Cisco 2011 Annual Report Download - page 30

including shortages caused by manufacturing process issues, that have affected our operations. We may in the
future experience a shortage of certain component parts as a result of our own manufacturing issues,
manufacturing issues at our suppliers or contract manufacturers, capacity problems experienced by our suppliers
or contract manufacturers, or strong demand in the industry for those parts. A return to growth in the economy is
likely to create greater pressures on us and our suppliers to accurately project overall component demand and
component demands within specific product categories and to establish optimal component levels and
manufacturing capacity, especially for labor-intensive components, components for which we purchase a
substantial portion of the supply, or re-ramping manufacturing capacity for highly complex products. For
example, during fiscal 2010, we experienced longer than normal lead times on several of our products and we
continue to see challenges at some of our component suppliers. This was attributable in part to increasing
demand driven by the improvement in our overall markets, and similar to what is happening in the industry, the
longer than normal lead time extensions also stemmed from supplier constraints based upon their labor and other
actions taken during the global economic downturn. If shortages or delays persist or worsen, the price of these
components may increase, or the components may not be available at all, and we may also encounter shortages if
we do not accurately anticipate our needs. We may not be able to secure enough components at reasonable prices
or of acceptable quality to build new products in a timely manner in the quantities or configurations needed.
Accordingly, our revenue and gross margins could suffer until other sources can be developed. Our operating
results would also be adversely affected if, anticipating greater demand than actually develops, we commit to the
purchase of more components than we need, which is more likely to occur in a period of demand uncertainties
such as we are currently experiencing. There can be no assurance that we will not encounter these problems in
the future. Although in many cases we use standard parts and components for our products, certain components
are presently available only from a single source or limited sources, and a global economic downturn and related
market uncertainty could negatively impact the availability of components from one or more of these sources,
especially during times such as we have recently seen when there are supplier constraints based on labor and
other actions taken during economic downturns. We may not be able to diversify sources in a timely manner,
which could harm our ability to deliver products to customers and seriously impact present and future sales.
We believe that we may be faced with the following challenges in the future:
• New markets in which we participate may grow quickly, which may make it difficult to quickly obtain
significant component capacity
• As we acquire companies and new technologies, we may be dependent, at least initially, on unfamiliar
supply chains or relatively small supply partners
• We face competition for certain components that are supply-constrained, from existing competitors,
and companies in other markets
Manufacturing capacity and component supply constraints could continue to be significant issues for us. We
purchase components from a variety of suppliers and use several contract manufacturers to provide
manufacturing services for our products. During the normal course of business, in order to improve
manufacturing lead-time performance and to help ensure adequate component supply, we enter into agreements
with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as
defined by us or that establish the parameters defining our requirements. In certain instances, these agreements
allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm
orders being placed. When facing component supply-related challenges, we have increased our efforts in
procuring components in order to meet customer expectations which in turn contribute to an increase in purchase
commitments. For example, the earthquake in Japan during the third quarter of fiscal 2011 resulted in industry
wide component supply constraints, and approximately $300 million of our purchase commitment increase was
attributable to us securing supply components as we made commitments to secure our near term supply needs.
Increases in our purchase commitments to shorten lead times could also lead to excess and obsolete inventory
charges if the demand for our products is less than our expectations. If we fail to anticipate customer demand
properly, an oversupply of parts could result in excess or obsolete components that could adversely affect our
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