Apple Chain

Read the case study “Apple: The Best Supply Chains in the World” on pages 628-630 in your textbook. Answer questions 3 and 4. Explain your answer in a clear and concise manner. 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.