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The Extent Of The Shortage
CRN interviewed dozens of Cisco solution providers, distribution executives, analysts and other Cisco observers over the past several months, trying to gain an understanding of how wide and deep Cisco’s supply chain shortages were. Many of Cisco’s public records on the subject -- including the 10-Q filings and comments made by top Cisco executives on quarterly earnings conference calls -- paint a challenging picture.
The crisis began last July and at the peak -- during the end-of-year rush to clear out IT budgets -- product lead times had stretched to two, three and even four times normal delivery dates, according to many solution providers. That meant delays of several months had become part and parcel of doing business with Cisco. And even now, one year later, supply chain issues persist.
Cisco and its channel felt the impact of the shortages up and down the product portfolio, but by far the most commonly affected product families -- named by nearly every source CRNinterviewed -- were its popular ASA security appliances, followed by large swaths of the Catalyst switch line, the newer CP-7900 IP phones, and the Nexus switches integral to Cisco-led data center deployments.
Cisco itself declined to identify affected products or what percentage of products affected by lead-time constraints had returned to normal as of July.
Cisco was hardly alone in its supply chain doldrums. Supply chain shortages during and after the 2009 economic meltdown were rampant, from Hewlett-Packard with printers (see “Battling for Components,”) to component challenges for Intel and plenty of issues for Alcatel-Lucent, Lenovo, Dell and other major vendors, according to solution providers.
But Cisco was in a class by itself in terms of the business impact felt by VARs. First of all, the Cisco products in question function as the central nervous system of the networks that keep businesses up and running. If a company’s network goes down, it stands to lose hundreds of thousands of dollars -- if not millions -- in business and productivity. Many solution providers said they felt painted into a corner because they were reluctant to swap equipment from other vendors into an end-to-end Cisco network.
“Of the VARs and distributors I speak with, Cisco was by far the most egregious offender of product availability over the past year, with lead times double what they normally are,” said Brian Alexander, managing director of equity research for technology hardware/distribution/EMS at research firm Raymond James & Associates. “The reason is that they aggressively curtailed production when the downturn began and demand recovered sooner and faster than they expected.”
It was there that the single biggest problem for solution providers emerged: a lack of communication from Cisco, specifically the type of communication that would have protected hard-won deals by giving solution providers the information necessary to do project planning with their customers. Sources described that lack of communication as jeopardizing their trusted adviser role with customers.
“What they told the channel was minimal,” said a channel source with knowledge of the supply chain, product shortages and how Cisco made its solution provider and distribution partners aware of the challenges. “We’d hear about things in e-mails, or one-off conversations, or a few structured calls; it was various formats. But there was nowhere to go where there was a product listing and you could find out what was constrained.”
Did Cisco’s communication come too late? Earlier information certainly would have helped INX, a prominent Cisco Gold partner in Houston that, in a form 10-Q filed with the SEC in November 2009, detailed a product revenue decrease of 21.4 percent for the quarter, “due to unanticipated product availability issues from our key manufacturer supplier, Cisco Systems Inc.”
In an early May interview, Andy Cadwell, INX’s vice president of sales, told CRN that the key problem was “not being able to set customer expectations correctly.”
“But we report to the public,” Cadwell said at the time. “Cisco’s been pretty quiet in the last year about these issues. You weren’t able to find any public comments except that there have been ‘constraints.’ If they’d talked about it more frankly, it would have helped give us a little bit of air cover and helped us be able to set the correct expectations. Cisco as a company hasn’t really acknowledged it publicly. That’s been the problem.”
Cadwell, reached again in late June, said in an e-mail that lead times had “vastly” improved, especially with Nexus, which was the largest share of INX’s backlog.
But the question is just how much have the lead times improved for partners serving the SMB market? Lead times for one Cisco partner on a $500,000 deal stretched out seven weeks (see “A VAR’s Tale of Discontent,”). This even as Cisco has ramped up its drive to capture SMB market share.
“It’s a shame it happened, because Cisco has finally gotten the messaging right around small-business partners, and they’re ready to go with Cisco, and the product isn’t there,” the supply chain source said. “I think it set them back a bit there. I’m sure it did.”
Joshua Lande, senior account manager at Maureen Data Systems, a Cisco Premier Certified partner in New York, suggested that SonicWall and Juniper were scoring big wins against Cisco based on product availability, and much of it probably came in the SMB space.
“[For those customers], we’ll recommend anything we can,” he said. “It’s very easy for us to say, ‘Just put in SonicWall or Juniper firewalls.’ We’re consultants to those guys [SMBs]; they don’t have anyone on staff. But for the bigger guys with millions invested in Cisco, they can’t really go that route, and then we have to seek help from Cisco.”
Rus Healy, CTO of Annese & Associates, a Herkimer, N.Y.-based solution provider, was among many solution providers who told CRN that information for distributors and VARs was in almost as short a supply as the products themselves.
“As a partner, we deal very much with distribution. We count on distribution to give us an update on delivery issues,” Healy said. “For them, it’s so crucial that they know.“ Healy was among attendees at Cisco Live in Las Vegas at the end of June, and during a networking reception for CCIEs and Cisco executives, asked Chambers for an update on the health of the supply chain.
“He said, ‘Well, I’m glad you asked,’ and he gave the same story,” Healy said, referring to what Goodwin, Pond and Chambers described at the Partner Summit some two months earlier. “It doesn’t really matter. The economy in China is sort of academic to us from the standpoint of trying to meet our customers’ needs, right? They spent five minutes of our collective lives telling us the story, but where does that leave us? Because it doesn’t address the problem.”
Meanwhile, Cisco’s Channel Account Managers (CAMs) were critical in helping solution providers weather the crisis. Lande came to rely on his Cisco CAM to help with loaner products, replacement products, alternative solutions, or at the very least, a flow of information.
“We asked about it a lot, why was it caused, and we didn’t get too many answers,” Lande recalled. “We got that this caught them in a bind, but nothing was straight or 100 percent.”
For a damage control comparison, Lande referenced the major outage suffered by Google in May 2009, which affected roughly 5 percent of all Internet traffic over a four-hour period.
“They sent a follow-up and a big letter out to all of their customers and partners explaining what happened, apologizing and saying they would do everything they could in the future to prevent it from happening,” he said. “Cisco didn’t do that. What we heard from the distributors was the same thing: We don’t know. The only reason I knew about what was going on overseas was because one of the CAMs told me.”
Several sources said Cisco did a poor job communicating the extent of the supply chain crisis because the company and its top executive team did not have comprehensive information on the shortages or how to fix them in a timely manner. The sources suggested that because of Cisco’s size and the complexity of its supply chain, that information wasn’t readily available.
Healy does concede that he is “relieved” that Cisco has made changes to fix and mitigate the supply chain issues.