John Chambers, president and CEO, once explained, “Our approach is something we call ‘global virtual manufacturing.’ First, we’ve established manufacturing plants all over the world.We’ve also developed close arrangements with major CEMs [contract equipment manufacturers].So when we work together with our CEMs — and if we do our job right — the customers can’t tell the difference between my own plants and my CEMs’ in Taiwan and elsewhere.” A specialist in creating network infrastructure hardware for data and telecommunications companies, Cisco prospered as the Internet burgeoned.

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Cisco is not alone in its sudden confrontation of problems in the supply chain.

Witness: All these companies had one thing in common: They had outsourced their manufacturing of essential components without a full understanding of the changes required in their business models.

They didn’t translate the old practices that had made them successful into their new business relationships.

By all outside appearances, Cisco was the picture of health and prosperity. Early last year, shortages of memory and optical components began paralyzing one path of production.

For the first time, Cisco’s supply chain began to experience the kind of growing pains that affected its earnings. Its raw-parts inventory ballooned more than 300 percent from the third quarter to the fourth quarter of 2000.

When the telecommunications infrastructure experienced a severe downturn, customer orders began to dry up … Cisco’s problems culminated in a .25 billion write-down.

In short, Cisco simply wasn’t able to scale up or down as quickly as it thought it could.

Perhaps no company underscored the limitless potential of the New Economy more than Cisco Systems Inc.

Last year, Cisco was poised to become the world’s first trillion-dollar enterprise, wielding a market cap greater than that of General Electric Company in pursuit of annual revenue growth projected at 30 to 40 percent.

Two of the things that gave Cisco its glow were its development of a virtual supply chain with limitless capacity and its ability to provide extraordinarily high reliability to its customers.

Another apparent strength was its approach to manufacturing: It didn’t build most of what it sold.