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Aligning Incentives in Supply Chains

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ALIGNING INCENTIVES IN SUPPLY CHAINS

AGENDA


OVERVIEW OF ARTICLE MODEL OF ANALASYS (CLASS DISCUSSION) CONCLUSION







QUESTION / ANSWER PERIOD

CISCO


(Mad Monday April 16, 2001)

The world’s largest network equipment maker shocked investors when it warned them they would soon be scrapping $2.5 billion of raw surplus (almost 50% of quarterly sales) - which is one of the largest inventory write-offs in US history. How could Cisco misread demand by $2.5 billion, almost half as much as its sales in the quarter? Many experts believed it was due to forecasting errors, or forecasting software problems, or even mismanagement from top executives







But were they right in their assumptions?

CISCO
 

(What really happened)

The truth is Cisco ended up with much more inventory (subassembly boards and semiconductors) then demand required due to supply chain partner’s behaviour in the 18 months leading up to Mad Monday Cisco did not have a manufacturing plant and subcontracted out to multiple third parties who mass produced the components because demand for Cisco products usually exceeded supply Cisco compounded the problem by offering incentives to suppliers who delivered quickly, which gave the suppliers incentives to build buffer stocks. The suppliers also boosted profits by buying in bulk from component suppliers. This turned out to be a win/win situation for the subcontractors and the component suppliers alike. Demand began to slow in 2000, and Cisco could not cut off supplies quick enough Cisco had also assured all suppliers they would purchase all the components they could make and did not stipulate the accountability or responsibility of its contractors, so much of the excess supply ended up in Cisco’s warehouses. Whether it was intentional or not, Cisco’s partner’s actions were not in the best interests of the...

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