Apple Inc Managing a Global Supply Chain Solution
Company Background
Apple Inc. is a California-based technology company. It designs, develops and sells consumer electronics, computer softwares, and online services. At first, the company was founded in 1976 for designing and selling personal computers. Eventually, their product gained popularity so they started to diversify the business to develop hardware products like iPod, iPhone, Apple TV, Apple Smartwatch, etc. Also, they have developed their own operating systems, macOS and iOS, for computer and mobile devices respectively. What's more, they moved on to online services like iTunes, App Store, iCloud, etc.
In 1980, Apple went public. Its shares are traded on the NASDAQ Global Select Market under the ticker symbol AAPL. Although it has gained huge brand loyalty and become the world's largest technology company by revenue to date, it has gone through a lot of ups and downs throughout the years and has constantly improved their control over the supply chain to optimize performance. In the following, more about Apple Inc. will be discussed.
History and Development of Apple
1976
Apple Computer was founded by Steve Jobs, Steve Wozniak and Mike Markkula. They introduced "Apple I" computer which was sold by 200 units.
1977
Apple introduced "Apple II", which had been improved in terms of design.
1980
Apple became the largest private manufacturer of personal computers in the US, and held initial public offering in 1980, which had created 300 millionaires.
1983 - 1984
Apple's competitors: IBM's PC became the best-selling computer in the US in1983. Even Apple's popular 1984 Superbowl commercial was not enough to stop IBM's growth.
1985
Steve Jobs left Apple in 1985. On the other hand, Apple's retail partners did not devote resources to displaying its products properly.
1993-1996
Apple went through three CEOs: John Sculley, Michael Spindler and Gil Amelio
1996
Steve Jobs returned to Apple as CEO. At that time, Apple's market capitalization had fallen from $11.6 billion to $3.1 billion.
1998-2001
Apple launched iMac computers (focused on design) since 1998. It introduced iPod in 2001, with iTunes music stores. The success of iPod revitalized Apple's prospect.
2004-2007
Apple gained better control over its supply chain by 2004. Apple's growing clout allowed it to work with its suppliers to launch a series of new products, e.g. iPod Touch and iPhone by 2007. Besides, Apple expanded its retail store base beyond the US.
2007-2013
Apple's success with its music players and introduced new Mac computers and other products, e.g. Apple TV, its application store, iPad from 2007-2013.
Apple's Supply Chain
| Apple | Competitors |
| Using air-freight as a more efficient transportation means. | Using cheaper transportation means, e.g. sea freight |
| Using Intermediate warehouse at UPS and Fedex to reduce waiting time of customers. | No such method |
| Maintaining close relationship with suppliers to ensure sufficient production capacity. | Treating suppliers very strictly and trying to reduce their price as possible |
| Maintaining Just-in-Time Supply Chain as global suppliers provided engineers at a scale that its US suppliers could not match. | Only focusing on cost and choosing the lowest price suppliers |
Apple's Key Advantages on Managing its Supply Chain Operations
1.
Real-time coordination of supply chain
From the timeline of the iPhones' launch date, it takes average a year to develop the new version only. Compare to the life cycle of traditional product which spans over 4 to 5 years, iPhone as an innovative product, management team of Apple kept the lifecycle closer to one year. In order to support the short product development cycle, Apple adopts a just-in-time supply chain to coordinate with the production in a real-time basis.
2. Internal control of entire supply chain
To develop the new product, a number of stakeholders are involved in the development processes. Apple typically partners with contract manufacturers to handle much of the engineering work involved in getting a product made in large numbers. Engineers often spend weeks at facilities in Asia making sure the parts and equipment they buy or make are working properly. By data sharing, procurement teams of Apple also keep closely control to its upstream suppliers. Unlike other technology companies simply outsourcing the manufacturing to the third-party service providers, Apple would rather control its entire supply chain internally.
3. Close relationship with suppliers
As mentioned above, Apple works closely with the contract manufacturers and build a close relationship with them. Apple's designers work in close proximity with suppliers to help translate prototypes into mass-produced devices. In addition, Apple continually shares its demand forecasting information to suppliers starting from 150 days in advance of the product launch to allow adjustment in production schedules and meet the sudden spikes in orders. One well-known example is within 96 hours, Foxconn produced over 10,000 iPhones a day due to the Apple's redesign of screens at the last minute.
4. Limited configuration of product
Apple's products are famous of its limited number of configuration. Compare iOS with Android OS, Apple restricted the design and configurations of its products. iOS is designed with less customization setting to provide a more user-friendly experience. With the limited number of configurations, Apple is able to streamline the supply chain process.
5. Highly integration with centralized R&D
It is common for technology companies to separate the R&D department and separate the profit and loss accountability for each product segment. However, Apple highly integrated the R&D department as well as the profit and loss accountability to the entire company. All people within the company are responsible for the success of the products.
6. Pre-purchased capacity
Many mobile phone firms used the same components as key parts from a single supplier. Therefore, it is often for the components to be out of stock during overwhelming demand. Apple then starts to pre-purchase suppliers' production capacity to ensure asteady supply of key parts from suppliers. For example, an agreement was signed to secure hundreds of the machines for manufacturing Apple's products from a US laser equipment supplier. Moreover, the pre-purchase strategy also adapts to logistics arrangement. Apple found that it is costly for the backlog of orders and hence they start using air-freight for transportation while other rely exclusively on shipments by sea. Apple pre-purchased available holiday air-freight to ensure delivery available during holiday sales rush. This also adds benefit of shutting out rivals.
7. Global operation
Apple divides its products' production in different countries, e.g China. Some of the production processes require labour-intensive operation with complex quality control processes. Other countries are able to provide resources that U.S is limited. One estimation from Apple for manufacturing iPhone reviewed that China took 15 days to find qualified industrial engineers while in U.S may take as long as 9 months
8. Effective reverse logistics function
Apple developed an effective reverse logistic function to enhance the post-purchase experience of customers. Consumers are allowed to input the defects online and the system would automatically retrieve purchase information by the serial number. Apple provides responsive service for product return by sending pre-addressed, pre-stamped box sent through express parcel service to collect the defective product. Apple's reverse logistic function greatly improved customer satisfaction, lowered the number of calls to its technical support service and eliminate the likelihood of customer error when processing a return.
9. Forward Integration
Despite using retail partners to distribute its products, Apple also operate its own stores in high-traffic location as well as the online stores. Over 70 % of products and services are sold directly to consumers and business by Apple itself.
10. Intense customer education
Operating self-own retail outlets not only for capturing more sales, Apple relies heavily on its retail store to provide customer education. Apple educates customers on their product usage and givesproduct training.
11. Light investment on fixed cost
From the financial report of Apple, the return of asset and inventory is high. This is resulted from the light fixed cost investment strategy. As low fixed cost need to spread over a high volume, the manufacturing cost of Apple account larger portion on variable cost. Apple strategically emphasizes on variable cost which only goes up when sales volume increase. Apple outsources its production and use third party logistics service to achieve light assets investment.
12. Emphasized brand management
Apple business model focus on innovation and new product development. By various marketing strategies and customer education, Apple advertise the lifestyle it created other than the actual functionality of its products. This help to create a strong brand loyalty.
Apple's Future Challenges and Their Implications for Supply Chain
Although Apple has been always praising for its amazing operations, the company has faced some future challenges for its business, which also impact its supply chain.
1. Developing overwhelming new products
Apple is having a difficult time in developing overwhelming new products in recent years. The company has been putting a lot of effort in improving and integrating its existing products like iPhone, iPad, MacBook, iPod and Apple Watch. The company has been keep adding new design, technology and function to its products and fittings for every new version. However, the market has much higher expectation than merely a slight improvement on its products' internal configuration. Apple fans are expecting technological breakthrough new major Apple products. Besides, the sales growth of iProduct is slowing down and the declining rate is high until next model is ready. This indicates that people lose interest in iProduct gradually .
Implication for Apple's Supply Chain
Apple product has been known for made by assembling numerous components produced from many different suppliers. Developing new major product means a large number of new components are required in its production. This makes Apple's supply chain network more extensive and its management more complicated . The company also has to invest more on its research and development(R&D) and reverse logistics system . Thus, Apple can do better product management and address the latest need for their customers through reviewing the old returned products. Besides, the company can introduce new majors customised product or new features for existing products which give the market a new surprise .
2. Maintaining sustainable relationships with existing suppliers or new suppliers
Apple also faces a challenge in maintaining sustainable relationships with existing suppliers or new suppliers. The company secures its components supply to meet high market demand by purchasing a large volume of components from its supplier with a huge amount of prepayment. The largely committed manufacturing capacity which occupied a large part of its supplier's business. It is difficult for suppliers to receive orders from other customers. Suppliers thus become dependent on Apple order to earn a profit. With prepayment , the suppliers also have high pressure to get components done with Just-In-Time manufacturing. Realising slim profit gain from Apple order with the above disadvantages, Apple's existing or potential suppliers tend to change their attitude and some even consider declining Apple orders to maintain their independence. The case also mentioned a major part manufacturing refused huge prepayment from Apple for providing largely committed manufacturing capacity.
Implication for Apple's Supply Chain
As some suppliers stop renewing the contract with Apple due to all the cooperation shortcoming and hardship, Apple has to spend extra cost on searching and scanning for new suitable suppliers . The potential suppliers may also hang back when they realize drawbacks for receiving Apple order's, which reduces Apple's choices of the supplier . Apple may thus need to offer a higher prepayment or new paying methods for suppliers in producing unique components for its products. This may lead to higher production cost and affect the total profitability of supply chain .
3. Upholding brand image
Upholding brand image is another challenge faced by Apple. Apple has been accused of co-operating with sweatshops in its upstream supply chain. Due to its just-in-time manufacturing and sudden order or change requirements, the assembler or manufacturer serving Apple may require their workers to work overtime for meeting Apple's needs. The case has mentioned that workers have to work for 12 hours continuously or Foxconn's worker has been asked to wake up at midnight to work.
Implication for Apple's Supply Chain
These ethical issues could Apple's reputation as Apple do not have strict monitoring on their partner for producing Apple's products. With long-term exploitation, the workers may have strikes to fight for better remuneration. This will lead to production disruption and affect Apple's just-in-time manufacturing with a tight schedule. This may increase both the lead time and cost for the products.
4. Staying as a market leader in fierce market competition
Apple has to stay as a market leader in fierce market competition. With the rapid development of smartphone industry in recent decades, many smartphone companies catch with innovation in horrible speed such as Samsung, Huawei, Xiaomi and LG, and they become strong competitors of Apple. It is very important for Apple to keep its first-mover advantage and set norms and practice for the industry by keep putting effort on innovation . There are also more people using Android phones rather than iOS phones. According to the statistic presented by IDC in Nov 2016, Andriod phone has occupied 86.8% in the market while Apple phone only share 12.5%. As customer easily shifts to other brand products under fierce competition, the demand forecasting for Apple becomes more difficult when comparing to the past.
Implication for Apple's Supply Chain
The company has to cope with the impacts brought by the greater demand fluctuation on its JIT system and place a good balance on stock and production. The company invests heavily on research and development of the product in the supply chain. Apple may also have to consider market segmentation to produce products not only for high-end but also low-end products to meet the customer's' need.
5. Minimizing the cost of production
Cost minimization is another future challenges for Apple. Although Apple has been doing an excellent job for cost control of its production, the company still has a higher cost of production when comparing to its competitor such as Samsung, Huawei, Xiaomi. As the smartphone market has become mature , smartphone producers not only compete on innovation but also cost . The price and production cost for iPhone has been higher than its competitor in general. Apple thus encounters a challenge in squeezing cost nowadays.
Implication for Apple's Supply Chain
When there is a need for cost cutting, it means that streamlining the process and cutting procurement cost are needed. Thus, the organisation of Apple's Supply Chain has to be further improved to achieve cost minimization. Apple also has to review its procurement strategy and transportation model for from time to time to find out opportunities to further lower the ordering cost or transportation cost. The company may also consider to reuse the returned unique components in their reverse logistics system to reduce cost.
Jessica Grant's Recommendations to BXE's VP
Our group suggest to adjust the shareholding of Apple depends on certain factors. For the reasons of increasing investment, they could be Apple's niche product offerings with huge market share and its well-renowned brand name. For the factors of decreasing investment, they could be uncertain development of new major products, fluctuating costs and unstable relationship with its manufacturer.
In terms of good brand name, Apple continuously delivers superior quality of buying experience in physical stores. The retail branches are stylish with experienced talents, who are able to provide quality services and knowledge to customers. Moreover, Apple's after-sale services can sustain more loyal customers.
In terms of mainland China market, the demographic demand for Apple's products keeps increasing. Factories located in China enable Apple to save costs of production and achieve better profit. Thus, BXE should keep investing in Apple.
Although there is uncertainty for developing new product lines, Apple is the market leader in terms of research and development (see below graph). It is worthwhile for BXE to invest more in Apple and look forward to their innovative products.
In terms of concerns for BXE to decrease shareholding in Apple, one of the reasons could be Apple's intention to capture wider target market segment. Apple introduced iPhone 5C and SE in 2013 and 2016 respectively, which were lower in prices to attract more customers who have limited budget. Nevertheless, Apple does not have distinct competitive advantages in economic smartphone market when comparing with Xiaomi. The ratings (see below graph) of iPhone SE were mostly similar or worse than Xiaomi's Redmi Note 3. Therefore, BXE may need to take this into consideration when adjusting the investment portfolio.
References
Apple Inc Managing a Global Supply Chain Solution
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