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Will Apple’s Supply Chain Strategies Take a New Turn?

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The following also appears as a published guest commentary on the Supply Chain Expert Community web site.

Last week, Apple again captured traditional and social media mindshare with the introduction of the newest version of the iPad which is scheduled for customer availability later this week. Consumer frenzy for having the latest and greatest Apple device is again building and already the company is warning that initial supplies may not be able to satisfy pre-order demand expected for the planned March 16 availability date.

Beyond the headlines and the consumer frenzy to be the first to get one’s hands on this latest new device is speculation as to whether the post Steve Jobs era of Apple also implies shifting and added challenges to supply chain strategies for Apple.

If you believe that supply chain strategies must support business outcomes, then Apple will have to adjust some of its supply chain strategies.

In terms of sheer capabilities, the existing scope of supply chain fulfillment is staggering.  The company boasts that it sold 176 million iPod, iPhones and iPad devices in 2011, accounting for 76 percent of total revenues.  This represents over a half million of these devices shipped every day if you do not count Sundays.  That is not a lot of room to allow for capacity or supply shortages.  The continued shipments of all of these devices also led to the company’s recent announcement of surpassing 25 billion ‘Apps’ downloads from the Apple App Store.  The leveraging of recurring electronic content sales is another key strategic component of Apple’s business plan.

It is no wonder that Apple surpassed Exxon as the most valued company. With market capitalization exceeding 500 billion, stockholders respond to every move or any setback, particularly when it relates to supply chain.

The open question for speculation, however, is whether Apple has reached a crossroads concerning its strategic supply chain strategies and future capabilities.  Visibility to the company has clearly escalated given the numbers cited above, along with more visibility to the company’s high profit margins. Our recent commentary on Supply Chain Matters pointed to two recent watershed events as triggering a new phase.  Apple’s January announcement of a more aggressive stance in supplier social responsibility standards, a revealing New York Times article revealing current production and supply chain practices, and a corresponding ABC News Nightline visit to Foxconn facilities in China have added considerably more visibility to the inner workings of Apple’s supply chain. There have also been reported rumors coming from Apple’s supply base that indicate testing of a subsequent tablet computer with a screen size of about 8 inches with a potentially lower cost market entry. Our Supply Chain Matters belief is that Apple is positioning the next generation of capabilities to penetrate broader, perhaps more cost sensitive geographic markets.

All of these current signs point to the need for changing supply chain strategies for Apple, some of which may be conflicting.  Reuters columnist Richard Beales argues on his blog that Apple needs good, not just better, supply chain.  The title is a bit of a misnomer since this columnist’s argument is that with $500 billion in market capitalization and $100 billion in cash, Apple needs to shift its supply chain strategy to a higher cost model to fund more social responsibility.  The sheer visibility and brand image of Apple has placed the company supply chain practices under the looking glass, and Beale’s argument is that just as Nike encountered in the 1990’s, consumers will demand a more socially responsible Apple supply chain.

Last week in the Opinion section of the Wall Street Journal, Holman Jenkins Jr. column, The End of Apple’s Roach Motel,  (paid subscription or free metered view) speculates that if Apple continues to be successful in its content and cloud services models, its devices will become cheaper and more disposable.  His argument is that Apple’s margins will start coming down sharply and the “Roach Motel” will prove less formidable than assumed. That seems to argue for a lower-cost supply chain driven model.

A recent Reuters article points out that for retailers other than Apple, the profit margins for stocking products are thinner than other consumer electronics products.  From a customer foot traffic and interest perspective, retailers like Best Buy have no choice but to stock Apple products, but must in-turn upsell the customer to other products to uphold margins.  While Apple remains ‘the’ channel master, pressure will increase for higher margins or shared profits for retail partners.

Which direction Apple eventually takes is up to Tim Cook and his senior supply chain team. As a supply chain community, however, we should anticipate that  some strategy changes may be forthcoming.

What about your views?  Do you believe that Apple has to shift its supply chain strategies to respond to both business strategy and consumer sentiment requirements?

Bob Ferrari

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