Apple leverages deep pockets to gain supply chain edge over rivals - report

Posted:
in General Discussion edited January 2014
A close look at Apple's supply chain has revealed that the company wields upfront cash payments and a highly-focused logistics ecosystem, largely credited to Chief Executive Officer Tim Cook, as "strategic weapons" to secure a significant advantage over its rivals.



According to an in-depth report by Bloomberg BusinessWeek, Cook distributes the book Competing Against Time to colleagues to drive home the point that Apple's supply chain is a remarkably powerful weapon.



Apple's new chief is known to place a high value on efficiency. ?Nobody wants to buy sour milk,? he often says, according to logistics executive John Martin who has worked with the company in the past.



Though the late Steve Jobs admitted to biographer Walt Isaacson that his successor is "not a product guy, per se," Cook is widely acknowledged as an operational genius who helped tighten up Apple's supply chain into the efficient machine it is today.



And, in addition to Cook, design chief Jony Ive has played a part in honing Apple's supply strengths. Jobs said that before he left Apple, he set up the company so that Ive, his "spiritual partner," had "more operational power" than anyone else there.



For instance, the report noted that, roughly five years ago, Ive wanted to design a new MacBook with a green light that could shine through the aluminum casing to indicate when the notebook's camera was in use. Unable to find an available solution, Ive and his team discovered a customized laser process that could perforate the metal. Apple then signed an exclusivity agreement with a company that made laser equipment, purchasing hundreds of machines for as much as $250,000 each.



Even Apple's rivals have recognized that it is reaching new heights in terms of operational efficiency.



?Operations expertise is as big an asset for Apple as product innovation or marketing,? Mike Fawkes, the former supply-chain chief at Hewlett-Packard, told Bloomberg. ?They?ve taken operational excellence to a level never seen before.?



The iPad, Apple's newest product line, speaks to the company's success. Competing tablet makers have had difficulty matching the iPad's price, even with devices that sport smaller screens and lower specs.



"Our potential competitors [in tablets] are having a tough time coming close to iPad's pricing. iPad incorporates everything we've learned about building high value products. We create our own A4 chip, software, battery chemistry, enclosure, everything," Jobs said last year.



But, the company's steady focus on world-class supply-chain management has been in the works since around the time when Jobs came back to Apple in 1997. According to Martin, Jobs paid $50 million in 1998 to book holiday air freight space for the first iMacs. When rivals, who generally chose to transport their goods by sea, needed air shipping that year, they were left out in the cold.



Changes that Apple made to its shipping process have been watched carefully by the company's competitors. According to Fawkes, an HP staffer had an "'Oh s--' moment" after using Apple's website to track the purchase of an iPod all the way from a factory in China.



Ive and his team reportedly work closely with manufacturers and suppliers to fine-tune production, sometimes living for months out of hotels located close to the company's partners. For example, in 2008, Apple released new Macbook computers with unibody cases built from a single block of aluminum. Competing notebook makers have struggled to find manufacturing capacity for their own aluminum chassis, resorting instead to fiberglass or other materials.







Apple has "a very unified strategy, and every part of their business is aligned around that strategy,? said Gartner analyst Matthew Davis. For the past four years, Davis has ranked Apple as the world's best supply chain.



With more than $81.6 billion in cash as of last quarter, Apple has room to flex its weight by negotiating cash deals and bulk pre-payments. The company has negotiated prepaid deals for NAND flash, displays and other, sometimes secret, components. Apple is planning to spend $7.1 billion supply chain-related capital expenditures this year, almost twice as much as last year, as well as $24 billion in prepayments to suppliers, according to the report.



In 2010, Apple bought up the available capacity of high-resolution displays for its iPhone 4, blocking HTC from procuring the screens it needed, said a former manager at the Taiwanese handset maker. In preparation for the iPad 2, Apple purchased so many drills that other companies saw wait times for the machines expand to six months, a manager at the drill maker told the publication.



Earlier this year, after a devastating earthquake and tsunami in Japan threatened component supplies, Apple reportedly offered upfront cash payments to secure parts ahead of its competitors.



Historically, Apple's successes have trickled down to its suppliers and partners, but not every company jumps at the opportunity to work with Apple. One executive at a "major parts manufacturer" told reporters that his company hard turned down a $1 billion payment from Apple because he feared being too dependent on the iPhone maker and worried that it would deflate prices.



Apple's notorious secrecy also comes into play within the supply chain. Ahead of new product launches, the company often stations employees at each handoff point to guarantee that nothing goes missing. Apple has even reportedly been known to ship its products in tomato boxes to avoid unwanted attention.



As the company's streamlined product portfolio, cross-device synergies (such as flash memory and A-series processors) and well-organized supply chain have come together, it has leveraged economies of scale to keep its prices down and its profits up. With competitors fighting to keep up with pricing in recent years, Apple has begun to erase the earlier notion that its products come at a premium.



If anything, Apple has struggled to ramp up manufacturing of the iPhone and iPad in order to meet demand. Both the iPad 2 and iPhone 4S saw overwhelming demand when they were released earlier this year.
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Comments

  • Reply 1 of 38
    solipsismsolipsism Posts: 25,726member
    Sometimes I think Apple is striving to emulate half of Ian Fleming's Bond villains. Just wait until Apple moves their HQ to an extinct volcano on a remote island… to protect trade secrets and because it's a tax shelter, of course.
  • Reply 2 of 38
    Quote:
    Originally Posted by solipsism View Post


    Sometimes I think Apple is striving to emulate half of Ian Fleming's Bond villains.Just wait until Apple moves their HQ to an extinct volcano on a remote island.



    Tmz has just released spy shots of the super secret Apple volcano. Allegedly this is the new home of Jony and his R&D elves.







  • Reply 3 of 38
    nhtnht Posts: 4,516member
    I've been in one of those "Oh sh__ moments" of discovery about a competitor. They are both awe inspiring (Oh sh__, that's amazing) and chilling (Oh sh__, we're so f'd).
  • Reply 4 of 38
    asciiascii Posts: 5,941member
    If Apple has monopolised all the 3rd party manufacturers then make your own factory. This is what is known in the industry by the technical term "not pussying out."
  • Reply 5 of 38
    nhtnht Posts: 4,516member
    Quote:
    Originally Posted by ascii View Post


    If Apple has monopolised all the 3rd party manufacturers then make your own factory. This is what is known in the industry by the technical term "not pussying out."



    Yes, because building a new factory to build the drills needed in your new factory that actually builds stuff doesn't impact time to market as much as simply waiting to buy drills 6 months later.



    Or building a private air shipping arm which you're going to use once or twice a year.



    Or building LCD panel factories that rival LG and Samsung in quality and volume.



    This is what is know in the industry by the technical term of "dumbshit over-simplification".



    The solution is to plan better and lock down your suppliers like Apple does. Or Southwest did with fuel pricing bulk contracts. Or any number of other companies that execute very very well.



    But it's a lot harder to do than say.
  • Reply 6 of 38
    irnchrizirnchriz Posts: 1,601member
    There is nothing wrong with what Apple do. You do realise that the Asian manufacturers don't give you credit payment terms. EVERYONE pays up front, whether its a million smiley face keychains or a million laptops, you pay cash.



    Apple is in a good position because they have bags of money but also because they have a narrow product line which sells well and quickly. They only ever have around 20 days of supply at any time. So they are never out of pocket for a long time.



    Other PC manufacturers are scattershot with hardware which takes longer to sell and has lower margins meaning that their cash is sitting gathering dust longer before they can reinvest in more manufacturing.



    The upshot is Apple are not doing anything magical, they are just better at managing supply.
  • Reply 7 of 38
    lukeilukei Posts: 353member
    Quote:
    Originally Posted by irnchriz View Post


    There is nothing wrong with what Apple do. You do realise that the Asian manufacturers don't give you credit payment terms. EVERYONE pays up front, whether its a million smiley face keychains or a million laptops, you pay cash.



    Really? No-one gets credit? What are you basing that on? When I worked for a company sourcing from China and Vietnam I got between 30-90 days from all my major suppliers.
  • Reply 8 of 38
    I honestly think people underestimate just how important and good, Tim Cook is at his job.



    Apple may produce good and innovative products but it is only successful because it can make a lot of those products, make them at an appropriate price, and get them to the buying public.



    Cook has ran the execution and operation of Apple over the last years better than anyone. Steve Job's may have been the front man but it was Cook who was driving the company forward as it scaled up.



    Don't get me wrong, the likes of Ive and Forstall are incredibly important in making game changing products but Cook is a good CEO.
  • Reply 9 of 38
    cnocbuicnocbui Posts: 3,613member
    Typical AI article. Apple is just so awesome no one comes close.



    Samsung executives must be reading this article wondering how they could possibly compete.



    Unless Samsung are selling parts to Apple at below cost to manufacture, they can beat Apples prices for components. They can supply themselves with the best possible components at the best possible prices.



    Samsung's trouble is they are always on the back foot and reacting to Apple's moves in haste. They don't have the strategic vision. They don't seem to have fully grasped that software is now the key to products, not the latest greatest hardware. If I were Samsung, I would be investing heavily in building up a software division and copying Apple in creating their own core software like OSX.



    They have made a sort of start with their in-house development of Bada, but I am not sure they have enough faith in their own progeny. Perhaps the Korean governments call for firms to not tie themselves to Android's skirt tails was really a prod aimed directly at Samsung, because as far as I know, they are the only Korean firm with a developed viable alternative in-house OS. I was actually surprised at the Korean Governments public announcement, because it seemed to be directed straight at Samsung. I wonder if those 2000 engineers working on Bada in Bangalore are going to be even busier than usual and if their numbers are being increased.
  • Reply 10 of 38
    Quote:
    Originally Posted by solipsism View Post


    Sometimes I think Apple is striving to emulate half of Ian Fleming's Bond villains. Just wait until Apple moves their HQ to an extinct volcano on a remote island… to protect trade secrets and because it's a tax shelter, of course.



    As long as it is a Bond villan and not Dr. Evil (or Scott Evil), we should be fine! Actually, we will have reason to worry if they soon start having codenames like Operation: Skyfall for their next product!



    The article was pretty interesting and it really shows another facet of what what makes Apple such a strong company. We know to quite an extent what the strengths of Apple's previous CEO was. Now we get to see what makes Tim tick. I really have nothing to do with supply chain management, but this is really interesting.



    Now, if only they could get the 4S launched quickly in India! Rumors say that it is 24th November. I was disappointed with the update (got carried away by AI and the longer-than-one-year wait), but it is time to replace my 3GS. Retina Display is sweet!
  • Reply 11 of 38
    jnjnjnjnjnjn Posts: 588member
    Quote:
    Originally Posted by AppleInsider View Post


    ... With competitors fighting to keep up with pricing in recent years, Apple has begun to erase the earlier notion that its products come at a premium. ...



    75% profit on the iPhone4S is a gigantic premium. So that notion isn't erased at all.



    J.
  • Reply 12 of 38
    Quote:
    Originally Posted by irnchriz View Post


    There is nothing wrong with what Apple do. You do realise that the Asian manufacturers don't give you credit payment terms. EVERYONE pays up front, whether its a million smiley face keychains or a million laptops, you pay cash.



    Keen observation... I worked for a chinese restaurant when I was younger and we usually went to Chinatown to buy supplies/bulk food. Never once in 10 years did I ever see anyone whip out a check or credit card, cash was king.



    Kudos to Apple for understanding the culture. I'm sure it opens doors for them that other suppliers can't match.
  • Reply 13 of 38
    MacProMacPro Posts: 19,251member
    Quote:
    Originally Posted by solipsism View Post


    Sometimes I think Apple is striving to emulate half of Ian Fleming's Bond villains. Just wait until Apple moves their HQ to an extinct volcano on a remote island… to protect trade secrets and because it's a tax shelter, of course.



    Well we all know who SMERSH and SPECTRE are!
  • Reply 14 of 38
    conradjoeconradjoe Posts: 1,887member
    Quote:
    Originally Posted by ascii View Post


    If Apple has monopolised all the 3rd party manufacturers then make your own factory. This is what is known in the industry by the technical term "not pussying out."



    But that would free up manufacturing capacity for Apple's competitors to use.



    Better to discourage competition by using their market power to erect barriers to entry.
  • Reply 15 of 38
    conradjoeconradjoe Posts: 1,887member
    Quote:
    Originally Posted by nht View Post


    The solution is to plan better and lock down your suppliers like Apple does. Or Southwest did with fuel pricing bulk contracts. Or any number of other companies that execute very very well.






    That was Enron's game.



    Their biggest success was a brief period when they were able to charge California distributors over $1000.00/Megawatt-hour for electricity because they had cornered the market.



    "A demand supply gap was created by energy companies, mainly Enron, to create an artificial shortage. Energy traders took power plants offline for maintenance in days of peak demand to increase the price.[6][7] Traders were thus able to sell power at premium prices, sometimes up to a factor of 20 times its normal value."





    Lock down the supply. Brilliant. The Hunt Brothers did it with Silver in the 1980's and made a fortune.
  • Reply 16 of 38
    Quote:
    Originally Posted by ConradJoe View Post


    That was Enron's game.



    Their biggest success was a brief period when they were able to charge California distributors over $1000.00/Megawatt-hour for electricity because they had cornered the market.



    "A demand supply gap was created by energy companies, mainly Enron, to create an artificial shortage. Energy traders took power plants offline for maintenance in days of peak demand to increase the price.[6][7] Traders were thus able to sell power at premium prices, sometimes up to a factor of 20 times its normal value."





    Lock down the supply. Brilliant. The Hunt Brothers did it with Silver in the 1980's and made a fortune.



    Apple doesn't gouge as tablet and phone prices show. Apple doesn't cook the books. Apple isn't running a scam as they have actual product that you can touch. According to the article, at least one company didn't work with Apple because "Apple?s bargaining tactics tend to exert downward pressure on prices, leading to lower profits and margins". In other words, you would have lower prices.



    Other than those things, Apple's just like Enron.
  • Reply 17 of 38
    Quote:
    Originally Posted by ConradJoe View Post


    That was Enron's game.



    Their biggest success was a brief period when they were able to charge California distributors over $1000.00/Megawatt-hour for electricity because they had cornered the market.



    "A demand supply gap was created by energy companies, mainly Enron, to create an artificial shortage. Energy traders took power plants offline for maintenance in days of peak demand to increase the price.[6][7] Traders were thus able to sell power at premium prices, sometimes up to a factor of 20 times its normal value."





    Lock down the supply. Brilliant. The Hunt Brothers did it with Silver in the 1980's and made a fortune.



    Uh..not so fast. They Hunt brothers were making a fortune until the markets had enough. The market changed the rules on how much leverage you could do in the silver market. Long story short the Hunt brothers went tits up (bankrupt).
  • Reply 18 of 38
    Quote:
    Originally Posted by KaptainK View Post


    I honestly think people underestimate just how important and good, Tim Cook is at his job.



    Apple may produce good and innovative products but it is only successful because it can make a lot of those products, make them at an appropriate price, and get them to the buying public.



    Cook has ran the execution and operation of Apple over the last years better than anyone. Steve Job's may have been the front man but it was Cook who was driving the company forward as it scaled up.



    Don't get me wrong, the likes of Ive and Forstall are incredibly important in making game changing products but Cook is a good CEO.



    Good point. It needed saying.
  • Reply 19 of 38
    Quote:
    Originally Posted by cnocbui View Post


    Typical AI article. Apple is just so awesome no one comes close.



    Samsung executives must be reading this article wondering how they could possibly compete.



    Unless Samsung are selling parts to Apple at below cost to manufacture, they can beat Apples prices for components. They can supply themselves with the best possible components at the best possible prices.



    Samsung's trouble is they are always on the back foot and reacting to Apple's moves in haste. They don't have the strategic vision. They don't seem to have fully grasped that software is now the key to products, not the latest greatest hardware. If I were Samsung, I would be investing heavily in building up a software division and copying Apple in creating their own core software like OSX.



    They have made a sort of start with their in-house development of Bada, but I am not sure they have enough faith in their own progeny. Perhaps the Korean governments call for firms to not tie themselves to Android's skirt tails was really a prod aimed directly at Samsung, because as far as I know, they are the only Korean firm with a developed viable alternative in-house OS. I was actually surprised at the Korean Governments public announcement, because it seemed to be directed straight at Samsung. I wonder if those 2000 engineers working on Bada in Bangalore are going to be even busier than usual and if their numbers are being increased.



    So a report by Bloomberg, corroborated by other known factor results in "Typical AI article. Apple is just so awesome no one comes close."? What are you looking for here exactly? I don't think you can field a substantive argument contrary to the fact that, and according to competitors as well, Apple has nailed down supply chain strategy better than any of their existing competitors. The evidence for this is overwhelming and proven, as has been called out in a number of business and technology articles, some captured here, some elsewhere.



    Moreover, and again as reported here and elsewhere, Apple has a very strong tactical advantage in their contracts with supply points like Samsung. Samsung is a conglomerate and not all units interface well with other. The component supply side enters into exclusive contracts with Apple, they demo new technology and products based on it to customers like Apple, but more importantly, Apple drives development of their own technologies under very specific terms - which involve exclusivity for a set time, followed by release for priority purchasing. In some cases they have gone in and directly partnered with the supplier to setup up the production line and provided the technology or the subcomponent supply source to enable that production of the needed components. Only once all those terms are met are the suppliers released from contract for that component and allowed to offer it widely on the market. This helps lock-in needed resources for Apple, ensures that their technology stays exclusive to Apple for market advantage for a predetermined amount of time, but gives their suppliers the ability to leverage that technology into the wider market for their own advantage. This has been covered several times here and elsewhere.



    It will be hard for Samsung to build out Bada as an ecosystem - not that they can't, but since so much of their operations in electronics is tied solely to hardware, they would have to make deep investments in the software and OS R&D to build it - and I don't think they have the internal discipline nor the long-term strategists to champion such an approach. HP did at one point but they're in turmoil and have bcome confused about what HP is as a company. Part of their "back-foot" reaction to Apple development is tied to those exclusivity agreements that Apple has with their component units.
  • Reply 20 of 38
    let's remember also that as Jobs matured into his role as CEO he drove pulling in the best executives he could find and invite to fall in love with Apple. This was inportant because he seemed to recognize where he needed expertise he did not have, or was not interested in cultivating. Each one of these officers brought incredible strengths to Apple, and working together as a team allowed them to complement each others' weaknesses as well. There is an interesting blend of driven and pragmatic, visionary and tactical skill sets in the Apple executive team - and I believe that's deliberate. If Jobs was as anal about whom he hired and for what traits and skills as he was about product (and there is every indication he was), then the Apple executive team is one of, if not the strongest in the consumer electronics industry.



    Apple has demonstrated that they are willing to make mistakes, learn from them and move forward in their product lines, and I think the same could be said for it's executive team as well. It's an organic structure that evolves and changes. Ron Johnson was brought in (for example) to drive the retail strategy and produced a game-changing approach that is in most marketing textbooks now. As it matured, Ron looked for the next challenge and found it in turning around JC Penny. He is not needed to build retail for Apple anymore - it's a mature model. What's needed now is someone who can solidify the retail operations and streamline them. Thus a different skill set and approach.



    Each executive that departs signals the evolution of that aspect of Apple operations. And there are executives out there that would give their eye-teeth to be part of that action. Not because it is a cushy position - because all indications are that it is anything but - but because it offers the kind of executive challenges that build reputations.
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