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Two of the World’s Most Competitive Supply Chains Adjust to Different Business Needs

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The two most visible and perhaps most competitive global supply chains have been those of Apple and Samsung.  Both companies have now formally reported their latest financial results with the implications pointing to needs for added tests for both associated supply chains.

Apple’s report of its Q2, FY13 earnings narrowly met extremely high market expectations. The consensus opinion from equity analysts was that while the company reported adequate total revenues, profit growth is definitely slowing, and the company is feeling the effects of a highly competitive market involving its products. Apple disappointed with product news, with CEO Tim Cook indicating that very exciting new products would be announced later this calendar year. To appease grumpy shareholders, the company announced a massive $100 billion two year buyback of the company’s stock while increasing the cash dividend by 15 percent.

Highlights of the quarter included an 11 percent increase in total revenues while net income of $9.5 billion, fell for the first time in a decade. Very closely watched gross margin came in at the lower end of guidance at 37.5 percent with a forecast indicating possible additional erosion in the coming quarter. Senior management attributed the erosion in margins to product mix, with more iPads being sold vs. the more profitable iPhone products. On the slightly more positive side, revenues for the iTunes store were reported to be $2.4 billion, up 28 percent, while revenues for the Apple Retail Store came in at an impressive $5.2 billion, a 19 percent increase.  There are now a total of 403 retail stores with 151 outside of the U.S.

On the unit volume side, 37.4 million iPhones were sold, an increase of 6.5 percent from the year earlier quarter. Unlike the holiday quarter that was somewhat supply constrained, senior management reported a total of 11.6 million units now in channel inventory, roughly 4-6 weeks of expected sales.  On the tablet side, 19.5 million iPads were sold, an increase of 7.7 million from a year ago, with an acknowledgement that the company sold significantly more of the iPad Mini model.  Volume growth in iPods and Macs were on the negative side.

Given the current financial and business picture, Apple’s supply chain remains under considerable challenge.  These past weeks have featured numerous information leaks which indicate a push-out in new product release schedules involving a new iPhone and possible other new products. Supply Chain Matters has further noted major supply sourcing shifts in the works as Apple sheds its dependency away from arch rival Samsung.

More importantly, the Q2 results, in our view, now reinforce a shift to a supply chain emphasis that is more focused on increased cost efficiency.  This is a strategy that can be attributed to a typical mature consumer goods company that values stockholder dividends over market and product agility, where supply chain costs are constantly scrutinized and where volume leverage is a big deal.  This new emphasis is quite different for Apple, and one that is not conducive to a market that values product innovation and earliest time-to-market. As we have noted in previous commentaries, Apple suppliers were conditioned to expect multiple product changes at multiple times, and were further expected to be able to ramp-up rather quickly to be able to reap the benefits of participating in explosive unit volume growth. That high ramp strategy drove high cyclical direct labor needs and consequent high profile challenges regarding labor and overtime practices across China based suppliers. This new emphasis on cost efficiency will inevitably lead to an increased emphasis on productivity and further production automation.

This week, arch rival Samsung Electronics reported its fiscal Q1 earnings with the banner headline of a 54 percent rise in operating profits and 42 percent growth in net profits. Revenues rose by nearly 17 percent, in-line with previous guidance. Its largest business segment that of cellphones and telecommunications accounted for 74 percent of total operating profit.

Samsung maintained its leadership in the smartphone market segment.  The Wall Street Journal quoted market research firm Strategy Analytics as indicating that Samsung’s smartphone shipments grew to 69.4 million units in the quarter, giving it a market share twice that of Apple. The company has more agile in its product introduction schedule, announcing the new Galaxy S4 last month, with worldwide availability occurring this month.  There have also been information leaks that indicate that Samsung is also working on other new products, similar to those rumored for Apple, including a new electronic watch.

Regarding the new S4, The Financial Times reported yesterday that the company has confirmed it is having difficulty in meeting worldwide supply commitments to support the global product launch. A company statement indicates that more pre-orders were received than previously forecasted, and Samsung was having difficulties in ramping-up supply in such a short period. Last week, the company announced that considering additional sourcing of mobile memory chips from SK Hynix.  Readers will recall that Samsung practices a more vertically focused supply chain, sourcing many of its own key components including processor, memory and display.

Samsung’s vertically integrated supply chain  has served that company well in its ability to continuously refresh innovation in products, quickly ramp products to enormous global wide volumes and deal with multiple global channel partners. While current revenue and volume growth is showing strain, the prime focus has by our view, always been on agility and market responsiveness, with a byproduct of efficiency. Vertical integration provides more control of component design and target cost parameters. With its current market and volume momentum, the Samsung supply chain will likely continue with its current emphasis toward agility and control of major supply components.

Thus, the two most visible and highly competitive global supply chains are in the process of moving toward different strategic needs supporting different expected business outcomes. Which ultimately garners the most success is a matter of time. One thing is certain, 2013 will be noted as a key milestone and turning point for each.

Bob Ferrari

 

© 2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog.  All rights reserved.

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