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Department of Management Science and Engineering MS&E-001-2009 September 27, 2009 Turning End of Life Product Reprocessing into a Profit Center at Cisco Systems, Inc. (A) "When competing for resources, even the best idea needs a strong business case… built on financial benefit, strategic alignment, environmental and customer value. A strong ROI is sometimes not enough." ‐Christine Fisher, Director, WWRL, Cisco The World Wide Reverse Logistics (WWRL) team had been working for almost a year since August 2005 on the pilot stage of an innovative Reverse Logistics (RL) program to prove that reuse of scrap could turn an $8 million cost center into a profit center and become a showcase for environmental sustainability. The thought that sending $500 million worth of used gear to scrap year after year was not the optimal way of handling the end of life processes of products was intuitively clear, but in a company like Cisco, many good ideas compete for investment every day. Was the RL opportunity big enough? Was it feasible? Would it cause downstream costs for service, or erode new product sales? After the successful implementation of the pilot stage, Christine Fisher and her colleagues were faced with the challenge of getting higher management committed to the full‐scale rollout of the Reverse Logistics program. The management review was just a fortnight away. How would she garner the support of other departments that were skeptical about this idea? Would this project, which promised $100 million in bottom line profits in addition to its environmental benefits, go into oblivion with scores of other projects in the absence of funding? Would her team lose motivation if the project was not accepted? These were some of the questions tormenting her. Christine was lost in deep thoughts gazing at the late afternoon California sun from her office on the second floor. The coffee in her hand was getting cold. Christine, one of the Directors in the WWRL group, was leading a global team responsible for developing the processes, policies and systems to maximize the value of end of life product returns for Cisco’s shareholders. She is a graduate of Harvard Business School and Stanford University. Her career spanned over 15 years in the areas of operations, supply chain and technology. Prior to joining Cisco, Christine had developed novel approaches to combining technology and services to drive value as a Senior Director with ICG Commerce, a leading supply chain outsourcing company. Previously, she had addressed strategic and operational supply chain challenges for Fortune 500 companies with A. T. Kearney consulting, and launched eBreviate, the company's eSourcing and Reverse Auction business. Graduate student Sundaresan Chandrasekaran prepared this case under the guidance of Professor Dariush Rafinejad in collaboration with the Reverse Logistics team at Cisco and Professor Dwight Collins of Presidio School of Management. Professor Robert Carlson and Assistant Professor Feryal Erhun reviewed this case. Stanford Engineering cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Sustainable Business Practices at Cisco1 Cisco Systems, Inc. was founded in 1984 by a group of computer scientists from Stanford University. It is headquartered at San Jose, California. Today the company has more than 66,000 employees, revenues in excess of $36.1 billion and a market cap of $126.2 billion2. It operates in more than 75 countries. Cisco is the leading supplier of network management and networking equipment. Its products include routers, switches, Ethernet, hubs, Data Center Equipment and others such as TelePresence, WebEx, Service Exchange, related to the Information Technology and Communications industry. The Company ranks first on Fortune’s 2009 “Most Admired Networking Communications Companies”. Cisco believes that corporations have a responsibility to consider the broader effects of their operations on the communities in which they conduct business and the world in general. Cisco’s President and CEO, John Chambers, noted that his company was passionate about not only maximizing return on investment to its shareholders, but also about the integrity and health of the company as well as the global community. Cisco published its first “Corporate Citizenship Report (CSR)” in 2005 which detailed its commitment towards the environment for fiscal years3 2004 and 2005. It has worked towards reducing its environmental impact in many different ways from improving Energy Efficiency of Cisco Routers to purchasing Organic Food and implementing Composting Programs in its dining facilities. It does not just offer energy‐efficient solutions to its customers that help them meet their sustainability goals but goes a step further by inspiring its own employees to get involved and take action towards making Cisco a “green” company. For instance, its Capital Remarketing, a business unit within Cisco Capital has played a key role in re‐manufacturing returned goods for reuse since 2000. Cisco’s new energy efficient San Jose headquarters resulted in the company decreasing its annual energy use by 49.5 million KWh per year – enough energy to power 1,800 homes for a year. The energy‐efficient office equipment, refrigeration systems and lighting saved an additional 12.4 million KWh a year and generated $1.25 million a year in cost savings. Cisco has many more such success stories. To reduce its Greenhouse Gas Emissions, Cisco procured 9.5% of the energy requirements at its headquarters from renewable sources in 2005. This translated to the elimination of around 12,700 metric tons of CO2 (see Exhibit 1 for Cisco’s CO2 emissions from FY02 to FY05). The company also implemented certain best practices to reduce operational waste (see Exhibit 2) coming out of its offices and onsite labs. As a result, the total amount of waste produced at its San Jose headquarters fell by almost 46% from FY2001 to FY2005 (see Exhibit 3). Cisco received waste reduction awards from the California Integrated Waste Management Board consecutively from 2000 through 2004. In October 2006, Cisco established the EcoBoard to set goals, priorities and form working teams to implement environmental policies and best practices. The EcoBoard also assesses the effectiveness of the company’s various efforts with both internal and independent third‐party audits. Today, networks have become a major force in environmental sustainability efforts for Cisco. "If it can be connected to the Internet, it can be green" is Cisco’s vision with respect to sustainable business practices. This increased focus from Cisco on environmental responsibility and corporate citizenship was one reason for the RL program to be initiated. 1 Information in this section is derived from Cisco CSR Report 2005 and Cisco Newsroom. Cisco company website – data for FY 09. 3 Fiscal year runs from Aug to Jul for Cisco. 2 2 Traditional Product End of Life (EOL) Practices4 Until 2005, like most other companies in the industry, Cisco considered its product returns operations as context (in Cisco terms these are not strategic or value‐add). The Customer Trade‐in Program is one such source of product returns where Cisco offers to take back used products from its customers and in turn provide them discounts on new equipment purchases. Their main goal was to responsibly recycle the returned “scrap” products rather than maximize the value from them. Thus the entire process of product returns and EOL management was outsourced to a third party vendor, Universal Reverse Inventory, Inc. The EOL Process managed through this vendor included product collection from clients, harvesting of precious metals and Cisco branded components, and recycling. In 2005 alone, Cisco collected 4519 metric tons of returned and excess gear. Worldwide, the amount of gear Cisco was sending to scrap filled an average of 69 pallets, or three truckloads, every day5. With millions of networking devices being shipped every year, a key element of Cisco’s commitment to a socially responsible supply chain was the reduction of the environmental impact of its products. Cisco markets almost 200 product families that require in excess of 35,000 component parts6. The company outsources manufacturing through more than 600 supply chain partners, making its supply chain one of the most complex in the industry. The company’s supply chain had to be aligned with one of John Chambers’ top priorities, Sustainability and reducing environmental impact in all of Cisco’s business processes. Genesis of the Idea For a decade now, until 2005, more than 95% of Cisco’s returned products were being discarded by making “Recycling” the default mode of ultimate disposal for these goods. So the only metric, “How many tons of scrap did Cisco recycle this year?” was essentially enough for the company to sum up the performance of its Reverse Logistics function. On average Cisco generated a staggering 6 million pounds of scrap every year which could fill 12 football fields knee deep. In spite of this, Cisco was doing pretty well when compared to many others in the industry. The product returns process was managed through Return Material Authorizations (RMAs) to capture the details of the products scheduled to come back from the field and the company tracked the RMAs to closure whenever the product was received. Cisco also recycled the returns responsibly. But having this system in place was not adequate as Cisco was sending the recovered products to a single external vendor and had no visibility or control over the disposal. (Exhibit 4 shows which stages in a product’s EOL were handled by Cisco before the Reverse Logistics program was implemented). Essentially, the vendor could process the materials as they deemed fit. There were no centralized processes for product collection or for monitoring the product’s transit from the client location to Cisco’s warehouse in Ohio. In Christine’s words a product’s end of life process was a “Black box”. In collaboration with an external agency in early 2005, Cisco conducted a meticulous study to identify areas for process improvement within Cisco. This led to an in‐depth consideration of the service supply chain and the entire returns process along with other business domains. The study uncovered a whole list of opportunities for Cisco out of which the Reverse Logistics option rose to the top because of the dollar value associated with the project. Moreover, the exercise was very helpful as it exposed many long‐standing myths about the reverse supply chain. A few of these were that, returned goods were 4 5 Some of the names in the case have been changed for the sake of privacy. CSCMP Innovation Award Whitepaper (April 2008) 6 Cisco CSR Report 3 largely defective, the company could keep costs down by treating all returns the same way, the returns process was too difficult to optimize and that Cisco’s supply chain was good enough the way it was. The study results valued the opportunity at $100 million, which was intriguing enough to convince Dan Gilbert, Vice President of World Wide Reverse Logistics (WWRL) to sponsor the effort and build a team to go after the opportunity. This was Phase I – the Discovery Stage – where the project got initiated. When asked about what opportunity he saw even before the WWRL group had the data to support their business case, Cisco Business Intelligence Manager Ali Miyasaheb responded “At that time if you looked at the product life cycle, conceptually it made sense. We saw that Cisco was getting tons of equipment back and our labs were ordering new units of the same equipment, so we thought why not marry these two product flows together into a closed loop? Even if we had a 30% strike rate7 then we are talking millions of dollars.” (See Exhibit 5 for a flowchart depicting an example of a generic Extended Supply Chain with Closed Loops). As a potential channel for returned product, engineering labs were an ideal customer for WWRL because they did not require perfect packaging or the latest technologies. It wouldn’t matter even if the product’s firmware was not current as the labs have access to all the latest software releases and so they can reconfigure them up to the current version. In spite of the apparent opportunity, however, the stark reality was that less than 1 out of every 20 products that Cisco received from the field was reused within the company. “We realized that we needed to not only recycle well but also recycle less,” commented Dan. The 4 Rs Ideology This realization led to the development of the 4 Rs: Reduce, Reuse, Recycle & Re‐think. It became clear that the company had to take a closer look at the end of life stages of its products to reduce the quantity of the so‐called scrap it was sending to recycle every year. Cisco could reuse the returned products to extend their useful life by providing them a second or even third incarnation. Most importantly the company had to re‐think the reverse logistics value chain to run it like a business to create value rather than viewing it as a cost center. Mark West, one of the Business Analysts involved in the WWRL program, reflected that the unwritten mission was to “exhaust all means of using the product or its components by finding a home either internally or externally before sending it to recycle”. Early Design Steps – The “100‐Day” Plan In September 2005 as part of Phase II, the Planning Stage, of the WWRL Program roadmap, Dan Gilbert mapped out a “100‐day” plan to capture quick wins to validate the idea and to drive performance by stabilizing trade‐in recovery and utilization. Another objective was to understand and document the current reverse supply chain business processes. This involved Cisco’s interactions with Universal Reverse Inventory, Inc. This phase also addressed the issue of lack of control over the reverse supply chain while focusing on capturing lost opportunities and challenging the existing system which was actually optimized to treat all returned gear as scrap. Building the team To capitalize on this opportunity and to achieve the target of $100M in profits, Dan set out to build a high‐performance team from scratch in January 2006. The top performers from different departments were hired. “I was drawn to the project because it was such a challenge. No one had done something at such scale before.” This was the comment from Christine about her motivation to join the 7 A 30% strike rate means the labs are able to make use of only 30% of the returned equipment. 4 team. Christine’s team was charged with building the processes and systems to transform and scale the new RL model. Another member, Ali was brought in to establish the analytical foundation for the WWRL Program by setting up proper metrics that would facilitate data driven decision making. The initial structure was well thought‐out and comprised all functions that the full program would entail. (See Exhibit 6 for WWRL team’s organization chart). The various functions and the requisite account managers were added as the project progressed beyond the planning stage. Phase III – Pilot Stage After the team was in place, the pilot stage of the project was undertaken to prove the feasibility of the idea. The business case appeared strong on paper, but would the customers materialize? Would the quality of the returned product be good enough to yield value? With manual processes, using phone, email and spreadsheets, the team set out to prove the value was real. They reached various potential internal customers over phone to check if they needed any parts and maintained spreadsheets to keep track of the demand. When the returned products arrived, the team matched the products with the orders they had collected and filled them. The Reverse Logistics (RL) team charged their customers only for shipping, and all the equipment or parts were provided at no cost. This eliminated the need on the part of the engineering labs, service parts supply chain or other internal customers to buy that product new from the Cisco manufacturing lines (at standard cost) thereby reducing their expenses and product lead times dramatically in addition to avoiding cost for the supply chain. Learning from Finance To build credence in the business case, the WWRL team partnered with finance to create a virtual profit and loss (P&L) statement (see Exhibit 7) to track the net cash contributions to Cisco generated by the Value Recovery operations. Each value recovery channel contributed to the “revenue” line, while the costs (transportation, refurbishment, team overhead, etc.) were subtracted to achieve a true “net cash contribution” figure. For internal value recovery channels (like labs and service parts), the value was calculated based on the cost avoided by offsetting expenses of purchasing the same equipment new from Cisco’s manufacturing lines. For external resale through the refurbished sales channel, the value was calculated based on the net margin contribution of the product sold. The early support and buy‐in from Finance was critical to build credibility and offset questions from skeptics, as the realized value from the pilot began to grow rapidly from an $8 Million cost center in FY 2005 to a $40 Million profit center by FY 2006 (see Exhibit 8 for WWRL team’s net cash contribution between Q4, 2005 and Q3, 2006). Beyond the Pilot Stage – Goals & Challenges By the spring of 2006, the RL team had proven that the value recovery from product returns was a viable opportunity, approaching $40 million in profits during the first year as part of the pilot stage. Now the WWRL team set out to expand the program globally and scale operations to reach the estimated potential of $100 Million net profit contribution. Dan convened a meeting with his leadership team to discuss the possible strategies and develop recommendations for the upcoming executive budget review for FY 2007. ******* 5 As the members were settling down in the conference room, Christine anticipated today’s meeting to be very lively. Everyone was excited about the opportunity to hit the $100 million mark in profits, but also acknowledged that the pilot project, even though very successful, was not scalable without incremental investment for taking it to the next phase, Phase IV – “the Transformation Stage. The team’s funding request was competing against multiple projects, each with strong projected ROI’s. The business case would need to be very strong to gain support from the executive management team. In addition, the team would need to prioritize scope and requirements to plan for the scenario of less than 100% of funding. Rehman Mohammed, Director of Value Recovery, placed his priority on investments to increase reuse and resale volumes and customer satisfaction. “Our demand is outstripping our product supply. We need to improve our proactive asset recovery to speed the return of products that are in high demand. And our ordering and allocation process is so cumbersome I’m afraid we’re missing out on a whole set of customers. Finally our order fill rates and order accuracy are so low, we need to improve data accuracy and operational metrics.” Dean Schiavone, Director of Operations, focused on investments to maximize scalability and speed of implementation, increase compliance and controls, as well as minimize costs. “While customer experience is important, we need to keep a perspective…the returned product is free for the internal customers, so users should be willing to live with our current manual ordering and allocations. More importantly, we need a Business‐to‐Business (B2B) web service to transfer RMA and product data between Cisco and our vendor. Without this, we cannot meet the volumes to hit the $100 Million target.” “Our team has very little clarity on how to best distribute all the products that we plan to collect, among our internal and external customers to capture maximum value. In addition to the B2B web service, we have to put a system in place for effective distribution of the product returns.” Ali Miyasaheb, the Business Intelligence Manager added. Mike McGlynn, Director of the Asia Pacific (APAC) region, raised another hotly debated topic – global scope. Several concerns had been raised about the expansion of the program into APAC. First, the supply and demand volumes were much lower than the US or Europe, and so lack of economies of scale made the business case less compelling in that region. Second, some stakeholders in the Sales organization were concerned about resale in the region, both from the risk of cannibalization of existing new product sales, as well as the risk of brand protection – the possibility that by pumping more refurbished product into the market, Cisco could risk feeding the Grey Market8. Mike remarked: “China is a fast growing market for Cisco and the China sales team is eager to promote the WWRL program. In addition, the program would help our globalization strategy by demonstrating Cisco’s commitment to develop local operations to serve APAC customers. Obviously, APAC needs to be part of the global scope, and ideally we should roll out APAC before US or Europe.” The Sr. Manager of Operations, Robert Anderson, opined, “If we agree upon the full scale implementation of the WWRL program then there are other implementation issues to address. Should we outsource the entire process as before and maintain a better degree of control? Otherwise should we bring all the processes in‐house? In fact, a hybrid model may work better in which case we would have to figure out what functions to be taken up internally.” 8 Unauthorized resale of Cisco refurbished product and/or counterfeit product 6 A senior member in the team also brought up a more conservative approach that was available to the team. “Implementing the program on a global scale involves very high levels of technical and business risks. Given the risk‐benefit tradeoffs facing our team, the choice to be the first to tread these uncharted waters does not turn out to be the clear choice.” He further added: “we could wait for another company to take the lead and then be the fast‐follower rather than a leader in Reverse Logistics. We could even consider acquiring the company, if that is an option.” “I second that argument!” an Engineering team lead responded. “There is no concrete data available on the repair costs or other intangible costs of implementing this program on such scale. Also as no other company has ever attempted anything similar to this, we do not have any reference point for rigorous comparison or analysis.” Robert placed yet another alternative on the table. “Our team can consider a gradual rollout plan. For example, let us start with implementing the project to fulfill the needs of Cisco’s Engineering Labs worldwide, next we could approach the service department and finally extend the program to after‐market customers.” He reasoned “this way we could learn from our mistakes and optimize the process with every successive implementation”. Christine was engrossed in the discussion all along and realized that everyone was raising good points. She offered her comment: “Without improvements in the customer‐facing processes and systems, our demand would plateau. And without improvements in the back‐end processes and systems, we would not scale to meet volume targets and our costs would increase to the point of eroding our profits. While the APAC region presents unique challenges, the WWRL program is part of a broader global strategic initiative and pulling out of this region would have negative repercussions. In addition, we would gain efficiencies in rolling out a standard program globally rather than fragmented regional solutions.” “Team, what we really need is a strong business case to help us get approval for full funding. We have lots of competition from other projects within supply chain, and we also need support and approval from the Service organization. We have focused on our Virtual P&L and the profit contribution, but we need to better articulate the other benefits.” As Dan spoke these words there were other questions brewing in the back of his mind. “How can we quantify our impact to environmental sustainability? How does our program improve customer and partner satisfaction? How do we address concerns from the Service organization about the costs of servicing refurbished product and other downstream costs?” ******* Around this time, Cisco’s transition away from Universal Reverse Inventory, Inc. was well underway, presenting the company a chance to embrace change through the selection of world class vendors for collection and recycling processes. Doing this could put within its reach the capability to have control and visibility of its products from cradle to grave. With this series of events in the near offing, the Reverse Logistics team could not have asked for a better opportunity to implement its bold strategy. Dan wondered if this was his golden chance to initiate change. 7 Exhibit 1 Cisco’s CO2 Emissions and CO2 Emissions per $M Sales CO2 Emissions (tons per $M sales) Annual Emissions (tons of CO2) Source: Cisco CSR report 2005. Exhibit 2 Composition of Operational Waste Stream Source: Cisco CSR report 2005. 8 Exhibit 3 San Jose Performance FY2001 to FY 2005 Source: Cisco CSR report 2005. Exhibit 4 Product EOL practice at Cisco prior to RL program Core Context Recover Assets & Reconcile RMAs Create & Manage RMAs Pickup Returned Product Receive Returned Product Manage Returned Inventory Cisco Recover Value Recycle Outsourced Source: Cisco internal company presentation. 9 Exhibit 5 Generic Extended Supply Chain with Closed Loops Source: Adapted from Presidio School of Management’s “Operations and Production” course, Dwight Collins and Dariush Rafinejad. Exhibit 6 Cisco’s WWRL team organization chart (2005) Source: Compiled by case writer. 1 0 Exhibit 7 An indicative Virtual P&L statement Source: Cisco internal company presentation. Exhibit 8 Value Realization by WWRL team in million dollars: Q405 – Q306 Note: The figures in the statement have been changed and they do not represent the actual values. Source: Cisco internal company presentation. 1 1 ...
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