Many supply chain professionals consider Apple’s supply chain to be the best in the world. I don’t.
The reasoning appears to be that since Apple is one of the fastest growing and most profitable companies in the world, it must surely have one of the best supply chains too. This is a “halo effect” fallacy.
Apple is the best in the world at innovative product development. Because the company develops hardware, software, and associated digital services—rather than just focusing on one dimension—it can provide an unmatched user experience. This allows Apple to capture high margins from its products and services. But by my definition, product development is not supply chain management; procurement, manufacturing, and logistics are.
That said, Apple has a fascinating supply chain that is very different from traditional supply chains. This supply chain comes with pre-built advantages and disadvantages.
On the advantage side, demand management is easier. Apple doesn’t have to get the demand forecast for a new product right. As long as it underestimates demand for a hot new product, Apple will have loyal customers clamoring for the new devices and willing to wait. In fact, the projected backlog leads customers to line up for hours before stores open to buy a new product. This helps to create marketing buzz.
Because Apple has become so large, it has procurement advantages smaller rivals can’t match. Financial analysts are beginning to focus on Apple’s supply chain. Samsung lost $10 billion in market value when Apple placed a huge order for flash memory with Elpida, securing more than half of that company’s supply. Apple reportedly has price advantages in securing key components, manufacturing capacity, capital equipment, and airfreight capacity.
Like other companies that have huge procurement clout, when Apple asks a supplier for a price quote, it demands a detailed accounting of how the manufacturer arrived at the quote, including estimates for labor and material costs and projected profit. Manufacturers can get hit with penalties for quality issues and warranty claims. Apple is becoming so big that even though it has a number of customized components that it has to pay extra for, the company’s cost structure is starting to resemble that of some of its rivals that only source common components.
But other parts of the supply chain become more difficult for a company that differentiates itself based on product excellence.
Apple works to lock up the supply of key components, particularly custom components, with exclusivity agreements. This serves to protect the uniqueness of its products. In some cases, Apple invests in capital equipment to make these special components (the company lends the production equipment to its manufacturing partner). At times this production machinery becomes Apple exclusive either because of exclusivity agreements or because Apple is so large that a backlog for the equipment becomes horrifically long.
Managing new product launches is also more important for a “fashion” manufacturer. The process from design to production launch typically takes 10 months. This includes sourcing, testing, government approvals (like FCC approval for an iPhone), and factory dry runs. For weeks prior to the launch, factories work overtime to build hundreds of thousands of devices. Then they work more overtime to clear the backlogs.
According to Apple’s supplier responsibility progress report, the company’s standard labor policy is for workers to work a maximum of 60 hours per week and to get at least one day off per week. And yet, at 93 of its suppliers, more than 50 percent of their workers exceeded these rather low limits. In fact, working conditions at Foxconn, Apple’s partner for final assembly and some core components, have been bad enough that Apple has gotten a bit of a black eye from press reports of accidents, suicides, and labor strife.
While the existing customer base has largely ignored these labor relations problems, the demographics of the people that buy Apple products indicate a concern for social responsibility. Further, the Chinese market is becoming very important to Apple, and closer Chinese governmental scrutiny could affect shipments.
What is different about Apple’s launch planning is the extreme secrecy attached to it. Apple places electronic monitors in some boxes of components to track them from Apple’s headquarters in Cupertino. The goal is to discourage leaks and ensure customer delight and surprise when the products hit the market. One article claims that Apple has shipped devices in plain boxes, even tomato boxes, to avoid detection.
But Apple, like many companies in the electronics industry, has a supply chain with a high-risk profile. Many of its key components come from northern Taiwan, the company sole sources several customized components, and it relies on massive factories located in Shenzhen, China for final assembly. Any sort of man-made or natural disaster at any of these sites could potentially grind Apple’s supply chain to a halt.
In conclusion, Apple’s new CEO, Tim Cook, is a supply chain guy with a strong reputation. He is working to improve the company’s reputation for social responsibility. But if I were Apple, I’d rather have another product development guru like Steve Jobs. To drive continued growth and margins, the company needs to continue to excel at product development, but only needs to be competent in supply chain management. Unfortunately, there are not many Steve Jobs out there.
Chris Jones says
Nice note Steve. Apple’s results are impressive, no doubt. But they are not an indication of supply chain excellence. You are dead right that because they don’t have any competition (sorry rest of the consumer electronics industry), they don’t face many of the challenges that “normal” electronic manufacturers do. The vast majority of companies that consistently run their supply chain behind demand would be facing significant market share erosion. Because they compete on product excellence, their supply chain performance really doesn’t factor into overall company performance as much as it would for the “99%” of manufacturers.
Alex Fuller says
Eric Ries makes an interesting point in his book, the Lean Starup, about Apple’s supply chain. Despite the fact that many of its suppliers may be close to lean, one-piece-flow capabilities, it still works in a very large batch supply chain (the iPhone 4 batch, 4S Batch, 5 batch). Because of this, customer feedback is slower than if they were constantly releasing updates. Occasionally you’ll get big snafus, like Apple Maps, which shows the advantages of smaller batches.
Of course, creating a backlog has an additional side effect of helping you not over-produce since you respond to the pull of the demand backlog.
Interesting points indeed about Apple’s supply chain. It will also be interesting to see if Apple remains in the market forefront or if another competitor can topple the empire – and whether it will be primarily through supply chain or product innovation.