Report Paper Sample: Cisco’s Inventory “BLUNDER” Essay
Cisco’s Share Price Between 1999 and 2003
In the year 2000, Cisco Systems had delighted in forty-quarters characterized by a staggering growth. At some instance, it had outdone GE as a highly valued business globally. Cisco was faced with the fortunate challenge being unable to meet its demand. As a solution, it ventured into long-term obligations with its major component producers and manufacturing partners. In addition, it also built up its constituent inventories. Because of communication gaps amid the numerous levels of the company’s suppliers, triple, and double orders were implemented in order to lock in limited components in the boom. The company was entangled in a spiteful cycle of theatrically inflated sale estimates (Duffy, p.64).
Cisco never saw the advance of the economic downturn until later. Consequently, Cisco was made to make the greatest and historical inventory write-down in May 2001. $2.2 billion was deleted from the company’s balance sheet for inventories it had ordered but possibly not utilize. The company’s stock depressed to less than $14 considering that thirteen months prior to the blunder, the stock value had been $82, and the share prices of the company fell intensely (Harrison, Terry, p.36).
Cause of the Share price Change
Flaws had caused the change in the Share Prices in the company’s system. In the 1990’s the company’s products were manufactured based on contracts with manufacturers. Cisco had adopted a policy of shipping wholly assembled machines straight from the manufacturers and then sold them to their customers. This policy resulted in many problems later in the business. the arrangements that Cisco had with its contractors led to pile-up of inventory. As a flaw of the company, it failed to note that the projections Cisco had made were exaggeratedly inflated. As Cisco had a policy of honoring its contracts, it was entangled in the cycles of inflated demands for its products, poor communication with suppliers, and higher expenses. When the stock market bubble burst, the share prices consequently fell.
Value of Cisco’s Inventory Write-off
Cisco was forced to write-off an inventory worth $2.2 billion from its records. Consequently, its stock value also fell to less than $14 from its previous $82 value.
Symptoms of the Inventory Problems at Cisco
Clear symptoms of the inventory issue at the company included the pile-up of inventory and bad communication with the suppliers. In the effort to lock supplies of limited products, the company was seen ordering enormous quantities in advance. Another symptom of the problem was the artificially inflated projections (Harrison, Terry, p.42). Other companies had noted the flaws in their projections, but Cisco failed to notice. This was because there existed other Competitors in the market that compromised Cisco’s projections since customers would turn to suppliers who would deliver the products first. In addition, the triple and double ordering of inventory without contemplating on the accuracy of their projections was a great symptom that squeezed on the supply of goods and bloated the demand projections.
The driving forces behind the Problems
One of the driving forces for the problems was the companies urge to grow to a large networking company through various strategies. One of the strategies was outsourcing manufacturing. The company entered into contracts with several manufacturing companies who then supplied the fully assembled goods to Cisco.
The second strategy was the company’s growth through acquisition. Since the company had gone public, 11 years prior to the blunder, Cisco had not been growing and at times, it had staggering growth. Cisco anticipated that if growth were to continue at a similar pace, it would be a big company in the American economy.
Another driving force was the rumor that at the time of the blunder, some components and products of Cisco were believed to be in short supply. In the effort to achieve all these, Cisco entered into prolonged contracts with various suppliers to facilitate building up its inventory. The contracts could also reduce the lead-time of supplying goods to customers due to the stock build up and availability without necessarily waiting manufacturers to supply in order for Cisco to sell to buyers.
Role of Forecasting in Cisco’s Inventory Problems
For years, growth had been rising with fifty-five percent growth in the last quarter of 2000. This growth had been followed by a captivating sixty-six percent growth in 2001. Towards the end of 2001, Cisco considered its virtual close and noted abundant bookings. Such numbers were sufficient to convince the executives who had not previously encountered a down quarter or a boom burst that all was okay. The executive saw the shortage in inventory by forecasting demand and interpreted it as a sign that sales were to be strong in the following months. Therefore, the forecast of high demand in turn led to the urge of building up inventory. The challenge of the forecast is that it failed to consider other competitors in the market and the possibility of a down quarter in their operation.
Cisco’s Supply Chain at the Time of the Blunder
The company’s supply chain was organized in the form of a pyramid. Cisco was located at the central point of the pyramid. On the second level, there was a number of manufacturers in a contract with the company and responsible for the assembly of machines (Harrison, Terry, p.44). Such manufacturers depended on big sub-tier firms for goods such as optical equipment and processor chips. In turn, the latter was also dependent on other larger base companies that supplied the commodities worldwide (Mansfield, John, p.104). The supply chain was characterized by poor communication that generated problems for Cisco. Once Cisco realized the problem in its supply chain and projection, it established a group of engineers and executives to formulate an ‘e-Hub’ counteractive program. The program helped the company in determining the accurate figure of manufacturers that would abide by an order by using the Partner Interface Process technology.
Duffy, Jim. "Why Cisco's Worried.(Company Business and Marketing)." Network World 19 Feb. 2001. Print.
Harrison, Terry P. The Practice of Supply Chain Management: Where Theory and Application Converge. Boston: Kluwer Academic Pub., 2003. Print.
Mansfield, John. The Nature of Change or the Law of Unintended Consequences an Introductory Text to Designing Complex Systems and Managing Change. London: Imperial College ;, 2010. Print.