In the first post in this series, we looked at some of the building blocks of Cisco's global procurement transformation effort in the indirect and services area. We'll continue the analysis of Cisco's efforts today, which can -- and should -- serve as a textbook example of how companies previously focused just on massive top line growth, both organic and inorganic, can quickly get a program in place to give the bottom line and balance sheet the attention it deserves. Even though Cisco's program is relatively new, it aims to deliver significant improvements in fiscal year 2011. Specifically, Cisco intends to save 4-6% on spend of roughly $2.5 billion during this time horizon (a savings estimated at approximately $133 million). They also aim to deliver "up to $175 million" in cash flow working capital improvement as well.
One of the tenants of the program structure is to focus on procurement relationship management by engaging the business and becoming a trusted internal adviser. Central to this approach is focusing on business strategy and supply chain alignment with business goals and objectives (e.g., expand and serve global markets), providing advisory services to business units focusing on category and supplier management trends and responding to market changes with data and intelligence through both rate and consumption benchmarking. The team effort is also aiming to deliver realized results through the active monitoring and tracking of savings realization, strategy portfolio management and optimization (e.g., supply base rationalization) and balance of trade considerations with key partners (and what Spend Matters believes could potentially involve key geographies, such as China, as well).
To deliver these results, the global procurement operations team within Cisco is also focused on category and supplier management that extends outside of basic negotiations and vendor management. To facilitate this more holistic engagement approach, Cisco is implementing approaches that encompass supplier governance, supplier strategy, risk management, industry presence and category strategies that go beyond "working within the transaction" with suppliers. Cisco is applying the proverbial 80/20 rule to spend considerations on target categories by going after the largest opportunities first. Cisco's largest spend areas outside of direct materials include labor, technology, integrated facilities management (IFM)/energy, marketing, travel (including meetings and events) and R&D. Even though Cisco shared the breakdown of these spend areas during the presentation, I will refrain from publishing them here given the potential sensitivity of some of the numbers.
Clearly, despite Cisco's consistent double-digit annual revenue growth and focus on product innovation, the bottom line and working capital strategies are mattering more and more for the tech giant. And global procurement strategies, processes, programs and technologies that extend beyond direct materials are paving the way to greater shareholder returns and stronger overall supplier relationships.