Apple's Average Traditional Supply Chain

By Kevin Meyer

Something that annoys me to no end is when I read articles lauding Apple's supposedly amazingly fantastical supply chain.  Really?  How?  Pray tell, Tim Cook.

So Apple builds a bazillion iPads, iPhones, iMacs, and what not at a handful of factories in China operated by a third party that treats its employees so well that they have a habit of jumping off the roofs of their dormitories.  To manage this process they send planeloads of engineers from Cupertino, and Steve Jobs once proclaimed that one reason they're in China is because there's no place else they could wake thousands of engineers at 1am and get them onto a line to solve a problem.

Sounds like a very traditional supply chain to me, albeit one executed spectacularly well.  But still traditional - outsource and chase "cheap" labor.  I could tell you about a few toy companies that do that equally well.  Come to think of it... Angry Birds and iPads...

I may have finally found a kindred spirit - Steve Banker at Logistics Viewpoints.

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.

Steve goes on to explain how Apple executes a traditional supply chain very well - and leverages opportunities that other companies can't.

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.

In other words, mismanaging demand, intentionally or not, actually helps Apple - and increases profit.  Such a deal!  Anyone else able to do that?

Because Apple has become so large, it has procurement advantages smaller rivals can’t match. 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 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.

Remember when Apple was gearing up the new MacBook with the solid aluminum case, and that tied up a large percentage of the global supply of new CNC machines?

Steve Banker goes on to describe the ongoing labor issues at Apple's outsourcing partner Foxconn.  We all know what's going on.  And Steve also describes the supply chain risk of building the vast majority of products in a few factories just a few miles apart.  In a country where wage inflation is starting to take its toll, social upheaval is increasing, and the government is beginning to scrutinize - and change - key business practices.  And now a key component comes from across the strait, Taiwan.

A traditional supply chain executed very well.  Not innovative or fantastic by any means.

If Apple had a truly innovative and fantastic supply chain they wouldn't have employees jumping off of buildings.  For starters they'd do more than cursory monitoring of employee working conditions.  They wouldn't need to wake thousands of engineers at 1am to fix a problem - those types of problems would have been caught and removed by design or (horrors!) inspection long before production was impacted.  Factories would be close to customers, with a geographic risk mitigation strategy - maybe someday that rumor of a second factory in Brazil might actually become true.  Plane loads of support engineers, let alone the presumably millions of minutes of conference calls across have the globe with associated translators and such, wouldn't be necessary.

But probably what bothers me the most, and in my mind the number one indicator of an average supply chain at best, is the perceived need to chase low "cost" labor.  To build a very high margin product, no less.  What is really the labor content in an iPad?  Why is that?  I can tell you of many, increasingly many, companies that manufacture very successfully from high-cost North America - some even from my home state of California.  High margin tech products to furniture and clothing.

Somehow Apple can't figure out how to do that - let alone the value in doing that.  Instead they live with "Designed in USA, Manufactured in China."  And with an unnecessarily complex supply chain spanning the globe to build in a geopolitically risky location with employees jumping off roofs and products being shipped in large batches across oceans.  Not to mention not understanding the difference - and lost opportunity - between "cost of labor" and "value of smart, experienced people."  Apple has $100 billion in the bank - imagine the truly innovative supply chain that could be created by investing a tiny fraction of that.

Come to think of it, "a traditional supply chain executed very well" may be too generous.

Comments

[Tim Swanson]

Kevin,
Great summary. Let's also not forget their Henry Ford approach of very few models, that also makes its mass production and not even close to Lean business model work.

Wait for the day when the "Jobs Polish" is off the Apple and they have to compete in the same world like the rest of us. Then let's see how revered their supply chain model is.

[dave henshall]

Erm...

http://blogs.computerworld.com/20207/apples_iphone_5_plan_rocks_global_e_supply_chain?goback=.gmp_771367

Big difference in perceptions.

I believe Apples NPD and relationships with suppliers to innovate plan the supply chain, and bring the product to market faster than competitors, and at higher profit margins speaks for itself.

What are you guys on?

[Kevin]

Dave-

So I should be impressed that Apple is having it's one primary assembly partner Foxconn build yet another factory in the same unstable geopolitical area? And the same Foxconn that is treating workers like crap? How does that address geopolitical supply chain vulnerabilities, ethical treatment of workers, and reduced transportation waste to end customers?

[Patricia E. Moody]

KEVIN GREAT JOB YOU SHOULD GET A PULITZER! KEEP IT UP! A MILL GIRL AT BLUE HERON JOURNAL

[John Hunter]

I think the data on suicides is spectacular but not what people think. The vast numbers make the data seem crazy. But if you take the same number of your people at the best colleges and universities in the USA the suicide rate is similar. I haven't looked closely but I looked a bit a few years ago and that is what I saw.

I agree Apple could do more to treat employees well. I also think they could consider more manufacturing close to markets - and also getting some production out of China (it is just a substantial risk to have a single point of failure).

I believe Apple's Foxcom jobs are actually highly sought after by workers. That doesn't mean it is perfect. But it does mean our judgements sitting in the USA for what is a good job are necessarily shared by the majority of the world. I do agree Apple should keep improving the situation for workers, I just also think it isn't reasonable to compare those workers to rich workers in the USA.

[Ben Benjabutr]

I totally get your points. When Gartner said Apple is number 1, people just take it for granted. In fact, there are lots of flaws in Gartner's survey methodology. For example, they use financial data instead of actual scm metrics that are available via Supply Chain Council or APQC. Secondly, opinion of Gartner's analysts is "black box". And it seems to me that company with good publicity tends to perform well in this study.