In the summer of 2000, with its order book overflowing but its assembly lines sputtering from lack of parts, Cisco Systems decided to crank up its supply line. It committed to buying components months before they were needed, and lent the manufacturers who build most of its Internet switching gear $600 million interest-free to buy parts on Cisco’s behalf. As it turned out, Cisco made a bad bet. On Monday April 16, 2001, with both its sales and the value of its surplus components shrinking, Cisco said it would write off $2.5 billion of its bloated inventory. People were in shock. In effect, Cisco executives had ignored or misread crucial warning signs that their sales forecasts were too ambitious. They overestimated Cisco’s backlog because of misleading information supplied by Cisco’s internal order network and continued to expand aggressively even after business slowed at some Cisco divisions. Alex Mendez, an ex-Cisco executive who left in November to become a venture capitalist, claims “Cisco always had a bit of trouble finding the brakes” (1).
The greatest potential of the Internet has been to facilitate collaboration between supply chain buyers and sellers to achieve better information visibility and facilitate better decision-making. Although the number of such applications is growing daily, one of the most promising is the ability to create information visibility between original equipment manufacturers (OEM’s) or large service providers (such as airlines) and their lower-tier suppliers. (A paper on this subject written by a group of students from NC State University recently won the 2002 Fogelman International Student Paper Award.)
Information visibility within the supply chain is the process of sharing critical data required to manage the flow of products, services, and information in real time between suppliers and customers. If information is available but cannot be accessed by the parties most able to react to a given situation, its value degrades exponentially. Increasing information visibility between supply chain participants can help all parties reach their overall goal of increased stockholder value through revenue growth, asset utilization and cost reduction. To improve responsiveness across their supply chains, companies are exploring the use of collaborative models that share information across multiple tiers of participants in the supply chain: from their supplier’s supplier to their customer’s customer. These trading partners need to share forecasts, manage inventories, schedule labor, optimize deliveries, and in so doing reduce costs, improve productivity, and create greater value for the final customer in the chain. Software for Business Process Optimization (BPO) and Collaborative Planning, Forecasting and Replenishment (CPFR) are evolving to help companies collaboratively forecast and plan amongst partners, manage customer relations, and improve product life cycles and maintenance. Traditional supply chains are rapidly evolving into “dynamic trading networks” (2) comprised of groups of independent business units sharing planning and execution information to satisfy demand with an immediate, coordinated response.
Perhaps no other company has been as successful in implementing information visibility as a competitive strategy than Dell Computer. Dell has fulfilled its commitments to customers through the company’s direct model, in which it holds only hours of inventory yet promises customers lead-times of five days. Component suppliers who wish to do business with Dell have to hold some level of inventory, since their cycle times are typically much longer than Dell’s (3). By utilizing the Web, Dell provides its supplier with forecasting information and receives information about the supplier’s ability to meet the forecasts. Dell uses i2 Technologies products for demand-fulfillment operations and products from Agile Software for engineering-change-order and bill-of-materials management. Communication between engineering changes, component availability, capacity, and other data between Dell and its suppliers flows both ways, in addition to forecasting and inventory data. Dell is also able to review suppliers and place Web-based orders into their factories in hours. After outsourcing to third party contract manufacturers, Dell executives realized that many of these manufacturers did not have adequate visibility of customer orders. This was a major driver in the initiative to increase visibility of orders. Dell’s build to order web-based customer model has become the benchmark for other industries, and organizations such as General Motors, Ford, BMW, General Electric, and others are seeking to create “build-to-order” models using the Web as the platform for taking customer orders.
Some of the considerations that must be planned for in implementing an information visibility system include the size of the supply base and customer base with which to share information, the criteria for implementation, the content of information shared and the technology used to share it. Clarifying these issues will help to ensure that all participants have access to the information required to effectively control the flow of materials, manage the level of inventory, fulfill service level agreements and meet quality standards as agreed upon in the relationship performance metrics.
(1) The Wall Street Journal, “Behind Cisco’s Woes Are Some Wounds of Its Own Making,” by Scott Thurm, p. A1, April 18, 2001.
(2) Cole S. J., Woodring S. D., and Gatoff J., “Dynamic Trading Networks”, The Forrester Report, January 1999.
(3) Lewis, Nicole. “Valuechain.Dell.Com Provides Pipeline to Info Exchange.” Dell Portal Adds ‘Value’. CMP Media Inc., 2001.