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Apple- A Supply Chain with Recognized Strategic Impact

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As industry analysts, influencers and consultants, we often look to concrete examples validating how a firm’s supply chain capabilities have proven to be strategic to its business results, and to its competitive standing in its industry.  Apple often fits this category, and the latest recognition of the strategic implications of Apple’s supply chain is reflected in a recent New York Times published article, Apple’s Lower Prices Are All Part of the Plan.  (metered free view or paid subscription required).

This article looks back at previous product introductions of Apple’s products, including the iPhone, iPad and MacBook, and notes how Apple’s scale and leverage in capacity, production, logistics and long-term procurement of parts have provided enormous strategic leverage. Many competitors have had difficulty in undercutting Apple in product sectors of ultra-thin laptops, tablets, and smartphones.  The Times article notes that Apple has not been shy in tapping its huge war chest of cash to take long-term gambles in locking-up supplies of key parts for years. It quotes a former Apple executive and current venture capitalist as noting that: “… Apple’s management of its supply chain had become a (its) “strategic weapon”.”

How many companies are willing to invest cash in strategic procurement and long-term capacity commitment decisions?

 There is, however, another important aspect of supply chain strategy brought out by the example of Apple, one that we believe should gain more consideration. In many industry settings in addition to consumer electronics, hardware products are becoming the leveraged platform to facilitate add-on sales of content, services or other products. This is often referred to as the razor blade model, where the razor can be aggressively priced in order to leverage the more profitable sales of blades. The overall product strategy is scale, and the supply chain strategy should be one of supporting high-volume, configure-to-stock products.

In Apple’s example, most all of its consumer devices leverage the sale of content for the music site iTunes.  Similarly, the company is rolling out its own cloud storage services as an additional upsell of services.  In other industry settings, namely consumer and industrial equipment sales, aerospace, and other products, more profitable services are leveraged by the volume penetration of the hardware platform.

This raises an interesting question in terms of product planning. Should the P&L and supply chain cost considerations be managed on the basis of the product alone, or on the broader aspects of added services revenues that the product will leverage? Do cross-organizational conflicts or functional barriers in goals prohibit these types of considerations?

The Times article notes that one of Apple’s competitors for the iPad was Motorola’s Xoom, which hit the market with an entry price of $899, considerably above the iPad’s $499 entry price.  Motorola later released an adjusted entry-level model priced at $599.  Would that extra $100 in unit revenues be offset by after-market content revenues?  The same examples could probably be argued for attempts by Research In Motion and Hewlett Packard to gain a presence of scale in the tablet market.  For Supply Chain Matters and other industry observers, HP’s fire sale price of $99 to cleanout inventory, which sold out in 48 hours, was further evidence that consumers are sensitive to price features and functionality.  Amazon’s new release of the Kindle Fire could prove to be another living test of whether the scale of volume hardware sales leverages broader and more profitable services revenue, and whether the supply chain strategy should incorporate a broader revenue return.  Supply Chain Matters will feature a follow-on commentary regarding Amazon.

In the meantime, is a supply chain strategy that incorporates considerations of product and add-on revenue potential an important consideration for your organization?

Bob Ferrari

 

©2011 The Ferrari Consulting and Research Group LLC and Supply Chain Matters

 

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  1. Ian Catterick says:

    Bob,….just recently there’s been alot of supply chain articles published by industry analysts, influencers and consultants, delving into the “whys-and-wherefores” of how so called leading companies, like Apple, strategically and tactically manage their supply chain. Whilst it’s interesting, I just wonder how much it helps the majority of start-ups, and small to medium size businesses, who are trying to optimise their local/national (perhaps international) supply chains with much smaller budgets?

    Please don’t stop writing about the likes of Apple, your audience wants to know what they’re aspiring to. But, how about adding balance for the majority of your readership, who want to see how comparable businesses are leading the way in today’s fast changing market.

  2. Bob Ferrari says:

    Hello Ian,

    Thanks for sharing your comments and observations.

    You are absolutely correct in the perspective that small and medium businesses may not have the clout and financial resources that an Apple or other large scale global OEM’s might have in leveraging supply chain advantage. That stated, SMB’s need to be much more savvy and nimble in navigating within these environments where the OEM dominant can sometimes call all the shots in terms of price and capacity.

    Supply Chain Matters has published previous commentaries directed at SMB’s which can be reviewed by clicking on the category of “supply chain strategy for small and medium sized business’.

    That stated, your comment is a reminder to us that we need to feature more of these perspectives, and we will certainly do so.

    Bob Ferrari

  3. Ian, I have been giving your post some thought, after reading Bob Ferrari’s insightful piece. After having had a few days to reflect on this, I have a few thoughts. This is a topic that my business partner over at SMB Research (http://smbresearch.net), Miles Prescott, and I have talked about more than once, and which Bob Ferrari and I have also talked about.

    The topic is a difficult one due to the need to generalize about SMBs in different industries in different competitive situations. One of the first challenges for SMBs is obviously around size and the related issue of market visibility. Apple has obviously been atop Gartner’s (formerly AMR Research’s) Supply Chain Top 25 (http://www.gartner.com/technology/supply-chain/top25.jsp) each of the past three years. I recall a conversation just a few years ago (when I was with AMR Research) with a prominent $2B high tech company who lamented that they could not even be in the running because at $1B- $2B at the time they were not large enough to be in the population of companies considered for the Supply Chain Top 25. (Ironically, perhaps, AMR Research – now Gartner – subsequently awarded $5B Harris Corporation its Supply Chain Excellence Award for Small to Midsize Businesses. But I digress.) [For more on SMBs and size, see SMB Research’s “Sizing up Small-to-Medium Business (SMB)” (http://smbresearch.net/blog/sizing-up-smb/).

    Size however can also be a key advantage, however, for many SMBs. The larger the enterprise, the more sophisticated their supply chain strategies often need to be to manage the complexity of their operations, overcome internal functional silos, and control what are often extended supply chains. In the past several years, we have seen increasing emphasis on the lean supply chain, tight inventory management, better forecasting and demand planning, and supply base management.

    In each of these areas, we see opportunities for small companies and SMBs to exert advantages in the simplicity of their operations, their closeness to the market and customers, and a certain business and technological ‘agility’ to achieve market advantages. On this latter point, technology has obviously evolved quite a bit over the past few years, and, to generalize, we believe that many small companies and SMBs are growing and maturing at a time that coincides with evolutions in technology and business conditions that certainly look like a major inflection point.

    While it is certainly true that market volatility can hit SMBs particularly hard, their size and technological and business agility can also be a key advantage for them. SMB Research is addressing the need for technology research and due diligence from small companies and SMBs. Bob Ferrari is right – your question about supply chain strategies for the SMB is of worthy of further attention. As we jointly and separately develop some research and ideas here, do not be surprised to see us write on this further, both here as well as over at SMB Research.

    Bob Eastman
    Managing Director
    SMB Research
    Boston, MA 02205
    reastman //(at)// smbresearch //(dot)// net

    ph (781) 904-0408 x734

    @reastman (twitter)
    @smbresearch (twitter)
    http://www.smbresearch.net/

    Delivering Technology Advisory and Due Diligence to the Midmarket and SMB sectors