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Cisco customers struggle with delays, shortages

Customers complain that although they are ready to buy Cisco equipment, the company often cannot keep up with their orders.

Are you ready? Cisco Systems, in some cases, is not.

Although the networking giant has produced a high-profile ad campaign asking that very question, many customers complain they are ready to buy Cisco equipment, but the company often cannot keep up with their orders.

Cisco has faced a lingering shortage of some components used in its network routers and switches for most of the summer, which has caused it to delay delivery of the final products to its customers for several weeks.

The delays have not affected the company's bottom line and indicate that demand for Cisco's products remains red hot. But customers who are used to receiving products within two weeks said in interviews with CNET that the situation shows no signs of abating and in some cases is hurting revenues.

"With the delivery expectations that people have nowadays, eight to 10 weeks is way too much" to wait for a product, said a Cisco customer, a distributor who requested anonymity.

In one case, a consulting firm had to cannibalize its own technology to satisfy the needs of its customer. The customer--a health care company that performs X-rays and other medical imaging services--needed a secure connection to a hospital for transmitting patient records.

Typically, Cisco ships the needed firewall devices that handle security within days, but when the consulting firm ordered the product this summer, the networking company said it would take three to four weeks to ship.

"We just needed it right away and ran out of time," said an executive at the consulting company who requested anonymity. The solution: The consulting company sent its own firewall to its customer until the Cisco equipment arrived.

In another case, network consulting company Skyline Computer in Campbell, Calif., lost business two weeks ago when a major bank needed Cisco networking equipment.

"We couldn't get it quick enough and lost the business to someone who actually had the equipment sitting on their shelf," said Carole Brennan, vice president at Skyline.

A chief executive of a Silicon Valley start-up who declined to be named plans to use low-end Cisco routers as part of a network-based service. Although he ordered the gear in June, he's still waiting for all the pieces to arrive.

For a company that prides itself on its relationships with its customers and even compensates many of its executives based on customer satisfaction, such experiences for Cisco appear to be out of character.

Cisco representatives insist the situation is part of an industry-wide crunch for the parts that go into the sought-after router and switching devices the company provides.

The company has warned Wall Street for the past two quarters that component shortages could affect its ability to make products.

"Cisco's guidance remains the same," a spokeswoman said this week. "Overall, component markets are still strong, and supplies remain tight. Cisco is managing through this tightness in several ways, including signing long-term agreements to assure supply, investing in manufacturing capacity, and building inventories in accordance with demand."

Time will tell
But some analysts are not as sure. Argus Research analyst David Toung said the parts shortage could affect revenue in the future and could give rivals, such as Redback Networks and Foundry Networks, a chance to steal some customers.

"For the most part, customers want Cisco products and are willing to get in line and wait," Toung said. "But certainly, if you can't get delivery and lead times to eight to 10 weeks, some revenue will be pushed out to later in the quarter and into the next quarter. The worst-case scenario is for the customer to get (angry) and go elsewhere."

Toung said the parts shortages could have a greater effect on gross margins. Parts suppliers can increase prices as demand rises, forcing Cisco's costs to climb, he said.

In addition, there are costs associated with unfinished products sitting in warehouses while the company awaits all the needed parts, Toung said.

"They discussed component shortages and have had longer 'lead times' before, but they said they had resolved it and are presumably in good shape," said Erik Suppiger of Chase Hambrecht & Quist. But maybe they haven't resolved them and haven't figured it out."

Suppiger added that if Cisco has continued shortages and doesn't fix the problem, it could affect the bottom line as disgruntled customers take their business elsewhere.

Rivals salivate
As an indication that Cisco's problem stems from unusually high demand, representatives from rivals Nortel Networks, Juniper Networks and Foundry Networks said their companies are not experiencing delays. Lucent Technologies, however, has suffered from shortages, primarily in fiber-optic components, a company spokesman said.

"The whole market is constrained, but we're getting what we need from our suppliers," a Nortel spokesman said.

Nortel in July announced plans to invest nearly $2 billion over the next 18 months to increase its optical systems and components production.

The components business is one of the hottest areas in the networking industry. Rival Lucent decided to spin off its network component business, and Nortel is pondering the same move. The companies say the spinoffs will benefit shareholders because the components businesses are worth more as separate companies.

Highlighting the frenzied demand for parts, fiber-optic technology maker JDS Uniphase in July spent $41 billion to buy parts maker SDL to fill a hole in its component strategy.

Rather than build expensive part-making facilities, Cisco largely relies on third-party companies for its network components, among them Lucent, JDS Uniphase and MMC Networks.

Nothing new for Cisco
The component crunch--part of an industry-wide scramble for technology--underscores the delicate balance large networking companies must strike to meet demand.

Following the announcement of a 58 percent increase in third-quarter earnings in May, chief executive John Chambers said Cisco could experience a "tight market" for components in the next two years. After announcing its strongest quarter in four years for its subsequent fourth quarter, Chambers reiterated his concern last month.

As a result, Cisco plans to increase manufacturing capacity for components by 50 percent, then increase it again by 50 percent in the near future, Chambers has said. Production is being expanded industry-wide.

But in Cisco's case, there appears to be little pattern to the shortages and delays in product availability. Some Cisco distributors say they are not having ordering problems with the company, while others lament delays of up to eight weeks or more or tell of having to go to other companies to fulfill customer orders.

It is a measure of Cisco's reputation that customers continue to wait for the company to deliver as it attempts to keep up with runaway demand for its networking goods. Much as in the glory days of computing giant IBM, a Cisco consultant, distributor or customer will "not get fired for using Cisco"--meaning that buying from Cisco is a safe bet.

But that is of little solace to Skyline Computer, the Cisco distributor.

A Fortune 300 company that recently signed on a new customer needed a Cisco router to provide additional services and turned to consulting firm Skyline last week. But Skyline couldn't secure the networking device.

"Price wasn't an issue, but availability was the greatest factor," Skyline's Brennan said. "We couldn't get it from Cisco. The lead time was four to six weeks, and we went to three different distributors, but they were back-ordered. So our customer won't be able to offer the service the way they want to be running it for the next month or so."