Cisco: When Supply Chains Can't Keep Up With Demand

One of the relative secrets of the recession has not been just how commodity prices have come down (or how certain suppliers have been willing to virtually give away the roofs over their factories in the form of 20%+ APR financing just to keep the lights on). It's also been how suppliers have taken capacity offline by shuttering facilities, cutting shifts, and -- in the case of raw-material suppliers -- curtailing new exploration, extraction, and production until the market returns. In many cases, bringing this capacity back will require more than a snap of the finger or the push of a button; it will take weeks and months –- sometimes quarters –- of efforts, and suppliers will be loath to make this investment unless they really feel that a sustained recovery is here to stay. After all, less capacity worldwide is one way to drive up margins. If you need evidence that, despite recent positive signs, suppliers are behaving conservatively when it comes to capacity, look no further than Cisco, which is seeing solid demand, but whose suppliers can't keep up, according to analysts.

The above-linked Fox Business story notes that Cisco has been "riding a strong demand wave as businesses begin spending more on information-technology gear, but the tide apparently is so strong, its suppliers can't keep up." The piece quotes an analyst from JMP Securities, who notes that "supply chain bottlenecks may be holding Cisco back … Our sources tell us that large customers are being told that supply chain constraints with third-party partners make it impossible for Cisco to ship orders this quarter, as sales have ramped faster than expected." Another analyst cited in the article suggests that Cisco "has faced intermittent shortages for a range of electromechanical components such as semiconductors and connectors" and that "the whole food chain wasn't ready for the demand that's been seen lately."

While the high-tech manufacturing industry is not a proxy for broader sectors -– demand was never down as much in this area for automotive, for example -– the fact that supply shortages are threatening Cisco's top-line revenue should be a wake-up call to all procurement organizations that, during a recovery, our supply risk systems and processes could be tested like never before. In this environment, it's not simply a question of monitoring supplier financials to determine whether they'll remain a viable option; it's just as critical to understand their capacity -– past, current, and future -– and where you stack up against the competition in terms of getting it. If you don't have this level of insight today, perhaps it's time to take a few steps back and better understand your potential supply chain bottlenecks before procurements goes from being a cost-savings function to a revenue-destroying one.

Jason Busch

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