A Case Study in Proactive Risk Management

Sáenz, M.J. and Revilla, E. A Case Study in Proactive Risk Management. MIT Supply Chain Frontiers, 49, May 2013

The tsunami that devastated parts of Japan in 2011 also wreaked havoc in many supply chains – including the one that supports the optical routing business of electronics manufacturer Cisco. Yet the company suffered negligible revenue losses as a result of the disaster. A case study from the Zaragoza Logistics Center, Zaragoza, Spain, and the IE Business School delves into the reasons why and offers some important risk management lessons.

Written by Dr. María Jesús Sáenz, Professor at the MIT-Zaragoza International Logistics Program, and Professor Elena Revilla at IE Business School, the case study is based on detailed research of Cisco’s response to the tsunami disaster. It is being used in the classroom to teach students about managing supply chain risk.

The story opens in March 2011 when James Steele, Program Director for supply chain risk management at Cisco Systems Inc., received an urgent phone call about a weather monitor that detected a high-magnitude earthquake off the east coast of Japan.

The subsequent tsunami posed a huge threat to Cisco’s operations. The company had about 250 tier-one suppliers in Japan, and many of them were the sole source of high-level engineering components. In response to the crisis, Cisco established a war room staffed by 100 people to figure out the potential impact on product orders.

In addition to the possibility of multiple tier-one suppliers in the region being disabled, externally triggered disruptions like this one could easily ripple through Cisco’s global supply chain. More than 95% of the company’s 12,000 products were made by contract manufacturers across the world. It used numerous third-party companies to provide services related to printed circuit board assembly, in-circuit testing, and product repair and assembly.

Moreover, at the time Cisco’s optical server router business was based on a configure-to-order model that was dependent on a dispersed network of multi-tiered suppliers. These ranged from suppliers of resins to vendors that specialized in the production of complex optical line cards.

“Now we don’t have tons of inventories when a disruption surprises us. But our customers for optical service routers desire products with low lead times and high responsiveness levels,” said Steele.

The tsunami ruthlessly exposed the supply chain’s vulnerabilities. For example, a primary raw material supplier lost more than 50% of its capacity. Other problems such as quality issues owing to a lack of manpower, and the failure of carriers that transported subcomponents in the area, also hit the supply chain. Manufacturing lead times became longer, and inventory management problems were caused by the disruption.

Prior to the disaster, Cisco had devoted much time and money to developing a proactive response to large-scale supply chain disruptions. In the aftermath of the tsunami, this work proved invaluable.

At the heart of the strategy was the concept of “design for resiliency.” This involved removing as much risk as possible from the company’s operations. In the product area, for instance, Cisco had selected alternative components in bills of materials and qualified additional manufacturing sites. These efforts were reinforced with efficient demand-forecasting tools for avoiding product shortages. A number of actions had been taken to de-risk the supply chain, such as improving design and execution practices with a view to reducing post-disaster recovery times. Operations and manufacturing teams identified high-risk nodes that required special attention.

The new approach represented a sea change in risk management strategy, according to Steele. Previously, the focus “was not on increasing the business, but on keeping the trains running,” he said.

A debriefing held 70 days after the disaster revealed just how much the company’s revamped supply chain risk management strategy had paid off. During the crisis, the impact on some 300 suppliers was identified in just 12 hours. Of particular importance were the consequences for the sub-tier vendors that supported Cisco’s optical service routers business. In the past, a lack of visibility into this segment of the supply chain was an Achilles’ heel. As a result of the proactive response program, however, the company quickly assessed the status of these suppliers and took corrective action where necessary. Also, customer response channels were vastly improved.

The high priority afforded risk management was underlined by Cisco CEO John Chambers, who attended the debriefing. “Disruptions provide a unique opportunity to enhance our capabilities,” he said.

For more information on the Cisco case study, contact Dr. María Jesús Sáenz. The case study is available for review. Here are the details: Sáenz, M.J. and Revilla E., Case Study: Cisco Systems, Inc., Supply Chain Risk Management. In Chuck Munson (Ed.), The Supply Chain Management Casebook: Comprehensive Coverage and Best Practices in SCM, Financial Times Press, 2013.