Let us dwell a few moments on real-life forecast error and another case of Apple related euphoria gone wild.

Over the weekend, Apple, Inc. new iPad tablet had its official public product launch where consumers were able to actually buy and take possession of their first iPad.  Initial reports in the blogosphere and business media indicated longer-than-expected lines.  A Wall Street Journal article (paid subscription may be required) noted that a Piper Jaffrey analyst actually doubled his initial forecast of first day sales estimates to a range of 600,000 to 700,000 units including pre-orders.  That same analyst also raised his full year 2010 unit forecast to 5.5 million, from a previous 2.8 million units.

Research firm iSuppli went even further predicting that 7.1 million iPads would be sold on a worldwide basis in 2010.  Forrester Research, on the other hand, remained conservative and predicted 3 million units.

This huge disparity stems from a number of different perceptions regarding consumers’ ultimate desires to have an iPad.  The article rightfully notes that unlike the iPhone or the latest wiz bang personal computer, an iPad seems to be a device that consumers may want but not necessarily need in their day-to-day or hour-to-hour needs for a technology fix.  This is also the first generation model of iPad, and experienced Apple consumers know that more functionality laden and perhaps cheaper priced models could be in the cards when later models are introduced to the market.  Interesting enough, a recent teardown analysis conducted by Chipworks headlines a commentary noting that the current iPad‘s technology represents a big iPod Touch, which doesn’t exactly scream ‘buy me’ for the current price.

Supply Chain Matters being what we are will focus our commentary on the rather large forecast discrepancies.  Consider the current situation that external analysts who supposedly know this market have a variance that now include a low of 3 million units to a high of as much as 7 million units.  Perhaps Apple euphoria is a selective disease practiced by some. The brute reality of this crazy situation is that Apple has now publically reported that, in reality, it sold an actual 300,000 units in the first weekend, just about a half of the day-old Piper estimate.

Apple’s supply chain planners, having great success in planning the launch of other Apple products,  purposely allowed three or so months to actually ramp-up production numbers to support product launch of the iPad.  No doubt, these teams will know better than to plan the remainder of 2010 sales outputs based on such wide external forecast bandwidths.  It is however interesting to note how Apple euphoria gone wild can play out among analysts.

Bob Ferrari

On his Supply Chain & Technology blog, Christian Verstraete provided rather insightful commentary in his Procurement vs. Supply Chain, what a match posting relating to the continuing conflict of goals among procurement and the broader functional supply chain community, and I cannot agree more with his observations. 

“Unfortunately, we are still measuring many procurement specialists by how much they can reduce the cost of supply,” notes Christian. “Taking an end-to-end look at the supply chain and analyzing the implications of such decisions, are typically not within their scope (procurement) of responsibilities.”

During these past weeks and months I have noted how so many companies continue to set rather aggressive supply cost reduction goals in spite of evidence that the global recession has reached bottom, even with some industries on the path to recovery.  Too often, the pattern seems to be one where incremental savings driven from supply cost reduction initiatives are utilized to fund other business initiatives such as increased marketing or sales activities, or even acquisitions of other companies.  To make matters even more challenging, the increasing need to exploit new growth markets in the evolving global economies seems to be blind to realities of more complexity in overall supply chain risk.

No doubt, during the dark days of the recession when few companies were spared the ravages of alarming reductions in sales volumes, supply cost reductions were a necessity, and obviously non-negotiable.  As we have noted in a number of our own commentaries on Supply Chain Matters, companies managed to maintain some levels of profitability leveraging large scale headcount, overhead and supply cost reductions.  This movement toward even leaner supply chain, supplier oversight and quality management processes has alarmingly increased supply chain risk exposure as witnessed by weekly occurrences of product contamination and recall incidents involving any number of global companies. 

The tides of business change however are moving more towards recovery, and the organizations need to shift focus towards insuring supply chain agility.  Agility includes the sensing of shifts in customer demand, the ability to adapt quickly to changes in supply or occurrences of overall risk.

As Christian further points out in his posting, we should not cast a totally negative eye toward procurement groups, since they are only responding to what senior management has mandated and rewarded.  Christian argues that cost reduction goals must take a broader product life cycle perspective that weighs the total contribution of component parts to end-item and overall warranty costs. That implies a cross-functional collaborative participation that includes product management, supply planning, finance, as well as procurement.  I would also hasten to include a broader cross-functional focus on supply chain risk management.  Too often of late, procurement oriented blogs preach that supply chain risk equals supplier risk management.  It is much broader than just supplier risk identification, and procurement professionals need to either step-up and take broader cross-functional leadership for risk mitigation planning, or recognize that supply chain risk is a cross-functional responsibility with strategic, tactical and operational implications.  Risk is not another chapter of supplier scorecarding, but rather a comprehensive view of the entire supply chain risk exposure.

As Bob Dylan’s famous 1964 title exclaimed, “The Times, They are a-Changin‘ “.   In the post recession recovery, companies will need to refocus on broader organizational measurements and outcomes, those that weigh the needs for cost control with the needs for increased supply chain agility and responsiveness.  We cannot slip back to functional stovepiping, since the overall risks are far more harmful to the overall business.

Where does your organization line-up with these needs?

Bob Ferrari