Many past accolades have been written and cited regarding Apple’s supply chain capabilities including recognition in most any industry analyst’s top supply chain ranking, including our own at Supply Chain Matters.

If you have not been keeping-up of late, Apple has entered, perhaps not to its liking, a fairly new phase of global-wide visibility to its supply chain capabilities. The current phase can best be described as a phase driven by public relations and perception, one that will once again challenge Apple’s internal supply chain management teams.

The watershed events leading to this current phase were triggered by two media events.  One was Apple’s January announcement of a more aggressive stance in supplier social responsibility standards, and the other was a rather revealing and candid article published in the New York Times revealing Apple’s certain production and supply chain practices which was not complimentary.

Since that time, Apple’s senior executive and public relations team have been hard at work depicting two sides of Apple’s corporate culture.  The first is one that protects the Apple brand for innovation and corporate responsibility.  The second is the ability to exercise corporate name and power to influence whom in traditional and social media Apple deems to grant access and visibility.

A recent blog posting penned by Wall Street mogul Henry Blodget on the Business Insider blog speculates that instead of thanking the Times for focusing attention on why so many high tech and consumer electronics companies have no choice but to deal with the implications of supply chain sourced in Asia, Apple has been  retaliating by offering competing traditional media outlets like the Wall Street Journal, or blogger friendly outlets like John Gruber’s blog, increased access to Apple senior executives for interviews. The takeaway conclusion is noted as access journalism.

The newest chapter comes tonight in the U.S., when an ABC News’s Nightline broadcast will air what is hyped as an unprecedented glimpse inside the contract manufacturing facilities of Foxconn.  Reporter Bill Weir has penned a fairly revealing perspective of what will be aired on tonight’s program. Weir provides the context for the invite to ABC News as a direct invitation by Apple to actually observe Foxconn final assembly lines as the Fair Labor Association (FLA) conducts its first ever audit of Apple’s supplier responsibility practices. Weir questions the fact that ABC News is owned by Disney Corporation and Disney CEO Bob Iger serves as a member of Apple’s board of directors.

Readers will note Weir’s statement that Apple promised complete access to factories, but denied repeated requests for interviews with either Apple CEO Tim Cook or senior vice president of industrial design, Jony Ive.  The remaining commentary provides eye-popping admissions that reveal how past events have led to Apple having no choice but to increase its oversight of supply chain working conditions.

Sound bites that are sure to resonate from tonight’s airing include the statement that Foxconn’s production campus “employs 235,000 people, roughly the population of Orlando Florida. “  That should hit a sour chord with current U.S. unemployed high tech workers. He notes that during the recent wave of worker suicides that occurred on Foxconn’s campuses, Tim Cook rallied a team of psychiatric experts for advice for dealing with this situation.  Readers may recall that recently the Times expose noted that Tim Cook secretly traveled to Foxconn for first-hand meetings.  There are many more revelations, but , in our view, probably the most revealing are stated quotes from FLA audit inspector Ines Kaempfer.  In the context of Apple’s decision to join and engage FLA in what is reported to be a six figure cost, Kaempfer states: “We call it the ‘Nike moment’ in the industry.  There was a moment for Nike in the ‘90s, when they got a lot of publicity, negative publicity.  And they weren’t the worst.  It’s probably like Apple. They’re not necessarily the worst, it’s just that the publicity is starting to build up. And there was just this moment when they just started to do something about it. And I think that’s what happened for Apple.”

Weir concludes his preview by replaying the  video interview with a production worker as he pulls out his personal iPad and shows photos of his children in America. He asks that worker: “For all the people in America who buy one of these, what do you want them to know about you?”  The reply is impactful: “I want them to know we put a lot of effort in this product so when they use this please use it with care.”

Thus by this airing tonight and the observations and impressions made by viewers, Apple is indeed orchestrating a new and far more visible perspective on its global supply chain.  This is a perspective not as Supply Chain Matters has previously penned as managed by extraordinary supply chain business process, procurement strategy or advanced technology.  It is one that will come from global consumer perceptions of the labor and supplier social responsibility practices within Apple’s supply chain.

The open question for Apple’s supply chain management community is how to manage in a public relations vs. overall improvement framework context.  Tune in tonight and share your own perspectives and observations.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

The most valuable company in terms of stock price, and the most admired in terms of depth of supply chain capabilities is once again priming traditional and social media channels to hype the next new product release.  According to numerous entries, Apple is expected to announce the next generation of its iPad tablet sometime in March.  Rumors and other reporting indicate that the next generation if iPad will operate on a 4G network platform and will feature even finer screen resolution among other enhancemenrts.

Of more interest to our community is a report published in today’s Wall Street Journal (paid subscription or free metered view) which notes unnamed Apple suppliers as indicating that the goliath of consumer electronics is prototype testing a new tablet computer with a screen size of around 8 inches.  The WSJ reports that Apple is working with display suppliers AU Optronics and LG Display Co. to supply the test panels and to later qualify a volume supplier. The significance of a far smaller iPad screen revolves around a potential lower cost offering to counter two other tablets , the Amazon Kindle Fire  and Barnes and Noble Nook Color.

Our Supply Chain Matters previous commentaries on the battle of the tablet wars has pointed out the significance of lower price and leveraging higher volumes of tablets as a means to gain a platform for future sales of higher margin electronic content.  Just like smartphones, this is a battle for numbers of installed devices that can be leveraged for future products and services.  As such, competitors such as Amazon are willing to forego little or no profit on its Kindle Fire tablet in order to build a longer term value platform.

The obvious question surrounding these rumored pipeline developments now relates to how serious Apple wants to compete for the hearts and minds of price conscious tablet consumers by pricing a smaller screen version tablet as a serious competitive alternative to current lower cost offerings.  Also, is Apple willing to forego its current fat and highly profitable product margins to enter a battle of volume. Will Apple change or alter its current supply relationships?

We believe that the bigger prize lies in emerging markets such as China and India, and other growing regions where pent-up demand for a price affordable tablet computer with high brand recognition is most lucrative.

What happens next is something for all of us to observe.  Suffice to state that Apple’s next challenge for growth lies in emerging markets where the economics are somewhat different and where cost has much more meaning.  Apple’s supply chain inherits yet another challenge.

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

A recent article published in the Wall Street Journal reports that Google is making firm plans to enter the home entertainment industry. According to this WSJ article the rumored home-entertainment system scheduled for market introduction later this year would stream music wirelessly throughout the home and would be marketed under the company’s own Google brand. This new development is being headlined as Google’s first entry into to consumer hardware electronics business, possibly to compete with Apple.

The reality however, is that Google has had a previous foray, albeit indirectly, with the former introduction of its Nexus One smartphone in 2010.  Google’s idea was to offer its own Android powered in an unlocked state, which would allow consumers to be able to acquire the phone online, regardless of current mobile carrier. The strategy was controversial in that it circumvented all existing fulfillment distribution channels. From the get go, Google experienced multiple issues related to consumer difficulties in purchasing and activating phones.  Questions were also raised on the deployment of a worldwide order channel and on consumer’s ability to easily obtain service, while contract manufacturer HTC was placed in a rather challenging position to be able to support all of these needs from Google. After a short existence, the phone had to be eventually withdrawn from the direct channel, in favor of distribution through select carrier distribution channels.

If this speculated electronics hardware product does come, the question is what has Google learned relative to market introduction and corresponding supply chain fulfillment management needs?  The answer may lie in Google’s pending acquisition of Motorola Mobility. ZD Net blogger Larry Dignan believes that we should not be too quick to count out Google.  While Google doesn’t know hardware, Motorola does, and already has a sizable installed base of cable set top boxes sitting in consumer living rooms.  Motorola also knows high volume, consumer electronics supply chain requirements and has been able to transform its supply chain capabilities through rather difficult times.

Supply Chain Matters therefore offers its humble advice to Google.  You may well have the coolest, wireless home entertainment system, but supply chain management is not your core competency.  You are about to inherit an equipment supplier who understands new product introduction, channel and supply chain fulfillment needs, with a track record of transformation.  Let the acquiree share with you that knowledge, competency and capability.

We submit that the goal for Google is to establish a presence and a quality reputation in the highly competitive hardware industry. While some may also include the goal as breaking down traditional barriers of distribution and fulfillment, perhaps that should be deferred to organizations that have already completed this successfully.  Apple and others are formidable competitors with strong capabilities, and a new entrant, even Google, has to have savvy and proven experience in the tenets of supply chain management.

Bob Ferrari

Once more, Apple has rocked Wall Street and financial media with spectacular fiscal Q1 financial results, again fueled by the company’s supply chain capabilities.  However, with each passing quarter, that supply chain becomes subject to more visibility, not all of which will remain complimentary.

The numbers are staggering even in context to the fact that the quarter included the holiday selling period. They included a 118 percent year-to-year increase in profits amounting to $13.1 billion on sales of $46.3 billion.  There is commentary that Apple could once again overtake Exxon Mobil as the world’s most valuable company in terms of market value. Internationally based sales accounted for 58 percent of the quarter’s revenue indicating the increased tapping of emerging markets as consumers around the world succumb to the Apple experience.

In terms of output volumes, Apple delivered 37 million iPhones and 15.4 million iPads during the quarter, sustaining an average fulfillment volume of over 402 thousand iPhones and over 165 thousand iPads per day. These are volumes that can challenge any global based supply chain. The iPhone 4S is now available in 90 countries across multiple channels. Company executives also admitted that the company struggled to meet demand and could have done better if it could have ramped production. The iPhone was noted as on ‘significant’ backlog at the end of the quarter, and the unavailability of supply has been cited as a cause of rioting at Apple’s new Beijing outlet as consumers and black market profiteers sought new iPhones.

Gross margin was equally impressive growing to 44.7 percent compared with 38.5 percent one year ago. Wall Street has been taken back with the fact that the company generated $16 billion in free cash flow during the quarter, along with a near $100 billion cash balance. In its reporting, the Wall Street Journal made note that Apple not only benefitted from strong demand but also lower component costs, highlighting how the company’s supply chain remains a distinct advantage. Keep in mind that the consumer electronics industry has been dealing with certain supply shortages brought about by the compounding effects of the Japan tsunami and Thailand floods. Apple’s influence over suppliers made its mark and volume remains a considerable influence.

The lens on Apple naturally turns to what comes next and how can it sustain these spectacular results.

For its supply chain, the lens is of course maintaining a steady stream of supply while supporting a new edition of the iPad later this year. As the company’s distribution turns more toward international channels, the risks will increase. Company officials see China as a huge untapped opportunity but the reality of being the most expensive smartphone implies either more prepaid plans and distribution channels or a scaled-down version. The lens on supplier social responsibility policies has also widened considerably.

Supply Chain Matters provided previous commentary related to Apple’s recent release of its 2012 Supplier Social Responsibility Report.  This weekend, New York Times columnists Charles Duhigg and Keith Bradsher penned one of the most revealing articles in our memory concerning the supply chain capabilities of Apple.  The article, How the U.S. Lost Out on IPhone Work, (paid digital subscription or free metered view) extracts observations from former employees and others as to why Apple elects to source all of its major manufacturing operations in China. It describes one incident where 8000 workers at one of Apple’s contract manufacturers were awakened after midnight and started a 12 hour shift fitting last minute re-designed glass screens into frames to support iPhone volume production.

Bottom line, Apple believes that China provides far more speed, flexibilities and far more skills than can be garnered elsewhere, including the U.S. Corning’s CFO is quoted: “The consumer electronics business has become an Asian business. As an American, I worry about that, but there is nothing I can do to stop it.   Asia has become what the U.S. was for the last 40 years.”

The Times article raises some profound conclusions as to the definition of supply chain flexibilities, and we urge our readers to absorb all that is within the article.  Apple employees and management appear to demand total flexibility without regard to the worker ramifications associated with such directives. At the same time, they enjoy the healthy financial benefits in corporate profits, bonuses, and over $2 billion in stock awards. Apple CEO Tim Cook, the architect of the current supply chain received a 2010 compensation package valued at $59 million, while the average Chinese factory worker garners $17 per day. Not many of these Chinese factory workers could afford to buy a new Apple product.

From our perspective, the most profound cited quote came from an unnamed current Apple executive who states that the company does not have an obligation to solve America’s problems, but rather making the best product possible. Having its pile of cash grow even more each quarter only leads to more perceptions of greed and lack of national or social responsibility as U.S. job growth continues to falter.

Readers no doubt are aware of the technology vendor hype concerning the need for supply chain flexibility.  The looking glass into Apple’s supply chain is perhaps revealing a real-world definition.

The Times columnists began their article by citing an event last February and the question that President Barrack Obama posed to Steve Jobs: What would it take to make iPhones in the United States?  We believe that Apple, and all of us in the supply chain community need to think long and hard on that question.

What’s your view? Have countries such as the U.S. any realistic opportunities in closing the supply chain capabilities gaps in consumer electronics and high tech?

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and Supply Chain Matters.  All rights reserved.

As noted in our earlier posting, there was rather significant supply chain related news involving the highly recognized supply chains of Apple, namely the open publishing of 97 percent of Apple’s supply chain suppliers in 2011. A supply chain shrouded in secrecy is now more visible, and an era of perhaps more openness and transparency may be the legacy that Apple new CEO, Tim Cook wants to portray.

You can view the listing at the following web link.

Supply Chain Matters shares some of our impressions from reading the listing.

First, consider that with the huge volume of material output that makes-up Apple’s supply chain velocity, there are roughly just 200 suppliers listed.  That reinforces Apple’s principles on concentrating its negotiation power on certain key suppliers for inbound materials, those that Apple can exert a lot of leverage and influence, not to mention some very long-term buying arrangements.

There are three contract manufacturers noted, but Hon Hai Precision Industry Co. Ltd. (Foxconn) is by far, the largest volume manufacturer for Apple.  Consider that Foxconn’s total manufacturing related headcount, hundreds of thousands of people,  could provide a considerate dent to any country’s overall unemployment rate.

There is a current hard disk drive shortage brought about by the monsoon related floods in Thailand. Two of the largest disk drive manufacturers, Seagate Technologies and Western Digital Corporation are both listed as suppliers, and with the addition of Hitachi-LG Data Storage, there is access to over 90 percent of worldwide HDD capacity.

By our count there are nine component and specialty component semiconductor suppliers including AMD, Hynix Semiconductor, Intel, Infineon, Qualcomm and others, which in total represent a global-wide footprint of capacity and a hedge against geographic related supply disruption.

We would be interested in our readers perceptions regarding this listing.  Readers can either add Comments directly to this posting or send an email to: info <at> supply-chain-matters <dot> com.

Today, there is rather significant supply chain related news involving one of the most highly recognized supply chains, that of Apple.  The Wall Street Journal conducted an unprecedented interview (paid subscription or free metered view) with Apple CEO Tim Cook, who for the first time in probably anyone’s memory, disclosed much more intimate information regarding Apple’s suppliers as well as Apple’s current efforts in the area of supplier responsibility and working environments. Cook indicated that his company “has long aimed to be more transparent and believes the steps it is taking- including nearly doubling the number of supplier audits it does- are “raising the bar” for the industry.”

Supply Chain Matters reviewed Apple’s latest 2012 Progress Report on Supplier Responsibility and we were positively impressed. We urge our readers to read the report themselves at the following web link. The report notes that the company recently became the first technology provider accepted by the Fair Labor Association (FLA), and that Apple will open its supply chain to the FLA’s independent auditing team who will measure performance against the FLA’s Workplace Code of Conduct, with results appearing for public view.

During 2011, Apple’s Supplier Responsibility teams conducted 229 audits, an 80 percent increase over 2010. More than 100 involved factories that had not been audited before. Each year, Apple audits all final assembly manufacturers (contract manufacturers).  The report notes that audits are targeted to suppliers with the highest risk factors where findings and corrective actions can make the biggest difference.  Apple considers the most serious breach of compliance to be a core violation which would include underage or involuntary labor, falsification of audit materials, worker endangerment or intimidation or retaliation, along with threats to the environment. The report identifies many of the core violations including 2 facilities terminated because of involuntary labor practices and 5 facilities with unintentional use of underage labor because of insufficient verification methods. We were also positively impressed to note core violations involving the 2 incidents of combustible dust explosions that occurred in 2011. An explosion at Foxconn’s Chengdu factory took the lives of four workers and an explosion at a Pegatron component supplier facility in Shanghai injured 59 workers.  As we speculated, Apple immediately investigated the circumstances, cited the suppliers for core violations, and later established new process requirements for the handling of combustible dust including aluminum and plastics.

Supply Chain Matters has featured multiple commentaries related to Apple’s social and worker responsibility policies.  Unlike certain other blogger commentaries, we did not elect to blast Apple for lack of responsiveness to certain work practices among its supplier base or for benefitting from enormous financial success for the sake of unsafe or unspeakable supplier practices.  Our commentary in September of 2010 reflected on a Bloomberg BusinessWeek article where reporters were granted unprecedented access and interviews focused on remediation practices that would address the level of unacceptable worker suicides at contract manufacturer Foxconn.  Our commentary in May of 2011 opined that being rated as the foremost supply chain comes with immense social and business responsibility, and while Apple is not without certain faults, it was doing more than a lot of other manufacturers. Apple purposely sources manufacturing in low cost regions even though it continues to benefit from higher pricing and fatter margins.  Thus, it has little alternative but to be serious about being an active advocate for labor and environmental standards.

We believe that this latest transparency initiative is a clear sign that Apple is raising the stakes for supplier compliance.  How many CEO’s can you think of who can articulate their company’s supplier responsibility programs?

In publishing a full listing of suppliers, and providing unprecedented detail related to supplier compliance, Apple has sent a clear message that if you want to continue to be a member of Apple’s value-chain, you will need to conform to these standards of performance.  Being an Apple supplier comes with certain rewards for production volume and potential financial gain but it increasingly comes with accountability standards.

Apple’s cause for social responsibility practices could also benefit from increased sourcing in countries that take labor standards conformance rather seriously.  Perhaps now is the time for Apple to also consider more sourcing among U.S. and European supplier locations since that would also add more emphasis on its commitment to trade profits for consistency in worker safety and environmental practices.

We all know how challenging standards within low-cost manufacturing regions can be, and as a community, we should thank Apple for taking an active leadership role.  Now it is time for other technology providers and manufacturers to re-double their efforts as well, since change comes from the power of many. In the end, the global workforce benefits.

What’s your view?  Should Apple be praised for its proactive outreach and auditing standards?

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.