Apple’s Secret Sauce Revisited: Strategically Investing in Supply Chain Capabilities

The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site.

Within the Supply Chain Expert Community, Supply Chain Matters has posted previous commentary relative to Apple’s Secret Sauce- it’s relentless attention to supply chain strategy and operational capabilities.  Our previous commentary in mid-February noted how Apple was plugging strategic and tactical holes in its long-term supply strategy by placing a $7.8 billion order for key LCD, NAND memory and other electronic components from Samsung Electronics, along with back-up supply contracts with strategic vendors such as LG Display. We have also commented on the reality that Apple’s influence and buying power within the industry insures that it will receive preferred status during supply crisis such as the one unfolding as a result of the earthquake in Japan.  Apple has also maintained a strong and collaborative working relationship with its prime contract manufacturer, Foxconn International, and in some cases has help Foxconn to invest in innovative new capabilities.

This week, a blog commentary penned by John Paczkowski on Digital Daily headlines that a glance at Apple’s latest 10-Q SEC filing indicates that Apple has invested more of its available cash resources in long-term supply.  Purchase commitments rose from $7.9 billion in Q4 of 2010 to $11 billion in Q1 of this fiscal year. Paczkowski speculates that there are two reasons motivating this 39 percent increase in long-term supply commitments: the tight supply environment caused by recent calamities in Japan and the expected increases in iPad2 shipments, which is in a backlogged, supply constrained situation.  Our community, especially those residing in the high tech sector can certainly add even more insights to the supply dynamics that occurring right now.

There is however a far more important lesson for global manufacturers, that being a sensitivity and commitment by senior management for strategically investing in long-term supply chain capabilities vs. short-term gains.

I read a recent commentary appearing on the Manufacturing News Blog which makes the observation that in the depths and consequent exit from the global recession, major manufacturers such as Cisco Systems, General Electric, Hewlett Packard, Intel, Pfizer, Texas Instruments and others allocated more cash to stock buyback programs as opposed to product innovation or other strategic business investments.  Stock buybacks can accelerate the appreciation of a stock price when earnings are on the rise, as they have been for many global manufacturers. It seems that financial engineering is alive and well.

Yesterday the Wall Street Journal noted (paid subscription required) that the stock-market rebound from the depths of the financial crisis has been a boon to executives who received grants of stock options at rock bottom prices in late 2008 and early 2009.  The depressed stock prices at the time motivated corporate boards to grant larger numbers of options than usual. The WSJ notes that more than 90 percent of CEOs of companies in the Standard & Poor’s 500-stock index received stock options from October of 2008 through September of 2009, and that consequent CEO equity has risen more than $3 billion above original grant valuations.

Our community would have rather strong arguments that a good portion of the business success since 2008 came from the ability of the supply chain to successfully navigate through many numbers of supply, demand or disruption centered crisis situations.  Conversely, as certain industry sectors are discovering, a crisis such as the Japan earthquake will again reinforce the notion that a highly visible supply chain setback can have a direct negative impact on stock price performance.

A recent Tomkins Supply Chain Consortium survey noted that senior supply chain executives now have a higher level of uncertainty than they did in the past. Nearly 31 percent expect riskier conditions in the future with areas of greatest concern centered on business planning, product sourcing, customer service and transportation. While manufacturers have managed to navigate very turbulent waters by dramatically cutting back on people, costs, and perhaps certain controls, more uncertainty, complexity and risk remains.

If as a community, we accept Apple as one highly visible benchmark for excellence in global –wide supply chain capabilities, we can again note that Apple understands that investing in long-term supply, fulfillment process capabilities, and supply chain resources can result in more rewarding bottom-line results and stockholder performance.  We should at least give Steve Jobs the credit for calling out stock buybacks for what they are, the transfer of cash from one pocket to another.

Over the coming months, we will all observe more evidence of where investments in supply chain vs. investments in financial engineering have the ultimate impact on customers and shareholders.

What’s your view?

As manufacturers transition from the severe recession, do short-term perspectives and goal fulfillment remain the norm?

Are investments in strategic supply, risk mitigation and customer fulfillment capabilities now being supported in your organization?

Bob Ferrari

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