Question

APPLE: THE BEST SUPPLY CHAINS IN THE WORLD?

For eight straight years, Apple has been recognized as having the best worldwide supply chains in the “Gartner Global Supply Chain Top 25” ranking. In the most recent ranking, Apple was actually classified above the ranking as a "Master" (Amazon.com was the listed the number one company). The Master status recognizes the accomplishments and capabilities of long-term global supply chain leaders in the Gartner Global Supply Chain Top 25. Companies qualify for the Masters category if their score places them in the top five rankings for at least seven out of the past 10 years.

Numerous accolades have also been made about Apple’s supply chain strategy, operations, and results. For example, Apple’s supply chains “best demonstrate leadership in applying demand-driven principles to drive business results.”*“Apple dominates because it consistently brings both operational and innovation excellence to bear in some of the most competitive markets in the world.”* Basically, Apple gets a lot of credit in the supply chain profession for being able to ramp up volumes both in hardware and software while also uniquely helping redefine the consumer electronics market (e.g., iPhone, iPad, MacBook).Page 431

Apple is the world’s second-largest information technology company by revenue after Samsung and the second-largest mobile phone producer also after Samsung. In Interbrand’s Best Global Brands report, Apple is now also the most valuable brand in the world. It overtook Coca-Cola in 2013 for the number one position after Coca-Cola’s 13-year run at the top and has stayed at the top every year since that time. Apple has an estimated brand value of more than $170 billion. “Few brands have enabled so many people to do so much so easily, which is why Apple has legions of adoring fans.”* These “fans” or customers have downloaded apps for Apple’s electronic gadgets more than 60 billion times.

The company’s general supply chain model follows the path of most large multinational corporations' supply chains. They do research and development to cultivate new technologies and/or to acquire intellectual property needed for future products. They test the product concepts via marketing research, product testing, and total cost analysis. After that, Apple typically does a prelaunch of new products, where global production, sourcing commitments, inventory management, and so on are evaluated. The product launch involves doing demand forecasts, resolving potential backlogs, and ensuring that the products are in the hands of its customers in as fast a cycle time as possible. After the launch, monitoring starts with periodic reviews of inventory, demand, life cycle status, and component cost forecasts.

A number of factors make Apple’s global supply chains world leading. First, early on, Apple took steps to manage the total value created in its global supply chains by managing its suppliers and all other providers within the chains. Predetermined expectations of suppliers, exclusivity in supplier arrangements, and volume guarantees ensured a supply chain infrastructure that could support Apple’s aggressive market leadership. Apple’s relationship building with its network partners is also a strength that has helped with increased scaling of production and resulted in improved quality in the manufacturing processes. Plus, and not to be underestimated, Apple has amassed lots of cash! The available cash funds have partially been used to place high-volume orders, which strengthen supplier relationships, and in other ways maintain global supply chain leadership.

Using its supply chain infrastructure, Apple has managed to solve most of the challenges it has faced. For example, while the global economic downturn in 2008 presented problems for virtually all companies, Apple came through it in great shape. At the time, CEO Steve Jobs said, “We’re armed with the strongest product line in our history, the most talented employees and the best customers in our industry. … Apple just reported one of the best quarters in its history.”* Other challenges that Apple is facing include obtaining enough quality components for its consumer electronics, potential for supply chain disruptions (natural and people created), dependence on third-party logistics providers, and inventory management issues. In each case, so far, Apple has strategically solved major issues to the satisfaction of the marketplace (the company consistently ranks at the top in “customer satisfaction” in the American Customer Satisfaction Index).

However, everything is not all rosy or positive about Apple. The company’s reputation has taken a few hits recently. For example, Apple was found guilty by a U.S. court of conspiring with publishers to set the price of e-books that were bought using iTunes. The ongoing feud with Samsung regarding various patents keeps lingering year-by-year, and worldwide customers are almost fanatically taking sides for or against Apple. There have also been allegations about the treatment of employees at Foxconn in China (one of the Apple suppliers). Plus, there was a U.S. Senate hearing that investigated Apple’s “highly questionable” tax minimization strategies. Now, on the more positive side, Apple has a portfolio of potential blockbuster products, welcomed upgrades, and innovative services in the making that are sure to remind its fans why they favor Apple products.

The challenges attached to these new offerings are sure to test Apple’s leadership in both brand value and best global supply chains. To some degree, the future challenges are clear. To stay at the top of its industry, Apple has to succeed in slowing Samsung’s momentum and capturing the booming Chinese mobile phone market. As always with Apple, as set in our expectations over the years by Steve Jobs’s “one more thing” announcements, CEO Tim Cook and the new Apple leadership team must keep communicating to the market that their vision, innovations, and leadership can drive the idea that Apple’s best days are ahead. As one way to do this, Apple is on a hiring binge in Asia, adding hundreds of engineers and supply chain managers to its staff in Shangai and Taipei as it seeks to increase the speed at which it introduces new products. Plus, with Cook as the CEO, Apple has a global production and supply chain management expert at the helm who constantly scrutinizes Apple’s supply chains, production operations, and fair labor practices.

Sources: D. Hofman, “The Gartner Supply Chain Top 25,” 2013, www.gartner.com/technology; “Interbrand’s Best Global Brands 2013,” www.interbrand.com; “Apple Is the World’s Most Valuable Brand at $98 Billion,” The Huffington Post, September 30, 2013; “Apple Reports Fourth Quarter Results,” Apple Press Info, October 21, 2008; E. Doe, “Apple Goes on Hiring Binge in Asia to Speed Product Releases,” The Wall Street Journal, March 3, 2014 (http://www.wsj.com/articles/SB10001424052702304360704579416660215507816); American Customer Satisfaction Index, http://theacsi.org; “Fixing Apple’s Supply Chains,” The New York Times, April 2, 2012 (http://query.nytimes.com/gst/fullpage.html?res=9C03EED91F3FF931A35757C0A9649D8B63).

Case Discussion Questions

1. According to Interbrand's analysis, Apple's brand is valued at more than $170 billion, while Google in second place is valued at $120 billion and Coca-Cola in third is at $78 billion (2015). Do you agree that Apple should be so far ahead of its nearest brand competition? What about Samsung, which is larger in size (Samsung is valued at $45 billion)?

2. With Steve Jobs, Apple's legendary founder and CEO, passing away in 2011, what can we expect from Apple in the future? Will they be as innovative? Will they maintain brand value leadership? Will they run the top global supply chains in the world?

3. Apple products have usually been priced above their competition and sold for their value, intrigue, and market leadership. Some would say Samsung is catching up on many of these fronts and even passing Apple perhaps. Do you think Apple can charge a price premium for their products much longer?

4. Apple's global supply chains make their business thrive. There is secrecy among suppliers, superior quality standards by every party involved in Apple's supply chains, and a total value focus that ultimately makes the customers happy. Is this a sustainable business model for their global supply chains?

Answer 1

1. To be a brand leader, there needs to be a strong leadership team to manage and grow business in the right direction, innovative but market relevant products in market and also in pipeline and most importantly target profit margin ratio. As on date, Apple does satisfy these criteria to be a brand leader with current revenue of $178MM. But Google isn't behind the race with new acquisitions and diverse, unique product range, who is potential brand leader in upcoming years.

Apple is considered to be more aspirational brand in developing countries compared to Samsung. With the increase in disposable income of developing countries, I think, Apple would be very much ahead of Samsung.

2.   Steve Jobs and Tim Cook have different personalities and leadership style. Steve was known as a passionate and abrasive, leader and CEO who demanded perfection and excellence, whereas Cook tends to have a very calm demeanour, approachable and the one who promotes collaboration at work.

Steve's focus was always on introducing new products to the market, whereas Cook's first priority is on stability of cash cow products and then new product's launch and success. Cook also knows how to take care of investors for long term relationship; hence he has paid dividends in 2012 for the first time in previous 17 years. Hence, I think if Apple 'keeps selling dreams, than selling products'- new management will maintain brand value leadership. Rightly expanding in developing countries, they will also run the top global supply chains in the world.

3. Apple could charge price premium for being first mover in many products, giving high-quality user experience and creating Halo effect for its products. But now there is stiff competition in the market on all of these fronts. Google has come up with new and innovative products in the market. Google, Samsung, One plus etc. also have set the milestone of high quality product, user experience and better marketing strategies to create hype during launch of new products.

Hence, I think, unless Apple is a First mover for any product- going forward it will be difficult for Apple to charge price premium.

4. Increasing revenue and decreasing costs makes any company more profitable. Tim Cook believes technology industry is vulnerable to obsoleting and depreciation; there is 1-2% of value loss each week. Hence, he has modified supply chain footprint for Apple by decreasing complexities and increasing benefit through consolidation.

• Leverage Global Sourcing- Major supplier base is at China (close to the manufacturing), Japan and for strategic raw materials USA.
• Design and Manufacturing- California is the base for designing and China is the base for manufacturing with lesser cost of resources. Moreover, increase outsourcing has helped to reduce manufacturing lead times.
• Reducing complexities- With as less as 26000-28000 SKUs to manage and having one central warehouse at California and having 12 month's product life cycle- Apple has maintained its supply chain less complex and manageable. All the other companies with comparable revenues (like Amazon, Walmart, and Toyota etc.)- has more complex supply chains.

Hence, I think, Apple has sustainable supply chain model. They need to keep evaluating the decisions around manufacturing and supplier base impacted by increasing labour cost at China and forex impact.