Apple Inc. – Managing a Global Supply Chain

Executive Summary

An analyst for a money management company based in Toronto, BXE Capital (BXE), was studying Apple Inc. as one of the company’s main investments. Apple had a market capitalization of nearly USD 500 billion and sales of USD 171 billion in 2013.

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According to the research company, Gartner Group, it had the best supply chain in the world, ranking ahead of firms such as Amazon, Zara and Walmart. As a part of the analysis, a full review of the supply chain of Apple Inc.’s is required to look for insight into the future performance of the company for deciding whether the analyst company should continue to hold the shares of Apple Inc. Introduction Apple Inc. was established by Steve Jobs, Steve Wozniak and Ronald Wayne in 1976. In the summer of 1976, Ronald Wayne had left the company, but Steve Jobs and Steve Wozniak launched the first of many trendsetting products to be developed and released, Apple 1 Computer. While under John Sculley’s leadership, Steve Jobs, Steve Wozniak left Apple in 1985.

However, Steve Jobs returned in 1997 and became CEO, taking control of Apple Inc. and bringing the company back from near bankruptcy to profitability by 1998. Under the legendary leadership of the late Steve Jobs, the Apple Inc. brand was successfully rebuilt and become one of the most innovative companies in the world today and has a large loyal customer base. Just after Steve Jobs returned, Tim Cook (a world-renowned supply chain expert) joined Apple Inc. in 1998, who helped transform Apple Inc.’s messy operations into a global supply chain success and credited with streamlining Apple’s supply chain, helping create the most powerful supply chain in the world. Apple Inc. is one of the world leaders in innovation today, product design and development, marketing and branding, software ecosystems, products and services.

It sells products through its retail stores, online stores, direct sales force, third-party cellular network carriers, wholesalers, and retailers. It also sells digital content and apps through the iTunes Store. Apple Inc. has evolved into the Most Valuable Brand in the world today. The Differences set Apple Inc. Apart From its Competitors There are several main aspects set Apple Inc. apart from its competitors (see as below): AppleCompetitors Adopting ‘Air-Freight’ as a more efficient methodAdopting cheaper transportation methods such as ‘Sea-Freight’ Adopting ‘Intermediate Warehouse’ at Fedex and UPS for reducing customers’ waiting time. N/A Keeping the close relationship with global suppliers. Strictly treating suppliers, and attempting to reduce their price Maintaining ‘Just-in-Time’ supply chain. Focusing on ‘cost’ and selecting the lowest price suppliers.

Apple Inc.’s Key Advantages in Manages its Supply Chain Operations

Real-time coordination of supply chain Comparing to the life-cycle of traditional product which spans over four to five years, iPhone as an innovative product, Apple Inc.’s management team kept the lifecycle closer to only one year on average. For supporting the short product development cycle, Apple Inc. adopts a ‘Just-in-time’ supply chain to coordinate with the production on a real-time basis.

Controlling internally the entire supply chain For developing new products, many stakeholders are involved in the processes of development. Apple Inc. typically handles much of the engineering works involved in getting a product made in large numbers by partnering with contract manufacturers. Engineers often spend weeks at facilities in Asia to make sure the equipment and spare parts are properly operating. With data sharing, Apple Inc.’s procurement team also keep closely controlling its upstream suppliers. Unlike other competitors simply outsource the manufacturing to the third-party service providers, Apple Inc. would rather internally control its entire supply chain.

The close relationship with suppliers Apple Inc. closely works and builds a close relationship with the contract manufacturers. Its designers closely work with suppliers for helping translate prototypes into mass-produced devices. Furthermore, Apple Inc. continually shares its demand forecasting information to suppliers starting from 150 days in advance of the product launch for allowing adjustment in production schedules and meet the sudden spikes in orders. A well-known example is that within 96 hours, Foxconn produced over 10,000 iPhones a day because of the Apple’s redesign of screens at the last minute.

Highly integration with centralized Research & Development Technology firms commonly separate the Research & Development department and separate the profit and loss accountability for each product segment. However, Apple Inc. highly integrated the Research & Development department as well as the profit and loss accountability to the entire company. All people within the company are responsible for the products’ success.

Pre-purchased capacity Many competitors used the same components as the key parts from a single supplier, so it is common for the components to be out of stock during overwhelming demand. Apple Inc. then starts to pre-purchase suppliers’ production capacity for ensuring a steady supply of the key parts from suppliers. Moreover, the pre-purchase strategy also adapts to the logistics arrangement. Apple Inc. found that it is costly for the backlog of orders and hence they start adopting air-freight for transportation while other competitors rely exclusively on shipments by sea-freight. Apple Inc.’s pre-purchased is available holiday air-freight for ensuring delivery available during holiday sales rush. This also adds the benefit of shutting out rivals.

Global operation Apple Inc. divides its products’ production in different countries. Some processes of production require labor-intensive operation with complex quality control processes. Other countries can provide resources that the U.S is limited. An estimation from Apple Inc. for manufacturing iPhone reviewed which China took fifteen days to find qualified industrial engineers while in the U.S may take as long as nine months.

Lightly investing on fixed cost According to Apple Inc.’s financial report, asset and inventory’s return is high. This has resulted from the lightly fixed cost investment strategy. As low fixed cost need to spread over a high volume, the manufacturing cost of Apple Inc. account larger portion on variable cost. Apple Inc. strategically emphasizes on variable cost which only goes up when sales volume increase. Apple Inc. uses third-parties’ logistics services and outsources its production for achieving light assets investment.

Forward Integration Despite adopting retail partners to distribute its products, Apple Inc. also operates its own stores in high-traffic location as well as the online stores. Over 70% of products and services are sold directly to businesses and consumers by Apple Inc. itself.

The limited products’ configuration Apple Inc.’s products are famous for its limited configuration. It restricted the design and configurations of its products, and iOS is designed with less customization setting to provide a more user-friendly experience. With the limited number of configurations, Apple Inc. can streamline the process of the supply chain.

Effective reverse logistics function Apple Inc. developed an effective reverse logistic function for enhancing customers’ post-purchase experience. Consumers are allowed to input the defects online and the system would automatically retrieve purchase information by the serial number. Apple Inc. provides responsive service for product return by sending pre-addressed, pre-stamped box sent through express parcel service to collect the defective product. Apple Inc.’s reverse logistic function greatly improved customer satisfaction, lowered the number of calls to its technical support service and eliminate the likelihood of customer error when processing a return.

Intense customer education Apple Inc. operates self-own retail outlets not only capture more sales but relies heavily on its retail stores for providing customer education. Apple Inc. gives product training and educates customers on their product usage.

12.Emphasizing brand management Apple Inc. business model focuses on innovation and new product development. With various marketing strategies and customer education, Apple Inc. advertises the lifestyle it created other than the actual functionality of its products. This helps to create a strong brand loyalty.

The Challenges Apple Inc. Faces in the Future & the Implications for it Supply Chain

Developing the overwhelming new products In recent years, Apple Inc. is having a difficult time to develop overwhelming new products. It has been putting a lot of effort to improve and integrate its existing products such as iPhones, Mac Books, iPads, Apple Watches etc. Apple Inc. has been innovating its products and fittings for every version, but the market has the higher expectation than simply a slight improvement on the internal configuration of its products. The consumers or users are expecting technological breakthrough new major products. Apart from this, the sales growth is slowing down, and the declining rate is high until the next model has been ready. This indicates that the consumers or users have gradually lost interests in Apple Inc.’s product. The implication for Apple Inc.’s Supply Chain The products of Apple Inc. have been known for making by assembling numerous components produced by a lot of different suppliers. Developing new products implicates a large sum of new components are required in its production which makes Apple Inc.’s supply chain network more extensive and its management more complex. Apple Inc. also needs to invest more in its research and development and reverse logistics system. Therefore, Apple Inc. can do better in product management and address the new or latent demand for their consumers by reviewing the old returned products. Apart from this, Apple Inc. can introduce the new customized products or new features also for existing products which give the market a new surprise.

Keeping sustainable relationships with existing or new suppliers Apple Inc. will be facing a challenge in keeping sustainable relationships with existing or new suppliers. Apple Inc. secures its components supply for meeting the high demand in the market by buying a large volume of components from its suppliers with a huge amount of pre-payment. The largely committed manufacturing capacity which occupied a large part of the businesses of its suppliers. This leads suppliers to receive orders from other customers with difficulty. Therefore, suppliers have been dependent on Apple Inc. for earning profits. Suppliers also have high pressure to get components done with Just-In-Time manufacturing in prepayment. Realizing slim profit gain from Apple Inc. orders with the above disadvantages, Apple Inc.’s existing or potential suppliers tend to change their attitudes and some even consider declining Apple Inc. orders for maintaining their independence. The case also mentioned a key part manufacturing refused huge prepayment from Apple Inc. for providing largely committed manufacturing capacity. The implication for Apple Inc.’s Supply Chain As some suppliers stop renewing the contract with Apple Inc. because of all the cooperation shortcoming and hardship. Therefore, Apple Inc. has to spend extra money on searching and scanning for new suitable suppliers. The potential suppliers might also hang back when realizing the drawbacks to receive orders from Apple Inc., which decreases Apple Inc.’s choices on choosing suppliers. Therefore, Apple Inc. might need to offer a higher pre-payment or new payment methods for suppliers in producing unique components for its products. This might lead to higher production cost and affect the supply chain’s total profitability.

Maintaining the reputation Apple Inc. has been accused of co-operating with sweatshops in its upstream supply chain because of its just-in-time manufacturing and sudden orders or change requirements, the assembler or manufacturer serve Apple Inc. might require their workers to work overtime for meeting the needs of Apple Inc. The case mentioned that workers had to continuously work twelve hours or Foxconn’s workers had been required to wake up at midnight for work. The implication for Apple Inc.’s Supply Chain These ethical issues make Apple Inc.’s reputation as it does not have strict monitoring on their partners for producing products. The workers might strike for fighting better benefits and compensations by long-term exploitation. This will lead to production disruption and affect Apple Inc’s just-in-time manufacturing with a tight schedule. This might increase both cost and the lead time for products.

Staying as the market leader in the aggressive competition In recent years, the smartphone industry has rapidly been developing, many competitors catch with innovation at a fast speed (such as Huawei, Samsung, etc.). It is important for Apple Inc. to keep its first-mover advantage and keep putting efforts in innovating. Those who use Android phones have dramatically increased. According to the report presented by IDC in November 2016, the market share of Android phones has occupied nearly 85%, but the iOS phone has only occupied nearly 15%. As consumers have easily shifted to other brands under the market with aggressive competition, therefore, Apple Inc. has to put more efforts to keep its position as the market leader. The implication for Apple Inc.’s Supply Chain Apple Inc. has to invest heavily in research and development of its products in its supply chain and places a good balance on stock and production for dealing with the impacts brought by the greater demand fluctuation on its JIT system. Apart from this, Apple Inc. also needs to consider the market segmentation that it not only produces high-end products but also low-end products in order to meet the customers’ needs. PeriodiOSAndroidWindows PhoneOthers 2016 Q115.40%83.40%0.80%0.40% 2016 Q211.70%87.60%0.40%0.30% 2016 Q312.50%86.80%0.30%0.40% 2016 Q418.20%81.40%0.20%0.20% 2017 Q114.70%85.00%0.10%0.10% Source: IDC, May 2017 5.Minimizing the cost of production Although Apple Inc. has performed well on cost-controlling for its production, it still has a higher cost of production when comparing to its competitors (such as Huawei, Samsung, etc.).

As the market for the smartphone has been mature, smartphone producers not only compete on innovation but cost as well. Apart from these, the cost of production and selling price of iPhones has generally been higher than competitors, therefore, squeezing cost will be a big challenge for Apple Inc. The implication for Apple’s Supply Chain When there is a need for cutting cost, it implicates that there is a need to cut procurement cost and streamline processes. Therefore, it is necessary for Apple Inc. to improve its supply chain organization to minimize cost. For further reducing the cost of ordering and transportation, it is necessary for Apple Inc. to regularly review its procurement strategies and transportation model. Conclusions & Recommendations As Jessica Grant, I would suggest the company’s vice-president Philip Duchene that Apple Inc. could adjust the shareholding depends on certain factors which could be Apple Inc.’s niche product offerings with a huge market share and its strong brand name due to the increased investment. For the factors of decreasing investment, they could be the uncertain development of new key products, unstable relationship with its manufacturer and fluctuating costs.

In the strong brand name, Apple Inc. keeps offering consumers the superior quality of buying experience in retail stores. The experienced talents in stores can provide quality services and knowledge to consumers. Furthermore, Apple Inc.’s services after selling can increase customers’ loyalty. For the China market, Apple Inc.’s products increased by the demographic demand. Apple Inc. can save the costs of production and achieve better profits by locating the factories in China. Although there is uncertainty for developing new product lines, Apple Inc is the market leader in terms of research and development. Therefore, it is worth for BXE to invest more in Apple Inc. For BXE to decrease concerns of shareholding, Apple Inc.’s intention to capture a wider target market segment. Apple Inc. respectively introduced iPhone 5C and iPhone SE in 2013 and 2016. These lower prices’ products attracted more customers who have a limited budget. Although Apple Inc. does not have distinct competitive advantages in the economic smartphone market when comparing with Xiaom, some magazines or reports in the market about smartphones show that the ratings of iPhone SE were mostly similar or worse than Xiaomi’s Redmi Note 3. Thus, BXE might need to consider about it when adjusting the portfolio in investment.

Bibliography

Apple Inc.: Managing A Global Supply Chain (2017), Published by Ivey, 9B13D005. Nigel Slack, Alistair Brandon-Jones, Robert Johnston (2011), Essentials of Operations Management, 1st Edition, Pearson Education Limited. https://www.apple.com/hk/

https://gadgets.ndtv.com/apple-iphone-se-3393-vs-xiaomi-redmi-note-3-3119

https://www.zdnet.com/article/three-huge-challenges-facing-apple-in-2016/

https://www.idc.com/promo/smartphone-market-share/os https://beebom.com/smartphones-market-analysis/

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