A Cautionary Real-Time Case Study: Cisco
Remember the inventory/production debacle at Cisco in 2001? Perhaps the story got lost in the deflating of the Internet bubble, but it is worth recounting as we look at the promised and pitfalls of using real-time data to manage supply chains.
Cisco bragged in the Harvard Business Review in early 2001 about its "virtual close" software. The CFO asserted that they could close their books within hours, and more importantly, "the decision makers who need to achieve sales targets, manage expenses and make daily tactical operating decisions now have real-time access to detailed operating data across the supply chain". However, within twelve months, the company had written off over $2 billion in inventory and laid off 8,500 people.
In their defense, Cisco managers did say that the real-time forecasting systems prevented a more major disaster in later quarters. But smaller competitors with less sophisticated technology rode through the storm without such drastic problems. What happened?
The big issue was growth, or rather being blinded by it and failing to look at any scenarios that modestly reduced growth to see what impact that would have on inventories. Another problem was long lead times for key products. Customers and Cisco sales guys got used to inflating orders to ensure that they would get what they needed. When the slowdown in demand began, customers canceled orders quickly, leaving Cisco with a huge inventory bulge in its supply chain, the result of the famous "bull whip effect" in action. Since demand was so high, Cisco had previously locked up key product components with long-term supplier commitments, promising to buy all that was produced over a period of time, no matter what.
The problem was exacerbated by the continuing use of real-time customer and sales person input into the forecasting system. As long as everyone had rosy forecasts, the system kept telling suppliers to build the product. When the rosy forecasts ended, some Cisco managers refused to believe what the market was telling them. There was a three month period of denial and then they could no longer ignore what the real-time economic data was now telling them--which the economy was tanking. Unfortunately, the real-time Cisco forecasting models did not include macroeconomic factors or projections in their analyses.
So, what’s the final word from Cisco? The CFO later said that the "slowdown happened at Internet speed" and that "they were developing a new module for their forecasting system—it’s called a crystal ball".
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