Cairo, Egypt. As a side-effect of that country's astonishing revolution, the facility "went down two days before the end of my quarter." Such is the lot of a supply chain manager who must constantly grapple with issues that dwarf his circumscribed universe.

It's no surprise, then, that companies do such a lousy job today of forecasting demand. One of Cisco's biggest customers has a forecast accuracy of just 12 percent, and the number isn't atypical. "It's naive to think that we could get back to the pre-2008 standard [of accuracy]," said Mendez. "It's not because we got stupider. It's because customers have a tougher time predicting demand."

The answer isn't crafting better forecasts - it's achieving a greater level of supply-chain agility, to deal with what actually happens. Cisco's notion of "customer intimacy" is supposed to achieve this very goal, with the establishment of cross-functional "customer value teams" that service the biggest accounts. The idea is to build flexibility into every stage of a product's lifecycle, with constant customer input and strict performance metrics for suppliers. To make that work, said Mendez, Cisco needs to obtain accurate data. "Ninety percent of the friction we deal with is about information latency - either late or not right."

There's still work to be done. Cisco needs faster access to data wherever it resides - in the enterprise resource planning system, in the demand-planning tool, in buyer-supplier exchanges. But the company seems sincere in its determination not to repeat the debacle of 2001. "Customers are everything," Mendez said. For once, that phrase just might mean something.

- Robert J. Bowman, SupplyChainBrain

Comment on This Article