Cisco Struggling with Product Shortages

Cisco Systems is struggling to keep up with demand for core networking
products as orders from businesses unexpectedly picked up in the last quarter
of 2009 and into 2010.

“Similar to what is happening in the industry we are seeing some product
lead time extensions stemming from supplier constraints based upon their labor
and other actions taken during the downturn. We continue to build upon our
strong relationships with our suppliers to proactively manage our supply chain
and minimize any potential impact to our customers and partners,” Cisco said in
a statement to Channel Insider.

Reports surfaced this week that Cisco and its manufacturing suppliers and
partners were caught off-guard by the sudden rise in orders.

"Our sources tell us that large customers are being told that supply
chain constraints with third-party partners make it impossible for Cisco to
ship orders this quarter, as sales have ramped faster than expected,"
wrote JMP Securities analyst Samuel Wilson in a note to investors.

Cisco has told its distributors that the product shortage is a result of a
raw materials shortage used in the fabrication of key components—such as
semiconductors and connectors. "The component shortage is leading to a
product shortage not just in the U.S.,
but worldwide," said Holly Garcia, who heads the Cisco business unit at
Ingram Micro.

Analysts forecast a strong January and first quarter of 2010 for Cisco based
on the surging demand for core infrastructure and networking products. But
analysts worry that the supply chain shortages could hold back Cisco.
Consequently, Cisco’s ecosystem of integrators and resellers could suffer from
back orders.

Cisco partners have lodged complaints about lack of products in the Cisco
supply chain dating back to the third quarter of 2009. Cisco, like many large
IT hardware vendors, cut back its inventory and product manufacturing during
the recession to prevent filling warehouses with unsold product.

In October, Cisco used similar language to address the inventory shortfalls.
In a statement to Channel Insider, Cisco said: "Cisco has partnered
closely with its suppliers through the economic downturn to closely manage
variable supply and demand levels. As customer and market demands increase,
Cisco and our suppliers have the flexibility to respond quickly to those supply
and demand changes."

This time last year, Cisco Systems was staring down an emptying sales
pipeline as businesses slashed IT spending and delayed refreshing hardware. For
the first half 2009, core infrastructure sales were down more than 20 percent,
and Cisco began offering generous rebates and incentives to move product.

Market analysts are reporting steep demand increases for data center
switches, video and Web collaboration tools and carrier routing gear—technology
segments in which Cisco leads the market. The supply chain issues could open
opportunities for competitors such as 3Com, Hewlett-Packard and Juniper
Networks, analysts say.

A recent Oppenheimer & Co. survey of 25 Juniper Networks channel
partners showed improving sales and increasing demand for core infrastructure
hardware. The surveys led Oppenheimer to give Juniper an optimistic but
cautious 2010 forecast; Juniper could be held back by sluggish demand for
carrier equipment.

Ingram Micro’s Garcia disputes the notion that solution providers can simply
shop other vendors to source core infrastructure products, since the supply
problem is affecting the whole industry.

Garcia praised Cisco for taking steps to mitigate the product shortage and
helping its reseller partners meet their customers’ needs. "It’s
definitely challenging, but we’re doing the best we can," she said.