SUPPLY CHAIN MANAGEMENT

APPLE

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1. Critically discuss how Apple’s strategic supply chain management creates sources of
competitive advantage for the company

ANSWER

Competition is at the core of the success or failure of firms. Competition determines the

appropriateness of a firm's activities that can contribute to its performance, such as innovations, a

cohesive culture, or good implementation (Porter, 1985). A competitive advantage is an advantage

over competitors gained by offering consumers greater value, either by means of lower prices or

by providing greater benefits and service that justifies higher prices (Argote, 2000). Competitive

Advantage is all about how your organization is being different from your competitor. Firms these

days, whether small or large, new age companies like Amazon, Ola or age old firms like the Tatas,

the Godrejs or Maruti, all want to gain competitive advantage. Firms can gain competitive

advantage through many ways, be it Cost leadership, catering to niche markets. Supply chain plays

important part in any organization. Firms stand at a very crucial stage, today. For one, they need

to make themselves respond quickly to the change in the needs of customers. Moreover they also

need to adapt to new product and process development and new technologies.

Below is how Apple’s strategic supply chain management creates competitive advantage for the

company:

The first thing Apple does to gain competitive advantage through its strategic supply chain

management is an effective customer relationship management. Customer relationship

management talks specifically about the need to prioritize customers with the aim of satisfying

their needs thereby maximizing revenues and profitability by targeting the available resources. A

supply chain based on close customer relationships has the greatest potential to generate unique

solutions that combine elements of timeliness, availability and consistency to exactly match

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desired values at prices customers are willing to pay (Barrat, 2004). It must be noted here that, the

success of a tailored service relationships depends upon the firm’s managers’ understanding of

their strengths in comparison to the differing needs and desires of each customer or customer

segment. It can confidently be said that the executives of Apple indeed possess the required

understanding. Once the specific needs of each customer or segment are understood, the customers

or the segments are prioritized based upon their strategic importance.

Thus, Apple is able to do this tough job of keeping all of its customers satisfied and at the same

time able to improve its economic profits by prioritizing its customers. From the case study, it can

be gleaned that Apple prioritizes it customers by targeting the consumer market rather than the

business-to-business (B2B) sector and delivering total solutions to its customers through tightly

integrated design of hardware components. This is supported by Gartner’s assertion that the

company has a zealous focus on starting with the consumer experience and working back through

the design of its supply network. Also, the decision by Apple to undertake a reverse supply chain

throws more light on the prioritization of its customers. Through the reverse supply chain, Apple

has collaborated with third party companies to handle its product recalls, recycling returns and

returns due to customer dissatisfaction or repair. An effective handling of returns is a competitive

advantage in the highly competitive personal computer industry in terms of customer satisfaction

and reducing costs. To satisfy its customers has always been the underlining drive of Apple and

this can be gleaned from the case study in this statement “customers come first”

Another strategy Apple is embarking to gain competitive advantage is through collaborative

supply chain. Thus, collaborative relationships with suppliers. Collaborative relationship is about

developing win-win situations with suppliers. This collaboration with suppliers helps a company

in the following ways:

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• Increase in in-stock fill rates

• Reduction in lead times

• Improvement in forecast accuracy

• Increase in inventory turnover

Apple is seen as one of the best if not the best in maintaining a close relationship with its suppliers.

In describing the relationship Apple has with its suppliers at a conference in 2010, Steve Jobs, the

founder of Apple had this to say; “I actually think Apple does one of the best jobs of any companies

in our industry, and maybe in any industry, of understanding the working

The collaborative relationship Apple has with its suppliers can be seen from the fact that Apple

allowed it suppliers to set up warehouses in close proximity to it. This enabled the suppliers to

have better information about Apple’s needs and the consumption patterns of their parts, as well

as about the inventory in transit resulting in a more effective management of inventory

replenishment and inbound logistics by the suppliers. This helped Apple to reduce the supply

uncertainties for Apple. Also, Apple is bent on improving conditions within the factories of its

suppliers, and has come out with a supplier code of conduct that details standards on labour issues,

safety protections and other topics. Apple is close to suppliers and manufacturers, working to

engineer the industrial process that delivers prototypes into finished consumer goods.

Furthermore, Apple uses transformational agile strategy to create a competitive advantage with its

supply chain management. Agility can be defined as a firm’s ability to quickly adjust tactics and

operations within its supply chain to respond to changes, opportunities and threats in its

environment (Gligor et al., 2013). Very few firms today have a clear cut supply chain strategy, let

alone transformational agile strategy. The following is the account of Apple’s transformational

agility strategies it has employed over the years;

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 The ability of Apple to balance outstanding serial innovation and addictive product design,

which commands premium pricing and redefines markets, with intense efficiency in

operations, is indeed an agile move. This is in the sense that the combination contradicts

conventional wisdom which maintains that, if a company’s competitive advantage is based

on intense efficiency and value, it will not invest beyond what is absolutely necessary in

terms of innovation, design, or service. Conversely, a conventional company competing on

innovation, outstanding design, or service excellence will not be able to reach intense levels

of efficiency, since these capabilities are costly to develop and maintain.

 The rationalization of warehouses for finished products and the cutting down of the number

of suppliers as well as the setting up supplier factories near Apple’s facilities displays the

agility of Apple. This is in the sense that though it enhanced Apple’s bargaining power and

made components to be delivered just-in-time it also slashed off manufacturing time.

 The creation of completely new markets repeatedly, from disruptive innovation is once

again a display of agility by Apple. This is due to the fact that Apple was the only global

company to be successful at creating entirely new markets as most companies have been

unsuccessful at creating completely new markets, either by being the first to enter entirely

new geographies or through ‘disruptive innovation’ that creates completely new products,

services, or business models. Through this move, Apple experienced a significant growth

which most companies have, on average, derived a negligible portion of growth.

 The decision of Apple to stop producing its product in USA and now produce it in low-

cost countries such as China and the decision to outsource manufacturing to countries such

as China is a transformational agile strategy. This helped Apple to produce at low cost and

also to have tremendous ability to scale and dominance of the supply chain.

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  Apple’s heavy investment in new technology with the aim of diving deeper into designing

and inventing technology for its manufacturing process is an agile move. The company

invested US$10.5 billion in new technology, from assembly robots to milling machines

that produce its products. Through this, Apple is able to increasingly strike exclusive

machinery deals and outspend peers on the tools that it then places in the factories of its

suppliers.

 The decision of Apple to transport its products by the more expensive option of air freight

rather than the usual industry means by sea is without doubt an agile step. In an attempt to

ensuring that its products be readily available for the 1998 Christmas season, Apple prepaid

US$50 million for all available holiday air freight space which later inhibited rivals that

later wanted to book air freight. This same thinking was used in 2001 for the shipment of

the iPod from Chinese factories to consumers’ doors. This new procurement mentality of

spending exorbitantly on the front-end and reaping the benefits from greater volume on the

supply-side is now part of Apple’s sourcing strategy.

2. Evaluate the main drivers for collaborative relationships that Apple Inc. has created with

its suppliers

ANSWER
One of the topical issues in business in recent times especially in the operations management

domain is the issue of co-operation between entities in a supply chain. Due to the fact that

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companies cannot successfully compete by themselves, they therefore seek establishment of

arrangements with other entities in the supply chain. Terms like integration, collaboration,

cooperation and coordination are complementary to each other in a supply chain as they consist of

similar elements (Spekman, 1998). Supply chain collaboration has become a powerful instrument

businesses use in achieving effective and efficient supply chain management. It can range from

very shallow transactionally focused to highly integrated close relations (Goffin et al., 2006); from

collaborative communication to supplier development (Oh and Rhee, 2008); or from inward facing

to outward facing (Frohlich andWestbrook, 2001). Before collaboration is possible, potential

partners need to be targeted (Goffin et al., 2006). Hence, it is extremely important for businesses

to make accurate choices about who to work with closely as efforts in supply chain collaboration

do not always lead to improvements (Vereecke and Muylle, 2006).

Globally, Apple has been one of the few businesses which have been successful in supply chain

collaboration over the years. The company has chalked great feat since it started collaborating with

its suppliers. The company recorded revenues of US$156,508 million during the fiscal year ended

September 2012 (FY2012), an increase of 44.6% over FY2011. The operating profit of the

company was US$55,241 million during FY2012, an increase of 63.5% over FY2011. The net

profit was US$41,733 million in FY2012, an increase of 61% over FY2011. Apple was the most

valuable listed company, with a market value of US$623 billion, in August 2012 and has gathered

the highest accumulation of cash reserves (US$121 billion in September 2012) of any listed

company. It regularly achieves net margins of above 20% in industries where most competitors

achieve single-digit margins.

One of the factors that drove Apple into collaborative relationship with its suppliers was the effect

of demand uncertainty. Demand uncertainty is the probabilistic nature of demand quantity, types,

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timing, and locations. It could be in the form of errors in the demand forecast (Schmitt, 1984),

changes in customer orders (Pujawan & Smart, 2012), uncertainty about the product

specification/mix that the customers will order (Li et al., 2006) and competitor actions regarding

marketing promotion (Wong et al., 2011). An empirical study involved 106 manufacturing

companies by Pujawan and Smart (2012) suggested that most manufacturing companies

experience order volatility from customers. Manufacturing companies, especially those producing

innovative products, face shrinkage in product life cycle and increasing competition in the market.

This ultimately creates demand uncertainty and forcing supply chain players to markdown product

prices. Supply chain flexibility is important to cope with the dynamic nature of demand. It must

be noted that long-lead times contrast with responsiveness (Jain et al., 2009). Thus, the longer the

lead times are, the less-responsive companies are to market changes. It has been found that

electronics manufacturing companies have a long lead time between 75-100 days and that the

combination of this long lead time together with high-demand uncertainty causes them to be

actively looking for close collaboration with partners.

It can be gleaned from the case study that demand uncertainty is a driver for collaborative

relationships that Apple created with its suppliers due to the following:

 Apple is described by Gartner as a master at delivering total solutions to its customers and

that Apple has a zealous focus on starting with the consumer experience and working back

through the design of its supply network.

 The fact that sales of iPods (one of Apple’s product) grew massively with many of those

sales increasingly made over the Internet. Hence, the need for a global logistics operation

to fulfil this demand.

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  Apple was 2013 ranked first in Gartner’s Top 25 Supply Chain survey, the sixth

consecutive year that the company has achieved this feat. Now, the core issue the survey

considers is about demand driven excellence, with three overlapping areas of

responsibility: supply management (planning, sourcing, manufacturing, logistics), demand

management (marketing, sales, and service), and product management (R&D, engineering,

and product development). Thus, if Apple was not excellent at meeting the demands of it

customers which without doubt were made possible through its supply chain management,

the company would not have been ranked first in the survey.

Another driver for the collaborative relationships Apple created with its supplier was the incidence

of supply uncertainty. It is a fact that in situations of market upturns, demand easily exceeds

capacity. The result is that capacity needs to be rationed over customer demand, which leads to

supply uncertainty for their customers. To avoid such situations, companies prefer collaborative

planning activities together with customers. In a research by Sander de Leeuw on the drivers of

close supply chain collaboration, a semiconductor company specifically mentioned product yield

uncertainty as an issue driving collaboration. Owing to the nature of their product, yield in

semiconductor manufacturing is variable (Uzsoy et al., 1992) and therefore a source of uncertainty.

Also, one retailer quoted that about 60 per cent of the deliveries arrive in the week planned; they

considered this as rather low delivery reliability typical for its fashion industry. Companies which

experience relatively high-uncertainty in timing of the deliveries compared to other industries go

into close collaboration with their suppliers. Hence, supply uncertainty is a major reason to

collaborate more closely with suppliers.

The incidence of supply uncertainty is said to have driven Apple into collaborative relationship

with it suppliers due to the fact that Apple initially estimated that it would take up to nine months

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in the USA for the company to find 8,700 industrial engineers to supervise the more than 200,000

assembly-line workers involved in manufacturing iPhones. However, factories in China generated

this workforce in 15 days. Hence, it was prudent for Apple to collaborate with it suppliers in China

to ensure that its products are available and easily accessible by customers at regular periods.

Furthermore, Apple as a leading customer was first in line for supplies and it had inventories for

several weeks, so there was little immediate impact on the company or its customers when Japan,

one of the countries of Apple’s suppliers was hit with a massive earthquake and tsunami in March

2011 caused major disruptions to suppliers’ operations.

Furthermore, the effect of market growth is seen as one of the factors that drove Apple into

collaborative relationships with its suppliers. The fact is that in situations with growing demand

that exceeds capacity (the “upturn”), it is important to have agreements with suppliers and with

customers about the capacity available and about order fulfillment procedures (Oliva and Watson,

2009). However, in a “downturn” when demand is much lower than capacity, the focus on close

collaboration is not as intense as in an upturn as there is sufficient capacity available in the industry

during downturns.

Gleaning from the passage, market growth served as a driver for the collaborative relationships

Apple developed with its suppliers owing to the fact that Chinese workers add no more than

US$6.50 to each iPhone 3, which is only 3.6% of the shipping price of the product. The implication

is that the high margin iPhone could be profitably assembled in the United States or any other high

wage country and that it is the profit maximisation behaviour of Apple rather than competition that

pushes the company to have all iPhones assembled in China.

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The effect of supplier capabilities is also one of the drives that led Apple into collaborative

relationships with it suppliers. Supplier capability has been found to be a key factor for intense

supply chain collaboration. In high-tech cases especially, collaboration is found to be important

with suppliers of key products for which there is no expertise in-house. The uniqueness of

capabilities combined with the availability of these capabilities without doubt drives the need for

close collaboration. Also, innovative capabilities of suppliers play a key role in the intensity of

supply chain collaboration. Some companies work very closely with those suppliers who can

improve some aspects of their products like product packaging. Due to the fast evolving packaging

materials and packaging types, new technology is needed frequently to accommodate new

packaging methods. One advantage of this is that considerable savings in supply chain costs is

achieved by optimizing packaging design. Close supply chain collaboration with suppliers who

can provide such innovative capabilities is therefore deemed critical.

From the passage, although Japan’s importance in the semiconductor industry as a whole had

receded in recent years, as more production had shifted to South Korea, Taiwan and China, Japan

still produces a high share of certain important chips like the lightweight flash memory used in

smart-phones and tablet computers. Japan makes about 35% of these memory chips and Toshiba

is the major Japanese producer. Industry analysts estimate that Apple buys perhaps a third of its

flash memory from Toshiba, with the rest coming mainly from South Korea because Toshiba has

the capabilities to meet the specifications of Apple.

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3. Discuss the factors that Apple might consider when developing a strategic supply chain

plan for re-shoring’ manufacturing capacity from low cost countries back to the USA

ANSWER
Reshoring is the process of returning the production and manufacturing of goods back to one's

own country. It is also known as onshoring, inshoring or backshoring and the opposite

of offshoring which is the process of manufacturing goods overseas to try to reduce the cost of

labour and manufacturing. Despite the fact that offshoring often has financial benefits, including

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cheaper labour and cost to produce goods, reshoring is one of the great ways used to strengthen

the economy of the home country. This is because it creates manufacturing jobs, which strengthens

the workforce and reduces unemployment, and helps balance trade deficits. Reshoring also

benefits manufacturing companies by reducing the total cost of their products, improving balance

sheets, and making product innovations more effective. In many cases, companies even find that

the extra cost to manufacture in America is so slim that the benefits would outweigh the labor

costs, especially considering the fees involved with customs and shipping from overseas. It is

important to note that while reshoring is a great way to stimulate the economy at home, some

products are best left offshore, particularly those native to other countries. For example, products

grown locally in China are often best manufactured there to stay close to the source. Relocating

manufacturing operations back to the U.S. from Asia, European and South American countries is

a growing trend. There is a steady increase in the number of companies considering reshoring their

manufacturing operations to the U.S. Reshoring does not always have positive results for the

companies involved, however. If the effort is poorly managed or thought out, or if the

circumstances aren't conducive to the transition, reshoring efforts can fail. Often, a company

underestimates the costs and the logistical planning involved. Hence, before any company will

undertake any reshoring project, manufacturers like Apple need to conduct a comprehensive cost-

analysis of overall costs and benefits of relocating. It must be noted that several of the important

factors in a company’s original offshoring decision have dramatically changed. As a result, before

Apple will reshore its manufacturing back to America, it has to consider the following in its

strategic supply chain plan:

The first is the cost of production. The costs related to the downtime required to facilitate a move

to the U.S. and all of the possible “hidden” costs must also be part of the overall equation for a

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Apple when considering reshoring. The total cost of moving production overseas is hefty, taking

into consideration factors like engineering, pre-planning, and cost to package, transport and re-

install production equipment and process lines in the U.S. Additionally, duties, customs and other

fees associated with exporting a company’s product should be compared to that of distributing the

product in a new location. The recent drop in natural gas prices in the U.S. has created cost

efficiencies and advantages for manufacturers. Also, rising oil prices have resulted in increased

shipping costs for manufacturers bringing goods into the U.S. Therefore, by setting up operations

back in the U.S., Apple must appraise whether it would experience certain advantages such as

reduced energy and transportation costs.

Closely related to the above is labour cost. Labor issues is an important part of the cost equation

as rising labor costs are challenging profitability for manufacturing companies especially those

located in Asia. According to a recent PricewaterhouseCoopers LLP report, manufacturing labor

costs in China have risen by more than 80% from 2008-2011. The study also indicates that Chinese

labor costs will continue to rise at a similar rate for at least the next four years. As a result, Apple

need to evaluate the increasing flexibility and productivity of the American worker, along with the

increase in advanced manufacturing techniques that makes production less labor intensive so as to

reduce labour cost to its minimum level. Aside the labour, Apple also needs to consider the labour

skills availability. One of the critical factors Apple must look at before reshoring to the US is the

human level – the skills available in its line of operations. Most companies lost millions because

they didn’t have the skilled labour to fill orders when they reshored back to America.

Another factor which is worth considering by Apple in making the decision to reshore its

operations back to the U.S is currency fluctuations. Combined with the weak U.S. dollar, American

and overseas manufacturing companies can now get more return on their investment in the U.S.

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for expansion and production. Overall, economists predict a stable long-term economic outlook in

the U.S., particularly when compared to many other countries.

The vetting process for companies considering reshoring also includes an examination of post-

move factors, such as regulation, logistics and transportation. If environmental impact is a concern,

Apple should consider whether the environmental regulation (or proposed regulation) is more

intense at the U.S or the existing location of manufacturing, and any financial impact incurred as

a result. This is because most manufacturing companies face hurdles from new healthcare

legislation, stringent EPA and emissions regulation guidelines and corporate tax rates in-flux.

Apple also needs to take a broad look at their business models and consider the big picture when

thinking about reshoring. The real challenges for global product strategy are how to develop

flexible platform products for global markets that accommodate the legal, size and customer

requirements in every country. Therefore, while improving one or two aspects of the business that

are causing concern may save considerable amounts of money, the savings could be lost in other

areas that are affected by the change.

Lastly, Apple need to assess itself to see if it is ready to automate. There is no question that the

wage gap between the US and China has narrowed. But it hasn’t disappeared entirely. For that

reason, “automation is really important if Apple is going to extract low cost labor out of its

production. Thus, Apple can do this by automating its processes through 3D printing, robotics,

and other automated technologies.

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