Tuesday, February 12, 2002

Cisco and the Perils of Outsourcing

At one time, Cisco Systems Inc was expected to become the world's first trillion-dollar company. Its business model was based on a virtual supply chain with apparently limitless capacity, and an emphasis on high customer reliability. Cisco referred to this approach as global virtual manufacturing.

But when the telecoms industry hit a downturn, Cisco was one of the worst affected - perhaps in part because of the high gearing that had served it well on the way up. Customer orders fell, production orders continued to go out, raw-parts inventory increased by more than 300% between the third and fourth quarter of 2000. Cisco was forced to write down $2.25 billions.

According to Lakenan, Boyd and Frey, "Cisco simply wasn't able to scale up or down as quickly as it thought it could."

Discussion Questions

Economics -- How does outsourcing affect profit: (a) in an expanding market, (b) in a contracting market.  
Social Patterns  -- What business relationships are implied by such concepts as the virtual supply chain or global virtual manufacturing? What is the nature of these relationships in the Cisco case?


Source: "Why Cisco Fell: Outsourcing and its Perils", by Bill Lakenan, Darren Boyd and Ed Frey, Strategy+Business Third Quarter 2001.

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