Cisco Response To Supply Chain Woes Lacking, Say Partners

As Cisco prepares to announce quarterly earnings for its fiscal Q3 Wednesday, many Cisco channel partners are still feeling the effects of supply chain issues that have hammered the Cisco channel for much of the past year. And several have called Cisco into question over whether the networking titan adequately addressed those issues in a public way.

Following a roughly six-to-eight month period of product shortages and ballooning lead times, most of Cisco's top executives acknowledged the supply chain issue directly at the Cisco Partner Summit in San Francisco two weeks ago.

Keith Goodwin, Cisco's senior vice president of worldwide channels, apologized from the stage and acknowledged the "impact it's having on business." Randy Pond, executive vice president of operations, processes and systems, blamed components shortages, a shift in the Chinese labor force thanks to China's economic stimulus, and the magnitude of the business-drop off during 2009.

Even Cisco Chairman and CEO John Chambers weighed in, admitting during his keynote that Cisco had "misread" the situation.

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Cisco declined to offer additional comment beyond what was said at Partner Summit, citing its quiet period, which will end when Cisco announces Q3 earnings at 4:30 p.m. EST Wednesday.

Earnings are expected to be another positive story following a stellar return to form by Cisco in the last quarter. According to a Thomson Reuters poll of analysts, Wall Street expects Cisco profits to report 38 cents per share compared to 30 cents per share in the year-ago quarter, on about $10.23 billion in revenue, or 25 percent revenue growth.

But swagger aside, the supply chain issues are what's still writ large for a number of Cisco partners.

"It's been very impactful to our business negatively," said Andy Cadwell, vice president of sales for INX, a Houston solution provider and Cisco Gold partner. "Number one, it was not being able to set customer expectations correctly, and number two, we can't really implement technology solutions until all of the products are either on our site or the customer site, so it's been impacting our services business as well."

Among solution providers, INX is one of the more public examples of how Cisco's supply chain woes have stymied solution provider profits. In a form 10-Q that INX filed with the Securities & Exchange Commission dated Nov. 12, 2009, INX details an overall revenue decrease of 19.6 percent, and a products revenue decrease of 21.4 percent for the period.

"The decrease in products revenue was primarily due to unanticipated product availability issues from our key manufacturer supplier, Cisco Systems Inc.," writes INX in the 10-Q.

INX's issues with Cisco product shortage also came up in a Form 8-K INX filed on March 26. In it, INX acknowledges that Cisco product deliveries "improved somewhat during the quarter" and that net billings to customers increased by about 27 percent compared to the third quarter.

"At the same time, partial shipments of orders made up a larger than normal portion of total shipments due to continued product availability issues," reads the 8-K.

Next: Shortages Hit Home

The problem isn't that Cisco ignored the issues, Cadwell emphasized. Cisco has been helpful to INX in sorting everything out, he said, and executives had been receptive to VAR and customer problems.

"But we report to the public," he said. "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."

Other solution providers had even harsher reactions.

"[Chambers] was really giddy on the last earnings call, yet none of these things came up," said another Cisco Gold partner, who asked not to be identified in print. "We did see some acceleration in the last few months and the shipping issues have been better, but, man, it's like, maybe you could recognize that a lot of us got screwed -- not fatally, but screwed regardless -- while Cisco returned to growth?"

Cadwell, the second Cisco gold partner and a number of other Cisco VARs have acknowledged that things are improving and that Cisco's addressing of the supply chain difficulties from the stage at Partner Summit was an important move. Whether it went far enough is the question.

"I've seen some promise in accelerated delivery, but it's still a substantial threat," said Rus Healy, CTO of Annese & Associates, a Herkimer, N.Y. solution provider, in an interview at the Partner Summit. "We've lost tens of thousands of dollars in revenue and lost customers. They gave us the reasons but they didn't articulate concretely what the strategy is."

Jon Pritchard, president of Comstor Worldwide, the Cisco-centric arm of distributor Westcon Group, said at the Summit that the public acknowledgment was a "brave thing to do" and that customers had responded, by and large, with understanding.

From many distributors' point of view, supply chain constraints for both Cisco and HP -- another tier-one vendor notably affected by supply chain issues -- are improving.

"At the Partner Summit, Cisco made it a point to let partners know they are investing in and improving their supply chain -- both in the short and long term," said Holly Garcia, senior director of vendor management at Ingram Micro, in an e-mail to CRN. "As Cisco's largest distribution partner, we are working very closely with the Cisco team to support the needs of our mutual partners."

In a research note following the Global Technology Distribution Council (GTDC) conference in New York last week, Brian Alexander, managing director for equity research at Raymond James & Associates, said that feedback from several major Cisco distributors was that lead times for Cisco products were continuing to contract, and will be at 6 to 8 weeks -- improved from 12 to 16 weeks three months earlier -- "relatively soon."

Not All Areas Affected, VARs Say

The vastness of the Cisco channel, some VARs said, meant that supply chain concerns were a general issue but certainly harder on some solution providers -- and particular product sets -- than others.

"It's been impactful, but I think it depends on what you sell," said Ryan Halper, president of Cynnex Networks, a Seattle-based Cisco solution provider focused on small business. "It's not messed up everywhere, so Cisco partners who focus on a certain product subset and sell a lot of that product set are going to be hit harder. The major supply chain issues overall seem to be behind us, but there are still plenty of caveats."

ASA security appliances were the most obvious shortages he saw, Halper said, while several enterprise-focused solution providers interviewed by CRN said that Nexus switches -- crucial to Cisco-led data center deployments -- were hard to come by.

At a more general product category level, partners said that the "bread and butter" Cisco switching and routing businesses were most affected -- a notion confirmed by several distribution executives, too.

One longtime channel executive who asked that his name not be used said that the supply chain issues will take longer to sort out than Cisco's more optimistic observers would suggest.

"Cisco's really had constraints for a solid six months. The stuff you might say is still a couple weeks from delivery is more like six to 12 weeks lead time. They've really had a problem getting certain components," the executive said. "It's really amazing. There were some chipset shortages with challenging numbers in January and February, but that happens every so often. That's normal. This is abnormal."

The executive said that supply chain shortages were hard on many vendors in the channel, but no other vendors have experienced the constraints that HP and Cisco have faced.

"The issue is raised to the highest level within those companies," he said. "But they're both so big they can only react so much."