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Company Background

Found in 1976 by Steve Jobs, Steve Wozniak, and Mike Markkula, Apple Inc. is one of the most successful technology company in the decade. Being the world’s largest IT company in terms of revenue, the world’s largest technology company by total assets, and the world’s second-largest mobile phone manufacturer by volume, after its competitor Samsung, Apple has the following mission: “Apple is committed to bringing the best personal computer experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software, and Internet offerings.” By 2016, the company has 478 retail stores in 17 countries. Moreover, consumers worldwide use more than 1 billion apple products.

Question 1

a)Give a brief summary of Apple’s history and its development.

History
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Apple Computer was founded on April 1, 1976 by Steve Jobs, Steve Wozniak and Mike Markkula (from left to right) to manufacture and distribute computers. The first computer was called “Apple I” and it was sold 200 units. Afterwards, Wozniak improved the design and showcased the Apple II in 1977.

The company held its initial public offering in December 1980 and became the largest private manufacturer of personal computers in the US. However, The entry of IBM into the market in 1981 greatly affected the leading position of Apple in the industry. IBM became the best-selling computer in the US by 1983. Despite tremendous marketing effort as well as the popular Super Bowl commercial broadcasted in 1984, Apple could not stop IBM from taking away its leading position.

Steve Jobs left the company in 1985 and the company had started its recession, which lasted for a decade. Although it launched a line of Mac computers such as Quadra, Centris and Performa, it failed to regain traction in the marketplace. Moreover, its retail partners did not devote resources to displaying its products properly and customers perceived its products as more expensive than Window PCs, its rival. As a result, the company failed to recover from the situation.

The introduction of Windows 95 greatly hit Apple’s sales and the company began licensing the Mac operating systems to 3rd party manufacturers. From 1993 to 1996, Apple went through three CEOs: John Sculley, Michael Spindler and Gil Amelio.

Steve Jobs returned to Apple Computer as CEO in 1996. One of Jobs’s decisions was to stop licensing Apple’s Mac operating system. And later in 1997, Apple, collaborated with Microsoft, released the dominant office software – MS office for Mac, but the situation had not been improved. Between 1998 and 2001, the company launched iMac computers that focused on design and led to great company success. In May 2001, it announced its opening of the first own retail store. In October the same year, it introduced the DAP – iPod portable with the iTunes music store, and again, it was a big hit in the market and helped consolidated the financial base of the company for further growth. Soon after its introduction of iPod, the company opened its first overseas retail store in Japan in 2003.

app-store-icon.pngBetween 2004 and 2007, Apple launched a series of products containing significant technological advancements such as the iPod Video, the iPod Touch and the iPhone. From 2007 to 2013, Apple’s success with its music players and iPhone had allowed it to further upgrade its products. During that period of time, Apple also introduced new Mac computers and other products such as Apple TV and developed its app store, where 3rd party developers can list their apps for Apple product users to download. In April 2010, it took the tablet computer market by surprise through introduction of the iPad, adding a feather in Apple’s glorious hat.

b)Review Apple’s supply chain for its iPhone product, what differences set it apart from competitors?

With reference to the case, the competitors of Apple at that time were Nokia, BlackBerry, and Samsung. Apple has successfully differentiated itself from its competitors by controlling its supply chain effectively and efficiently and gained manifest competitive edges.

Apple has a superior degree of control over its supply chain, it enables the market-leading company to change product design and production more easily whilst its competitors outsource the entire production and management of the supply chain. Moreover, Apple has a highly integrated, centralised R&D department pivoting the whole company, which prevents the occurrence of silos between different departments by enhancing communication. It also allows and encourages the sharing and use of designs on different products, hence streamlining the supply chain processes. On the contrary, its competitors have separated R&D and profit/loss accountability for each product segment.

In terms of supplier selection criteria, Apple prefers to have a close relationship with its suppliers. In other words, relationship with suppliers is more important than the quoted price. It even pays for the machinery in exchange for the volume commitment whereas its competitors prefer suppliers with the lowest price and highest volume commitment. The company also purchases the production capacity in advance while others purchase when needed.

Moreover, the innovative firm always looks for ground-breaking approach to accelerate the supply chain. For instance, back to 1990s, it used expensive air-freight when most computer firms were still relying exclusively on sea shipments. In 1998, the company purchased all available holiday air-freight, paying $50 million for the ensurance of delivering Apple’s new iMacs to stores for the holiday sales rush. Even now, the company is still using air freight to ship its iPhones and other products.

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The world-leading corporate also has a superior level of customer services. Its renowned “reverse logistics” finishes handling the product return within 48 hours. Apple allows consumers to enter data regarding the defect on the Apple website and uses courier to collect and deliver defective/repaired products. In contrast, for ordinary return process, customers would have to bring the defect product to the store with a receipt, and the store would take the item, issue a refund, then hold the presumably defective item until it could be delivered back to the manufacturer. The customer service level is manifestly lower as compared to Apple.

The close management of its supply chain even extended to the packaging of its devices. The use of plain boxes can avoid detection, and monitor every handoff point for ensuring each unit is accounted for.

The high level of control over the entire sophisticated supply chain has successfully set Apple apart from its competitor, kept cost low while maintained a high level of customer service, and allows the company to focus on its core business – Innovation.

Question 2

What are Apple’s key advantages in how it manages its supply chain operations? Support your analysis with data from the case.

Before discussing Apple’s key advantages with respect to its supply chain operations, it is important to understand Apple products’ nature, their demand and supply characteristics. Apple products are expensive, tech-related, and with highly innovative nature. Though Apple products, in general, are highly perishable (with average product shelf life of 12 months), they are considered to be of medium perishability when compared to industrial standards.

Demand-Driven-Logistics.pngTaken into consideration of the aforementioned product characteristics, Apple deploys a pull strategy and launched pre-ordering systems, such as online order and order via text messages, to gauge demands beforehand and supply accordingly. Moreover, in light of its product perishability, Apple stresses great importance in Just-In-Time (JIT) supply. By 1) coordinating its design teams near manufacturing sites for seamless translation from prototypes to mass-production devices; 2) cutting down the number of component suppliers from 100 to 24; 3) shutting down 10 of its 19 warehouses, 4) owning UPS and FedEX warehouses, and 5) shipping products directly to customers instead of via buffers (such as warehouses or in consolidated batches), the lead time of Apple products can be reduced drastically.

With the use of a JIT supply chain, not only did Apple achieved an average inventory turnover of 5 days in 2012 (its rivalries, Samsung and Dell, had 10 and 21 days respectively), but resulted in higher flexibility for its inventory storage since it only needs to keep two weeks’ part components (in accordance with its estimated demand) as safety stocks. In an attempt to present a holistic picture of Apple Inc.’s successful practices, the following cases as dissect Apple’s secret to success will be examined – a sophisticated supply chain.

Success examples of Apple Inc. ‘s supply chain

shutterstock_190917404-300x3001.) Seamless integration of design, sourcing and manufacturing

Chief Design Officer (CDO) Jonathan Ive wished to penetrate small holes in Macbooks, Trackpads and wireless keyboards for green lights to pass through metal surfaces as to indicate devices are in use. However, it is difficult to pierce small holes on hard metal surfaces with great precision. By then, Jonathan found a perfect solution – laser equipment which could achieve desired outcomes. Subsequently, an agreement was signed between Apple Inc. and the laser equipment manufacturer to secure exclusive usage.

In this case, we can see not only did Apple constantly revolving its designs, but also actively participated in partnering with key suppliers through exclusive agreements. As a result of such efforts, Apple can guarantee its product quality and govern costs.

Logistics.png2.) Foreseeing logistical demand and exerting logistical advantages

In 1997, Steve Jobs prepaid $50 million to buy up holiday air freight to ensure iMac would be delivered on time at Christmas. At that time, market competitors primarily use cheaper transportation methods (such as sea) to ship their products. During Christmas that year, due to peaking demand, Compaq’s, Apple’s business rival, logistics were handicapped as a consequence of Job’s prepayment to dominate all commercial freights.

Also, in 2001, Jobs, taken into consideration of the diminutiveness of iPod, alternated its shipping method from using sea to air, resulting great savings in cost and lead time.

From the above two examples, we can see Jobs is a farsighted leader who is willing to adapt to new approaches when dealing with product logistics. It is through trial-and-error that Apple Inc. discovered direct shipping would attain higher degree of customer satisfaction whilst maintaining optimal efficiency (reduced cost).

Investment-Finance-shutterstock_258863162-e14468284542733.) Adequate leveraging of capital investment

In 2010, Apple Inc. planned ahead and purchased a significant amount of screens prior to the launch of iPhone 4 as safety stocks. HTC, a competitor of Apple’s iPhone product line, suffered great losses due to lack of display supplies.

Similarly, before the launch of iPad 2, Apple bought a vast amount of high-end drills which were essential for the production of general consumer electronics, repercussing delays in competitors’ production time and capability from 6 weeks to 6 months.

Learning from the above two cases, we applaud for Apple Inc.’s providence in respect of its excellent inventory leadership in foreseeing demands for part inventory and equipments.

Internal-Audit.jpg4.) Excellent internal inspection and management

Electronic monitors were placed in boxes carrying iPad 2 before its debut as to monitor efficiency in supply chain processes at loading docks, airports, truck depots and distribution centers, data collected was then used to further improve parts of its logistical chain. With such measures, Apple Inc. is able to conduct trouble-shooting correspondingly, and can take corrective actions in inefficient processes.

Apart from making good use of technology to govern supply chain efficiency, the current CEO of Apple Inc. Tim Cook, always inspires its subordinates to “Compete Against Time” by giving them copies of the same title. With lessons learnt from other successful businesses, such as FedEX, Ford and Wal-Mart, staff of Apple Inc. is motivated to adopt different approach to enhance supply chain efficiency.

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Competing Against Time, By George Stalk, Jr. Thomas M. Hout

5.) Sophisticated information management system

inventory-management-techniques-1024x579.jpgProducts of Apple Inc. have its own unique serial number, which facilitates verification processes for in-trading, warranty-claiming, and remanufacturing/ refurbishing of products. Furthermore, it also has a sophisticated reverse logistics system which provides customers one-step warranty-calming services through uses of pre-mailed boxes. Upon receiving customers’ mailed defective products, non-defective component parts are extracted for remanufacturing or refurbishing, whilst defective parts are sent to be repaired.

Question 3

a)What are the challenges that Apple faces in the future?Supply-chain-listicle.png

  1. Fast and unstoppable supply chain

The first challenge Apple would potentially face will be about their supply chain efficiency. Due to product characteristics of Apple’s product, which are innovative products, its product life cycle is very short. For instance, iPhone’s product life cycle is approximately one year. Innovative products are very sensitive to the customer demand as they may be easily outdated after the sudden hit of the product. To fulfil requirements from customers immediately, Apples deploys flexible supply chain for the orders. If there are accidents and sudden changes for the product production, instant reaction is also needed to keep the whole supply chain run smoothly and fast.


foxconn-iphone_productionFor example, there are cases where Apple requires last minute changes before the device needed to be on shelf before. According to a former executive from a Chinese iPhone manufacturing factory, due to redesign of the screen at the last minute, assembly was required at the midnight. About 8,000 workers were roused and within 30 minutes, a 12-hour shift had started. The speed of production was very fast and over 10,000 iPhones per day within 96 hours after the demand alert.

From the above example, it shows the rapidity and flexibility of Apple Inc.’s supply chain which means it requires high quality suppliers and manufacturer that are capable to provide such reliable production pace in their factory.  

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  1.  Difficulties in reacting the overwhelmed demand

Apple has chosen Just-In-Time strategy in their supply chain management, which requires highly flexible and responsible suppliers for providing components at the right time. In order to determine the right amount and time for ordering, a reliable forecasting model for predicting product demand is needed. Besides, final changes before releasing may increase extra labour cost and resources that is difficult to obtain immediately at the time required.

iphone-6splus-colors.jpgA good example for illustrating this situation is the unexpected demand for iPhone 6S and iPhone 6S Plus during their launch in 2015. Customer demand to the new model was very positive and the pre-order exceed company’s own forecasting, especially for the online demand. At the same time, problem about the backlight of the product arise and requires instant shift of another supplier. From Minebea Co. Ltd to Radiant, with a rush order that can increase Radiant’s supply of iPhone 6S Plus backlights from 40% to 80%. Due to the mentioned reasons, the shipment time was pushed out 3 to 4 weeks after the official launch in September 25.

Under the external and internal pressure of the iPhone 6S supply, it indicates potential difficulties of Apple company in reacting the overwhelmed demand, as well as the supplier management issue in their core components.

  1.   Difficulties in maintaining suppliers’ relationship

partner-relationship-management-3Unlike other companies that outsource the whole manufacturing process, Apple company focus more on their procurement of components so that to ensure their product quality. After they have identify a good supplier, it will then order their key components from that single manufacturer. However, manufacturers may also serve other companies and the production capacity is limited. To secure supply, Apple will purchase the production capacity in advance so that the supply will be steady and reliable. Under this strategy, it limits the suppliers from getting more business. On the other hand, suppliers may increase the carrying cost of component as they need to keep the inventory 2 weeks in proximity for the assembling. In addition, the suppliers cannot receive the cost to carry the parts immediately as the payment from Apple can be as long as 90 days after the parts were used. Under these circumstances, suppliers may not want to co-operate with Apple even it can provide large amount of advance payment.

For instance, some suppliers reject Apple’s order and investment, such as a major parts manufacturer refuse to sell its production capacity under a $1 billion initial payment from Apple. Despite the above reasons, another point will be the worry of Apple’s approach of low price and high quality requirements will impact on other customers’ expectation and requirements.

From this example, the suppliers relationship of Apple may face potential challenges and requires extra cost and efforts on suppliers’ relationship management.        

b) What are the implications for its supply Chain?

  1. Closely linked with suppliers

handshake-pano_19966.jpgIn order to keep the whole supply chain fast and flexible, Apple puts effort in controlling the entire supply chain, but not simply outsource the manufacturing process to third party.Start from the design process, Apple designers work closely with the suppliers to monitor and make sure from the prototype to the final product will be exactly the same as their design. Furthermore, the R&D department and accounting department that in charge of the profit and loss will also be linked and highly integrated to ensure the whole process is under Apple’s control.

Using this strategy can reduce uncertainties and  probability of miscommunication between different parties, such that the entire process can be speed up and errors can be effectively reduced. Apple can also keep the power for management decision so to enhance product quality.

  1. Orders forecasting and demand alert

One of the characteristics of innovative product is difficult demand forecasting due to the fluctuation of customer demand. Apple develop a complicated forecasting model to forecast their sales so that to increase their revenue. The product demand is forecasted 150 days in advance and keep updating continuously in suppliers’ data for them to adjust the production accordingly. To ensure the production capacity is available, Apple also sign agreement beforehand with the suppliers.00af5d1

Despite the forecasting before the launch, it uses historical data of inventory level to adjust the demand forecast every quarter to make sure the data is under relevant time basis. With the order forecasting and demand alert, Apple is capable to have a reactive and secure process to react with the unexpected demand.

  1. Production incentives towards suppliers

As Apple sources from single suppliers and rely highly reactive supply chain, it gives production incentives to its suppliers for steady supply of their product. Purchasing the production capacity, upfront capital investment, prepayment and material purchase commitments are the frequent methods it uses.  Not only reserving the production capacity, Apple can also negotiate the lowest price and volume commitment per order through giving those production incentives.

For example, Apple formed a deal with GT Advanced Technology Inc. for the furnace equipment to produce sapphire materials for covering smartphone lenses and home buttons. In exchange, Apple prepaid $578 million of investment and GT Advanced would pay Apple back over 5 years. Although the deal will limit the ability to make additional business, it will increase the sales of that machine from 31% to 80% of the entire company’s business. The total revenue is predicted to be $600 million to $800 million.

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With production incentives, it can increase the motivation of the suppliers and increase the efficiencies of their production. Besides, the enhancement of partnership relationship between Apple and suppliers can increase the sense of commitment and improve the product quality through better technology provided by Apple.

  1. Reverse Logistics

Different from normal supply chain practice, Apple applies reverse logistics system that combines warranty claims, trade-ins and recycle and reuse program. Customers with return needs for Apple products can easily register online. Apple will then send a confirmation email followed by a pre-addressed, pre-stamped box for the customer to return the product after 48 hours. Without stepping out of their office or home, customers can return the item to Apple. As the overall process is rapid and responsive, it can increase customer satisfaction and service experience.

Furthermore, Apple can fix the returned product and resell as refurbished product with a label “Apple Certified, Good as New”. As a result, it can reduce cost of material as they can re-manufacture from the used parts.

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Question 4

As Jessica Grant, what recommendations would you make to the company’s VP?  Explain.

We would recommend to increase the holding of Apple Inc. stocks in BXE portfolio. The reasons are of multifold, which are listed in the following:

1. Great Capitalizing Capability

The stock value and great sales of Apple products have made Apple Inc. a very fast growing company with tremendous amount of capital. By Feb 2014, Apple had cash $160 billion and its stock price was at $524.4.

150908192226-tim-cook-apple-logo-thinking-780x439Secondly, Tim Cook, the CEO of Apple, had promised the investors and stakeholders that “Apple was focused on the future, and it had a solid pipeline of new products.” in Apple’s annual shareholders’ meeting on February 28, 2014.4. From the words of Tim, the confidence of stakeholders had been greatly instilled, making Apple a more creditable company in the long run. As a result, it is believed that the stock price could keep growing.

From the above figure, although the sales of iPhone had an slightly decreasing trend, it could reflect the market value and growing potential of iPhones.

2. Successful Product Team and Supply Chain

New products are developed through tight internal cooperation and communication. There are internal group handling the hardware, software, and production parts of the new product. For instance, the production and internal design team work together to better control the quantity produced. Furthermore, designers, suppliers and manufacturers closely cooperate to facilitate mass production.

In terms of protection towards intellectual property, Apple acquired licenses for intellectual property and acquired technology companies that make key components.

As for R&D, Apple invested $ 4.5 billions in 2013,  $3.4 billions in 2012, and $2.4 billion in 2011, which had helped predict the trend and consumers’ preference better.

3. Procurement

Apple purchased production capacity in advance to avoid stock out problem of key components.

It also purchased equipment for vendors to further cut material cost and ensure the supply of materials.Secondly, Apple’s production teams are highly flexible and efficient. They keep adjusting production schedules based on demand forecast made 150 days ahead, and update after then. Once, they could produce 10,000 iPhones within 96 hours .Picture3.jpg

Apple also signed contracts with essential vendors. As a result, machines are secured to produce Apple’s products. To be the market leader, Apple even bought materials before the competitors.

Bulk and in advance purchases had made competitors wait for key components

For instance, Apple had made a bulk purchase of high-end drills to make the iPad 2 had resulted in at least 6 weeks waiting time for other companies to use the same the drills.

4. Final Assembly of Products

The final assembly is of low cost yet efficient. For instance, the cost of assembly is only $8 by Foxconn. It has labor-intensive quality control processes and tested every iPhone camera before final assembly.

5. Retail Experience

apple_hero_china_storeApple stores have great accessibility to customers. There were 424 retail stores in 16 countries around the world with online Apple Store available in 39 countries, in which stores are located at popular shopping spots.

In addition, apple stores are built with simple design, which better fits the taste of customers. Also, it provides new and high quality services to current and potential customers. In terms of customer satisfaction and responsiveness to customers, Apple trains its workers to ensure they are knowledgeable enough to solve the problems encountered by consumers.  A well-developed after-sale service is also provided.

Conclusion

Though Apple had faced many challenges throughout the growth of company, it turns out that Apple is a great problem shooter. There is a great potential for Apple to grow and we expect highly of Apple’s future performance.

Reference

Bellatrix Exploration Ltd: 2016 Corporate Responsibility Report. (2016). Bellatrixexploration.com. Retrieved 28 March 2017, from http://www.bellatrixexploration.com/docs/default-source/corporate-governance/bxe2016corporateresponsibilityreport.pdf?sfvrsn=2

Hughes, N. (2015). iPhone 6s Plus expected to be constrained at launch due to backlight bottlenecks. Retrieved 28 March 2017, from http://appleinsider.com/articles/15/09/14/iphone-6s-plus-expected-to-be-constrained-at-launch-due-to-backlight-bottlenecks

Lu, C. (2014). Apple Supply Chain – The Best Supply Chain in the World. Retrieved 28 March 2017, from https://www.tradegecko.com/blog/apple-had-the-best-supply-chain-in-the-world-for-the-last-four-years-here-is-what-you-can-learn-from-it

Overview. Bellatrixexploration.com. Retrieved 28 March 2017, from http://www.bellatrixexploration.com/operations/overview

Riley, D. (2015). iPhone 6S set to break records as Apple struggles with supply chain issues. Retrieved 28 March 2017, from http://siliconangle.com/blog/2015/09/14/iphone-6s-set-to-break-records-as-apple-struggles-with-supply-chain-issues/

Satariano, A., & Burrows, P. (2011). Apple’s Supply-Chain Secret? Hoard Lasers. Retrieved 28 March 2017, from https://www.bloomberg.com/news/articles/2011-11-03/apples-supply-chain-secret-hoard-lasers

Tibken, S. (2015). Apple Watch delays may be due to faulty part. Retrieved 28 March 2017, from https://www.cnet.com/news/apple-watch-delays-may-be-due-to-faulty-taptic-engine/

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