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A Low-Priced Apple iPhone Has Considerable Supply Chain Implications

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Since our inception in 2008, Supply Chain Matters has provided numerous commentaries related to Apple and its supply chain strategies.  Why not, it is clearly the most visible and recognized supply chain on the planet.

Thus, we were not all that surprised yesterday when The Wall Street Journal indicated that Apple is presumably working on a lower-priced version of the iPhone that could launch later this year. The WSJ points out that today, iPhone associated sales account for 48 percent of Apple’s revenues, yet the current high cost makes market share penetration within broader global markets a challenge. Apple’s market share in China has taken a major hit and remains low in other emerging markets.  Thus to continue its market growth momentum, Apple must further penetrate highly cost sensitive emerging markets.

The article further speculates that to achieve a lower-priced iPhone, the phone’s shell would be produced in plastics vs. the current aluminum design. Many other component parts could either remain the same or be recycled from previous models.

In our view, such descriptions of options are not all that simplistic and straight-forward.

In a September 2012 commentary, Time to Factor the New Realities for Low Cost Manufacturing and Supplier Social Responsibility, we opined that whether the objective is a new product launch, the peak consumer buying season, or an extraordinary market opportunity, there are new realities occurring in global based supply chains, and as community, we need to be aware of the implications. The notions that an OEM, even Apple, can dictate limitless flexibility or insist that virtual capacity exists is now being challenged by the realities of supplier social responsibility. There are unfolding implications in the need for increased automation of assembly tasks, flexible and multiple contract manufacturing sourcing strategies and better planning. Product marketing and executive teams may presume that the global supply chain will always respond to the needs for endless agility and flexibility to changing market needs or market opportunities, but certain and more complex new realities exist for Apple as well as the broader industry.

In other commentaries during 2012 we noted that the sheer visibility and brand image of Apple has placed the company’s supply chain practices under the looking glass. The current supply chain has been dealing with stark new realities, namely whether to shift its supply chain strategy among higher cost options to fund more social responsibility practices related to assembly and supplier labor costs.  The million plus workers who assemble Apple products are the emerging market consumers who desire to one day, own an iPhone. A lower-cost, higher volume iPhone product strategy has to be far more sensitive to considerations of margin and profit distribution among Apple’s contract manufacturing, channel and retail partners who will be instrumental in penetrating higher volume consumer markets such as China and India. It must either have to deal with the new realities of rising labor costs or be much more dependent on factory automation. As many senior supply chain executives and their teams are all too aware, there are distinct differences in the requirements between a high-volume, high-margin global supply chain strategy vs. a higher-volume, much lower-margin one that must cater to the unique channel distribution requirements of emerging markets. In some cases, it requires distinctly different supply chain structures. Unilever, Nestle or perhaps Lenovo are notable global benchmarks on how to balance these needs.

Whether Apple ultimately elects a lower-price, global distribution model will no doubt garner lots of senior management attention in the coming weeks.  However, make no mistake that the implications for Apple’s global supply chain and its ecosystem are far-reaching and way beyond simple changes in components.

Bob Ferrari

 

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