Cisco 2015 Annual Report Download - page 30

requirements based on our business needs; or a decrease in demand for our products could materially adversely affect our
business, operating results, and financial condition and could materially damage customer relationships. Furthermore, as a result
of binding price or purchase commitments with suppliers, we may be obligated to purchase components at prices that are higher
than those available in the current market. In the event that we become committed to purchase components at prices in excess of
the current market price when the components are actually used, our gross margins could decrease. We have experienced longer
than normal lead times in the past. Although we have generally secured additional supply or taken other mitigation actions when
significant disruptions have occurred, if similar situations occur in the future, they could have a material adverse effect on our
business, results of operations, and financial condition. See the risk factor above entitled “Our revenue for a particular period is
difficult to predict, and a shortfall in revenue may harm our operating results.”
Our growth and ability to meet customer demands depend in part on our ability to obtain timely deliveries of parts from our
suppliers and contract manufacturers. We have experienced component shortages in the past, 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 including capacity or cost problems resulting from industry
consolidation, or strong demand in the industry for those parts. 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 the re-ramping of manufacturing capacity for highly complex products.
During periods of shortages or delays the price of 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 contributes to an increase in purchase commitments. 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 gross margins. For additional information regarding our purchase
commitments with contract manufacturers and suppliers, see Note 12 to the Consolidated Financial Statements.
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