Apple Lesson of the Day: Inventory Is Evil

By Evan Niu | More Articles March 23, 2012 | Comments (5)

here are !lenty o" lessons to learn "rom the lar#est com!any in the $orl% &y mar'et ca!( Even thou#h Apple (Nas%a)* AA+, ) -ust &reache% the ma#ical .500 &illion mar' "or the "irst time, -oinin# a select clu& o" com!anies to have scale% to such ca!itali/ation altitu%es, it0s still only hal"$ay to reachin# the mythical trillion1%ollar mar'et ca!( 2e0ve alrea%y 3oolishly %iscusse% a cou!le o" lessons that A!!le has tau#ht us so "ar, such as $hy !ro%uct %e!th is more im!ortant than &rea%th an% $hy in%ustrial %esi#n is so im!ortant( ,et0s tac'le another lesson that rivals shoul% &e ta'in# note o"( 4nventory is evil( Not just evil, but "fundamentally evil" here0s #oo% reason that im Coo' is no$ A!!le0s CE5, a"ter earnin# his stri!es as Cu!ertino0s C55 "or many years( 6es!ite the "act that he0s not a 7!ro%uct #uy7 li'e 8teve 9o&s $as, much o" A!!le0s o!erational !ro$ess an% un!arallele% su!!ly chain is %irectly attri&uta&le to Coo'( Coo' starte% at A!!le shortly a"ter 9o&s0 return as the last millennium $as $in%in# %o$n( +rior to his arrival, A!!le0s manu"acturin#, %istri&ution, an% su!!ly o!erations $ere a -um&le% mess( 4t $as his call to $ith%ra$ "rom manu"acturin# in "avor o" usin# contract manu"acturers, as $ell as to close %o$n $arehouses all over the $orl%( 4m!ortantly, this $as aroun% the time that Dell (Nas%a)* 6E,, ) $as ma'in# a name "or itsel" &y !ioneerin# the &uil%1to1or%er mo%el $ith com!uter assem&ly, $hich inevita&ly &ecame a mo%el o" e""iciency "or the $hole com!uter in%ustry( Coo' has al$ays vie$e% inventory as 7"un%amentally evil(7 :e0s note% that inventory ty!ically loses rou#hly 1;12; o" its value !er $ee' un%er normal con%itions, &ut can %e!reciate "aster $hen times are tou#h( :e even com!ares it to mil' that0s a&out to #o &a%* 7<ou 'in% o" $ant to mana#e it li'e you0re in the %airy &usiness( 4" it #ets !ast its "reshness %ate, you have a !ro&lem(7 :avin# inventory sittin# on the &oo's is a ris' in itsel", &ecause i" it0s not &ein# sol%, it0s &oun% to &e $ritten %o$n eventually, $hich can &e !ain"ul( 9ust as' Research In unsol% +layBoo's that $ere sittin# aroun% collectin# %ust( !an I "et your di"its# ,et0s ta'e this a ste! "urther $ith some col%, har% num&ers( here are t$o metrics that 40ll "ocus on* inventory turnover an% %ays o" inventory( otion (Nas%a)* =4MM ) ho$ it "elt $hen it ha% to eat a .>?5 million !re1ta@ non1cash char#e -ust a "e$ months a#o relate% to its #lut o"

4nventory turnover is ty!ically calculate% as cost o" #oo%s sol% %ivi%e% &y avera#e inventory, an% theoretically re!resents ho$ many times a com!any0s current inventory &alance coul% &e sol% an% re!lace% %urin# the !erio%(

4n #eneral, a hi#her num&er is &etter &ecause it in%icates #reater e""iciency $ith movin# the com!any0s !ro%uct, $hich minimi/es the ris' that it $ill lose value an% nee% to &e $ritten %o$n( A hi#her "i#ure sho$s that the com!any0s inventory is &ein# mana#e% !ro!erly( 6ays o" inventory is closely relate% an% is calculate% &ase% on inventory turnover( <ou #et this metric &y %ivi%in# the num&er o" %ays in a !erio% &y the inventory turnover( 4t theoretically re!resents ho$ lon# it $ill ta'e to sell throu#h the com!any0s current inventory &alance, &ut can also &e inter!rete% as ho$ much inventory a com!any has on han%(

4n #eneral, a lo$er num&er is &etter here, &ut not too lo$( 4" a com!any has an inventory shortage, then it0s leavin# money on the ta&le in terms o" unsatis"ie% %eman%( 4" it0s too hi#h, that li'ely means the com!any has too much !ro%uct an% runs the ris' o" #ettin# hit $ith the a"orementione% $rite%o$ns an% im!airments( :o$ %oes A!!le stac' u! to some o" its com!uter an% mo&ile %evice rivalsA 8ource* =euters( M B trailin# 12 months(

4n terms o" e""iciency measure% &y inventory turnover, A!!le lea%s the !ac' &y a lar#e mar#in( Even 6ell, $hich $as once re#ar%e% as the !ara#on o" e""iciency $ithin the +C in%ustry, trails A!!le0s lea%, althou#h it &ests its closest %omestic com!etitor, :+( ,oo'in# at historical %ays o" inventory a%%s a%%itional !ers!ective(

A!!le 6ays 4nventory 5utstan%in# Chart &y <Charts Note that the "i#ures in the chart %i""er "rom those in the ta&le a&ove, since the ta&le is !resente% on a &asis $hile the chart is not, an% the %ata on Motorola is limite% %ue to its s!ino"" in 2011( Apple: Inventory e$traordinaire 2hile it can &e susce!ti&le to shorta#es every no$ an% then, Cu!ertino has mastere% the ancient art o" &alancin# its inventory 11 'ee!in# -ust enou#h on han% to meet sur#in# %eman% $hile minimi/in# im!airment ris'( M

Most o" its inventory is carrie% at its retail stores, an% anyone $ho has or%ere% "rom its online store $ill notice that !ro%ucts are "re)uently shi!!e% %irectly "rom the manu"acturin# "acilities in China( 4n those cases, A!!le never ta'es !ossession, so it never &ears the ris' o" eatin# $rite%o$ns o" those !ro%ucts( A!!le0s su!erior inventory an% o!erational a#ility are to%ay0s A!!le ,esson o" the 6ay( A!!le is one o" the lar#er !layers usherin# in the mo&ile revolution, &ut there are !lenty o" $ays to !lay it( he Motley 3ool has -ust release% a ne$ s!ecial "ree re!ort on he Ne@t rillion16ollar =evolution( 4n it, you0ll "in% the name o" a relatively small chi! ma'er that0s !o$erin# the revolution "rom insi%e the #a%#ets( Cet the "ree re!ort no$(