It makes perfect sense that Cisco Systems Inc. would build its entire business model around the internet. Cisco is the world's largest seller of routers and switches for data networking. But its use of the internet to fashion an "extended enterprise" of channel partners is a relatively recent event.

Founded in 1984 by a pair of Stanford University computer scientists, San Jose, Calif.-based Cisco began life as a traditional maker of networking hardware. Production was mostly done in-house, and dealings with suppliers and customers were complicated by the usual reams of paperwork and communication lags. The result was high inventories, erratic demand forecasts and variable levels of customer service.

Cisco products, which make possible the transfer of data across the internet, are sold in some 115 countries. Customers range from multinational corporations and government agencies to small businesses in need of web-driven data networks. Sales channels include an in-house sales force, distributors, value-added resellers and large system integrators.

The company's interest in supply-chain networking dates back to 1985, when it set up an electronic mail system between engineers and customers. By the early 1990s, it was using the public-domain web browser known as Mosaic to perform key transactions.

Those tentative efforts were just the beginning. Eventually, Cisco's internet investment would exceed $100m. And no part of the company would remain untouched.

Like many of its Silicon Valley counterparts, Cisco enjoyed early dominance in a burgeoning field. But in the mid-'90s, it reached the point where it could no longer succeed in spite of itself. Sales were climbing at the dizzying rate of 100 percent a year, employment ranks were swelling, and supply-chain costs were unacceptably high. "We couldn't keep going at that rate without doing things differently," says Barbara Siverts, manager of supply-chain solutions within Cisco's Internet Business Solutions unit.

Executives were faced with the challenge of devising solutions in a business that refuses to stand still. The dynamics of the networking industry change virtually every month, says Siverts. Product life cycles are continuing to shorten. Demands for reliability, flexibility and speed are escalating at an alarming rate. To keep pace, Cisco undertook a wholesale revamping of its business processes, from design and forecasting, to raw materials acquisition, production, distribution and customer follow-up.

Many high-tech market leaders are steered by aggressive visionaries, not the least of whom is Cisco's own president and CEO, John Chambers. But creation of Cisco's Global Networked Business model can't be put down to any one individual, says Siverts. It arose in multiple departments at the same time, out of a shared realization of the need for change. "There wasn't a high-level plan that everyone was marching to," she says.

Weaving a Fabric
From Day One, Cisco viewed its supply chain not in a linear fashion, but as a "fabric of relationships," says Dick Gillespie, director of enterprise business with Cisco Systems UK Limited. The goal was to transcend the internal focus of enterprise resource planning (ERP) systems to embrace a networked supply chain of all trading partners. Key areas for improvement included product testing, supplier relationships, new product introductions, and fulfillment capability. Primary goals were servicing the customer better, coping with huge growth and driving down costs.

Significantly, Cisco drew on expertise from both the information technology and logistics sectors to forge a new chain. Shepherding the effort were Peter A. Solvik, chief information officer, and Carl Redfield, senior vice president of manufacturing and logistics.

Solvik understood the strategic role of IT, which had previously been treated as a cost center. "He took it out of the back office," says Siverts. Redfield moved to outsource anything not considered a core competency of Cisco, while retaining strict control over logistics service providers.

Outsourcing was a watchword from the start. Like computer makers Dell and Gateway, Cisco saw little value in making its own products. Today it relies on five contract manufacturers for nearly 60 percent of final assembly and testing, and 100 percent of basic production. Through strict oversight and a clear set of standards, Cisco ensures that every partner achieves the same high level of quality. All 14 of its global manufacturing sites, along with two distributors, are linked via a single enterprise extranet. Customers neither know nor care where products originate.

Cisco's ability to monitor contract manufacturers and other third parties wouldn't have been possible without the internet, Siverts says. The new business model called for a faster and easier way of exchanging accurate information between customers, suppliers, service partners and employees. Existing solutions, such as electronic data interchange (EDI) via value-added network connections, were too expensive, complex and unwieldy to fuse the supply chain by means of a continuous stream of data.

The quest for a single enterprise has tied Cisco to its suppliers in unprecedented ways. Product now flows from first and second-tier suppliers without the documentation and notifications on which most supply chains rely. Instead of responding to specific work orders, contract manufacturers turn out components according to a daily build plan, derived from a single long-term forecast shared throughout the supply chain. Items move either to Cisco or directly to its customers.

Payment occurs automatically upon receipt; there are no purchase orders, invoices or traditional acknowledgments. "We just send them the money," says Gillespie. "No bills of lading are transferred."

In exchange for getting paid sooner, suppliers are required to aggressively attack their cost structures but not to the point where they can't make a profit. "It's not a partnership if you're putting the other guy out of business," says Siverts.

Cisco's Report Card
Cisco cites at least $128m in annual savings from its single-enterprise strategy. It has reduced time to market by 25 percent, while hitting 97 percent of delivery targets. Inventories have been cut nearly in half. Order cycle time has declined from six to eight weeks four years ago, to between one and three weeks now.

The program began with one key supplier, which worked with Cisco to hammer out a general process flow largely shorn of the usual time-consuming steps. It since has been rolled out to half a dozen contract manufacturers, with each new partner carefully scrutinized before signing on. The emphasis is on managing growth, says Siverts, not amassing an army of networked suppliers for its own sake.

Additional players, especially distributors and value-added sellers, will allow Cisco to develop even more accurate forecasts. Currently it uses the forecasting software of Dallas, Texas-based i2 Technologies to generate reliable numbers. The package ties into Cisco's ERP system, supplied by Oracle Corp. of Redwood Shores, Calif.

Equally important, says Siverts, is a flexible and responsive supply chain that can adjust to sudden changes in demand. Under a program known as dynamic replenishment, demand signals flow instantly to contract manufacturers. Inventories can be monitored by all supply-chain partners on a real-time basis.

"If we depended [entirely] on accurate forecasts," Siverts says, "the supply chain probably wouldn't work."

Cisco relies heavily on product testing to ensure consistent quality. A major part of its supply-chain program was the initiation of automatic, standardized testing to order, allowing the entire process to be outsourced to suppliers. Other benefits include reduced cycle time and the placement of detection efforts closer to the cause of any problems. Cisco estimates annual savings of $23m from having spun off some $70m of testing each year to 320 locations worldwide.



Another breakthrough involves elimination of one of the supply chain's biggest stops: Cisco itself. Some 55 percent of product now moves directly from supplier to customer, bypassing Cisco altogether. In a single stroke, it has removed several days from the order cycle. "Cisco does the design and the partners do the rest," says Lance Travis of AMR Research, Inc., in a recent report on the company.
Direct fulfillment means reduced inventories, labor costs and shipping expense. Cisco pegs savings at $10 per unit, or around $12m a year.
Tighter integration with chief suppliers means faster development of new product. In a world where chip capacity is doubling every nine to 18 months, component lifecycles can be exceptionally brief. Companies must roll out new models at an ever-increasing rate.

Prototype building used to take weeks. Now, with engineers able to correct product information at the touch of a button, that span has shrunk to a matter of days. Additional time is saved because prototyping takes place at the supplier's site. Annual savings are in the range of $12m, Siverts says.

Focus on Logistics
The logistics component of Cisco's supply chain has undergone an equally dramatic transformation. Work in that area began in 1997, following implementation of Oracle's

ERP software, Siverts says. Guiding the effort was Greg Stein, senior manager of logistics. Among Stein's responsibilities were implementation of the direct fulfillment model and a merge-in-transit program for materials flowing from various contract manufacturers into a single destination. Subcontract manufacturers were brought into the network so that product would have the same look and feel, regardless of origin. Third-party logistics providers were plugged into Cisco's database via the World Wide Web, giving customers complete information on shipment status.

Stein also oversaw the creation of Cisco's European Logistics Center in Best, the Netherlands. Not a place for storing large amounts of inventory, it serves instead as a cross-docking and customer fulfillment operation. UPS Worldwide Logistics operates and manages Cisco's European supply chain.

Previously, European customers had been responsible for coordinating shipments all the way from Cisco headquarters in California. The result was a mishmash of more than 150 carriers crowding the shipping docks in San Jose. Cisco had virtually no control over finished-product movements, let alone the quality of customer service.

Working with UPS, Cisco took control of the outbound supply chain, allowing for time-definite delivery throughout Europe within five to eight days, via a single point of contact. With Oracle's inventory-control system hooked directly into UPS's logistics management system, Cisco now tracks product to destination on a real-time basis. The extra measure of control allows it to intercept, reroute or reconfigure orders on short notice. Through deferred delivery, Cisco ensures that a component won't arrive at the customer's dock until it's ready to be installed.

Aiming for good relations with European customers, Stein made participation in the new outbound program optional. Buyers can choose their own carriers and routes for delivery, but most of them don't. Eighty-two percent have opted for delivery services through the European Logistics Center, he says.

Cisco's outsourcing strategy took another step forward recently, with the decision to turn over shipping and warehousing functions to Memphis, Tenn.-based FedEx Corp. The air, ground and logistics services provider will manage a merge-in-transit operation for direct shipment to end customers, resulting in the near elimination of Cisco-operated warehouses within five years.

Cisco Faces Front
Cisco hasn't made the mistake of focusing exclusively on the back end of the business. At the heart of its reengineering effort is an interactive web site known as Cisco Connection Online. Introduced at the same time as the supply-chain initiative, CCO serves as a portal for customers and resellers globally. Features include ordering, product configuration, technical assistance, software downloads, support contacts, order status, partner referrals and self-service diagnosis in 14 languages, 24 hours a day.

Siverts has been with Cisco for six years, but doesn't recall the company's first order handled over the internet, or any particular celebration of the event. "My impression is we were running a bit too fast to take time out," she says.

Portal traffic grew at a phenomenal rate. Through CCO, Cisco went from handling 4 percent of orders over the internet in August 1996, to 83 percent today. It now runs the world's largest internet commerce site, with more than $35m a day in sales. The Cisco MarketPlace feature of CCO operates like the most popular consumer-oriented sites, with a virtual shopping cart and a complete line of products, from hardware components to promotional T-shirts, available in one location.

The CCO also offers a wide range of help tools, including a software library with instant upgrades and an "Open Forum" message center to resolve technical problems. Users get most of their answers through self-service rather than dialing up call centers. With 15 million log-ins per month, 81 percent of all questions are handled online.

Cisco benefits, too. Between January 1994 and December 1998, Gillespie says, customer satisfaction among regular users rose from 3.4 to 4.28 on a scale of 5. Yet the company didn't have to add live bodies to its customer-service group at a rate commensurate with growth in sales.

"It's like automated gas pumps," he says. "We didn't realize how much less expensive it was going to be." Total savings from Cisco's various reengineering programs are conservatively put at $825m a year, according to Siverts. Of that amount, supply-chain innovations account for $444m, consisting of $175m in cost savings and $269m in new revenue contributions. Additional monetary benefits include $269m from customer care, $57m from internet commerce, and $55m from workforce optimization.

Cisco's lessons were mostly learned the hard way: through direct experience. No other company had blazed a path to follow; most were too embroiled in ERP and Y2K issues to worry about extensive networking with external partners. Even today, no one has come close to matching Cisco's record of savings through reliance on the internet, although companies such as Wal-Mart Stores, Federal Express and Procter & Gamble have made impressive gains.

Sharing the Wisdom
Now Cisco is eager to share its experience with others. The two-year-old Internet Business Solutions unit, comprising supply-chain management, e-commerce, customer care, workforce optimization, World Wide Web foundation, and e-learning, was created to help Cisco's partners, customers and others achieve true networking. IBS, which reports directly to CIO Solvik, conducted 300 executive briefings in the last quarter of 1999 alone, Siverts says.

Some of Cisco's advice sounds like Business 101. Gillespie advises managers to "question everything. Act like a 25-year-old." Middle management, he says, tends to display the most resistance to innovation.

Siverts urges a measured pace to actual change, if not the setting of goals. "We started by doing things small, but built up very rapidly," she says. "We didn't do it all in one day and it's not perfect now."

Cisco's most valuable lesson may stem from an initial determination to harness its future to the ever-changing world of the internet. "The brands of tomorrow are being determined today, to a great degree by implementation of these technologies," Gillespie says.

More remains to be done. AMR's Travis says Cisco's channel partners must follow its lead in emphasizing a range of e-business services such as application hosting and deployment. For many, he says, the transition won't be easy. "They've focused on router and switch hardware deployments and now need to retrain for application services."

Siverts views Cisco's biggest challenge as continuing to manage massive growth. Annual revenue is hovering in the $12bn range, up from $1.2bn when Siverts joined the company six years ago. In a stock market gripped by dotcom mania, Cisco recently became the most valuable company in the world, passing up Microsoft and General Electric, though its market capitalization has since fallen.

Cisco has been on an acquisition tear, gobbling up nearly 70 networking firms in five years. Quarterly unit volumes topped 100,000 units in 1996 and are running at more than a million today. Manufacturing orders rose from 1,200 a day in May of 1997 to their current level of around 2,000, and are expected to exceed 4,000 in the near future.

Recently Cisco moved to expand European sales through an $835m partnership with San Francisco-based Northpoint Communications, an internet access provider via digital subscriber lines (DSL). Cisco had already announced its intention to boost sales of equipment to telecommunications providers, placing it head-to-head with market leaders such as Lucent Technologies Inc. and Nortel Networks Corp. Cisco recently got a big boost in that sector, with the announcement of a multi billion-dollar sales and marketing alliance with SBC Communications for various types of internet equipment.

"Cisco's goals may seem outrageous," admits Siverts. "But if you only had incremental goals, you'd be thinking incrementally. We got there a lot faster than if we had been totally reasonable."