October 15, 2012

An Insight into Apple's Supply chain

Agility or the ability to respond quickly and effectively to market demands has become an important competitive tool in the manufacturing industry. Companies that deploy global sourcing strategies need to balance the monetary benefits against the limitations of off shore productions. Improving supply chain performance is a key to achieving this, and the improvement largely depends upon the degree to which uncertainty can be reduced in the supply chain. As the industry saying goes "A dollar saved in the Supply Chain is worth 10 in the books". Supply chain management is one of the most important element in any business. And if you are the world's biggest company, it is all the more daunting. Apple has forever been known for its innovative products and awe inspiring designs but one factor that differentiates Apple in terms of services is their supply chain know-how.

Operations expertise is as big an asset for Apple as product innovation or marketing. Apple's new CEO Tim Cook may not be Steve Jobs when it comes to stunning the world with product launches or marketing campaigns, but he excels in the unglamorous but certainly essential task of managing a supply chain. Apple's operational efficiency can be affirmed by this example. When Apple's design master Jonathan Iverealized that the new MacBook should have a green light beside the webcam to indicate when it is turned on, the manufacturing team deemed it near impossible as it was not possible to shine light through a metal and they did not have equipment to drill such a small hole into the aluminum. To conquer this problem, Apple bought laser equipment from a U.S based company at $250,000 each machine (of course with an exclusivity agreement!) This shows the amount of dedication for the supply chain at Apple for something so small and hardly ever noticed by the customer. Apple's success has been credited to their ability to look from a user point of view and then work the supply chain backwards.

Apple is a very American company in many respects. But, their supplier management is more reminiscent of the Japanese way of doing business. Apple has built a closed ecosystem where it exerts control over nearly every piece of the supply chain, from design to retail store. This coupled with the volumes Apple operates today, brings in a ruthless cost efficiency which results in astonishing profit margins that competitors can only aspire to reach. When iPods sales were at a peak in the early 2000s Apple started shipping directly to the customer from their Chinese manufacturing factories, thereby reducing heavy logistics and airfreight costs. In their retail operations, teams are given the go ahead to spend what ever is required to get around a bottleneck of not availability or defective items.

Weeks before the famed Apple product launches, key part manufacturers and assembling units work overtime to meet the announced date of delivery. To see through that before launch there are no fallacies in their secrecy Apple places electronic monitors in few boxes of parts that allow observers in Cupertino to track them through Chinese factories, an effort meant to discourage leaks. Manufacturing is where Apple really flexes its financial muscle to deal with suppliers. They select their suppliers through a very stringent process, which even requires them to declare the profit margin that they acquire by this agreement. Apple's bargaining tactics coupled with their financial muscle allows them to consume all of the supplier effort and concentration that rival companies' wait time for key parts is increased massively. Before the release of the iPhone 4 in 2010 many of mobile manufacturers were not in a position to source their requirement of screens, as most of the screen manufacturers were busy fulfilling their Apple contracts.

But Apple is not all about the pie, there is a dark side to the story too. Data suggests that 3% of supply chain workforce was putting more than 60 hours a week into assembling Apple products at Foxconn, China. Apple has been criticized for the appalling working conditions and army style discipline at the plant. Although these were actually better than many of the other plants in China and most of the multi-national manufacturing operates in these conditions in other parts of the country, Apple has been made a lightning rod for the issue given its reputation as the world's largest company. Responding to this criticism Apple announced a wage increase of 25% for workers at Foxconn and also declared that it will be increasing the staff from 500,000 to 800,000.

With such efficiency in the supply chain, Apple is able to earn huge profit of upto 40% while positioning at a similar price range as the competitors, who earn far lesser profit margins. With operations experts like Tim Cook at the helm as CEO and with over $100 billion dollars in cash reserves with continuous investment into operational efficiency, things are looking brighter than ever in the supply chain at One Infinite Loop. This emphasis on efficiency is set to keep Apple poised at the zenith of technology industry for a long time.

And yes we agree with Tim Cook, nobody wants to buy sour milk.


The article has been contributed by Varun Bora, who is presently a first year PGP student at IIM Raipur.  His areas of interest include adventurous sports & technology.  He can be reached at pgp12012.varun@iimraipur.ac.in.

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