Shifting Inventory — A Risky Proposition for Cisco?

A couple of weeks back, Embedded Computing published a fascinating article that examined how the lean practices of a player at the top of a supply chain can spell disaster for those under it. In this case the sector in discussion was the contract manufacturing and electronic manufacturing services market, which, according to the article is "already at the limits of margin and profitability." A number of these companies, it turns out, are supplying to Cisco, who has realized that their "lean results can quickly turn into another’s inventory-filled shoes." By working with four EMS providers -- Foxconn, Celestica, Jabil Circuit, and Solectron -- Cisco has been able to shift significant stocks of its inventory onto the books of its parteners.

The net impact of Cisco's lean activities and overall shifting of inventory onto its partner's books has been dramatic. Solectron alone has added hundreds of millions of dollars in inventory thanks to Cisco's actions. In fact, "since August 2005, Solectron’s inventory level has surged by 44 percent." Granted, Cisco is not alone in the high tech manufacturing world when it comes to pushing inventory off its books and onto those of its suppliers. But just as beating up suppliers for margin points from a sourcing standpoint can have a detrimental effect if a procurement organization pushes too hard without realizing the consequences -- the North American automotive supply chain exemplifies this -- it's also possible to drown your suppliers by making them take the hit for your lean practices. Given this, might Cisco become known as the GM of supply chain?

In my view, in any good procurement and supply chain strategy, the goal should be to engage your suppliers by balancing risk and reward -- not to bludgeon them to death with a hammer or slowly crush them with the weight of inventory. In this case, Cisco obviously needed to deliver for Wall Street. And Angel Mendez brought a unique background to do it, considering while at Palm, he had little room to maneuver given that manufacturer's precarious market position (thanks to the rise of RIM and others). But might Mendez and his team have pushed too far? Might the supply risk at the lower tiers in the electronics supply chain rise as a result? As the saying goes, #$*! roles downhill. And so does inventory, in the case of an overly leaned out supply chain.

Jason Busch

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