Yesterday, after the stock market closed, Apple announced its fiscal third quarter financial performance and Wall Street’s headline was immediately one of disappointment. This was despite reporting that profits had surged 38 percent from the year earlier period along with total revenues that grew 33 percent. Gross margin was reported as a whopping 39.7 percent which is extraordinary for the majority of today’s consumer electronics providers. Yet within minutes of the earnings report, Apple’s shares plunged 7 percent in after-hours trading and today, dropped as low as 21 points before a small rebound.
What the investment community is primarily concerned with is a perception that Apple is trending toward a one-product company, that being the iPhone, which with the latest results, accounts for 63 percent of Apple’s overall sales. That is a ten percentage point increase from a year ago, prompting concerns that other products such as the iPad are declining in sales, while new products such as the Apple Watch have yet to provide an offset. Unit sales of the iPad are believed to have declined 18 percent in the latest quarter, making a sixth consecutive quarter of year-over-year declines. Once more, the previously touted partnership among Apple and IBM, designed to provide more business applications leveraging the Apple tablet, do not appear to be stemming the declining trend.
In the fiscal third quarter, while Apple reported shipping 47.5 million iPhones, an increase of 35 percent from the year earlier quarter, that number was 23 percent lower than shipped units reported for fiscal Q2. According to a report by The Wall Street Journal, analysts noted previous quarter-on-quarter iPhone volumes fell by 19 percent and 17 percent respectively, and remain concerned for a steeper rate of decline. Apple attributed unit shortfall to the lowering overall inventory by 600,000 units during the quarter. Fiscal Q3 has traditionally been Apple’s slowest volume quarter.
In an interview with the WSJ, CEO Tim Cook indicated that he refuses to accept the thinking that Apple cannot sustain its existing growth rates. He further indicated that Apple has pried open the door to untapped markets such as China, and that the company is sensing a larger conversion rate from Android powered devices to iPhone.
Apple did not provide any breakdown of Apple Watch performance but CEO Cook indicated to analysts that the “sell-through” of the Watch was better than the iPad and iPhone at their product introduction phases. We will have to wait and observe what that means over the next two critical quarters.
From our supply chain lens, the upcoming quarters will provide Apple’s planning teams with added challenges. Earlier this month, we highlighted that Apple is now actively planning the ramp-up of the planned next release of iPhone. Reports indicate that the company is requesting suppliers to support between 85 million and 95 million iPhones for the all-important end-of-year holiday buying season that ends at the end of December, This is despite anticipated modest hardware changes.
Planners are obviously reducing existing model inventories but must be diligent to not impact Apple fiscal Q4 results. With expectations for increased sales of the Watch, as well as a newly introduced iPod Nano, additional effort will be focused on ramp-up production milestones. An added challenge has got to be focused on what to plan for inventory and fulfillment needs for the iPad, given that there may well be a product change coming.
And then there is that mega “elephant in the room”, what to do with $200 plus billion in cash.
The adage for Apple’s and indeed many other global supply chain teams is often, not what you did yesterday, but what are you going to do tomorrow, next month, and next quarter.
Does that resonate?
A lot of electronic alerts come across the desk of Supply Chain Matters regarding web content focused on key topics and challenges involving today’s supply chains. We only elect to share content that we feel will serve the interest levels of our global based readers.
Thus we recently came across a blog posting on EBN: Talking about Supply Chain with John Kern, Cisco.
EBN Editor-in-Chief Hailey McKeefry recently interviewed the Senior Vice President, Supply Chain Operations at Cisco. This author has heard John Kern speak at prior industry conferences and has spoken with John on past occasions. I find John to be a visionary leader.
In the EBN interview, John articulates the mission of supply chain management- namely on enabling the success of the company strategy. He further speaks to the uniques challenges underway within high tech supply chains, in-particular, customer shifts from capital investments to services investments.
John further articulates Cisco strategies regarding the challenge of demand and available supply of supply chain talent. Pay particular attention to what is defined as the “landing zone”, which is defined as what the supply chain needs to look like in three years in terms of locations, skills, generational mix, roles and leadership.
By our lens, this is an insightful interview and worthy of reading and reflection. Take some time on the beach or in the yard to review it.
Bob Ferrari, Executive Editor
A firm’s supply chain exists to support and enable specific business outcomes. Such outcomes might include increased profits, broader product selection or higher levels of customer satisfaction and service. Supply chain strategy setting can often stumble when specific outcomes are not clearly defined or outcomes become conflicted. Consider the notion that a strategy driven to overall supply chain cost efficiency can sometime hinder needs for more agile response to market opportunities.
Supply Chain Matters has often praised Apple’s supply chain capabilities, not only from aspects of product and supplier innovation, but in overall agility as well as enhancing product margins. By our lens, few supply chains exhibit such a track record.
That point was driven home by today’s published report from The Wall Street Journal, Apple Gets 92 Percent of Smartphone Profit. (Paid subscription required) The report cites estimates from Canaccord Genuity concluding that in the first quarter: “Apple recoded 92 percent of the total operating income from the world’s top smartphone makers.” That was an increase of 65 percent from a year earlier. According to this report, the combination of Apple and Samsung accounted for more than 100 percent of industry profits since other makers broke even or lost money.
According to the report, what stands out even more regarding this achievement is the fact that Apple sells fewer than 20 percent of total volume, yet manages to garner the highest average prices and occupy the high end of the smartphone market.
Once more, as we have pointed out in our numerous Supply Chain Matters commentaries, Apple has the ability to practice highly agile sales and operations planning, segmented supply risk and multi-channel customer fulfillment while supporting the industry’s highest product margins.
From our lens, a lot of the success of the Apple supply chain stems from the ecosystem of responsive suppliers who can scale with Apple’s relentless requirements. And in fact, some suppliers have succumbed because they could not continue to meet Apple’s requirements while attempting to support individual financial outcomes for profitability.
Some will speculate that Apple’s advantage may eventually succumb to the track record of other high tech or consumer electronics OEM’s that eventually over-saturate their market and are attacked from more innovative producers. For now, however, Apple and its supply chain remain the ‘best of show”.
The Wall Street Journal, citing informed supplier-based sources, reports that Apple is planning for a larger initial production run of the next iteration of iPhones. According to the report, Apple is requesting suppliers to support between 85 million and 95 million iPhones for the all-important end-of-year holiday buying season that ends at the end of December, despite expected modest hardware changes.
Last year, Apple planned its supply chain output for a range of 70-80 million phones, and actually shipped 74.5 million smartphones during the holiday quarter. That was a 45 percent increase from the year ago holiday surge quarter. The iPhone6 incurred its own set of production ramp-up challenges including a last-minute design change involving its larger screen displays. There was the usual production yield challenges associated with the fingerprint scanner and with the LCD displays. During its most recent fiscal quarter, Apple shipped 61.2 iPhones, fueled primarily by emerging market demand primarily from China, Hong Kong and Taiwan.
The WSJ indicates that hardware changes are expected to be less noticeable and that Apple is in-essence betting that consumers will flock to upgrade their existing iPhones. Display sizes and screen resolution are expected to be unchanged.
Further reported is that contract manufacturer Hon Hai Precision (Foxconn) is in the process of hiring additional workers for its Zhengzhou China facility, in anticipation of beginning volume production starting in August.
The report confirms that a third contract manufacturer, Taiwan based Wistron Corp. will supplement production needs this year. In an April Supply Chain Matters commentary, we echoed a published report from Taiwan based Digitimes indicating that Apple was expected to adjust its lower-tier supplier Q3 order volumes for both the iPhone 6 and the newly released Apple Watch to minimize the risk of too much volume dependency on any one single supplier, as well as to meet or maintain targeted gross-margin goals. Noted was that Apple had invited both Compal Electronics and Wistron, noted contract manufacturers in laptops and other consumer electronics, to join its supply chain as augmented suppliers. The report further indicated that Apple’s two major PCB partners, Zhen Ding Tech and Flexium would have their order rates adjusted while suppliers Largan Precision and Advanced Semiconductor Engineering, which reportedly have advantages in advanced technology, will benefit from increased orders.
As noted in many of our past commentaries, the ability of the Apple supply chain to support steep new product introduction ramp-ups is predicated on active supplier risk management coupled with supply chain segmentation strategies focused on product margin and profitability goals.
The next test comes in the next five months.
Whether you reside in a large or smaller, up and coming business, accurate product planning is always essential to insure timely and responsive supply chain customer fulfillment, especially when new products are introduced to the market. For consumer electronics, the first few months of customer demand are the most critical. That includes the demand expected among different model variants of a product.
A reminder of such importance is reflected in this week’s business headlines concerning Samsung Electronics, and its recent release of the Galaxy S6 smartphone family. The company alerted its investors this week that second-quarter earnings would be disappointing because of laggard sales of its new Galaxy S6 model. According to a published report by The Wall Street Journal, Samsung may have misjudged demand.
The WSJ cites informed sources as indicating that when the Galaxy S6 family was launched April, the established supply and manufacturing plan called for demand for the Galaxy S6 to be four times more than that of the Galaxy S6 Edge, curve screen variant. It turned out that consumer demand was evenly split between both devices which led to a surplus of unsold S6 devices and an eventual shortage of the higher priced Edge model. Samsung’s supply chain teams then had to scramble to boost component supply and contract manufacturing levels of the Edge model.
As to how much the planning snafu contributed to a sales or revenue shortfall will come when formal quarterly results are reported. Final quarterly results are due later this month. However, the WSJ observed that the company’s stock has fallen 17 percent since the April launch of the Galaxy S6.
Certainly, Samsung is but one visible example of the importance of more dynamic and agile supply chain planning. Other manufacturers and retailers have experienced similar lessons, some public, others not as public but equally challenging.
The report serves as another timely reminder of insuring that adequate resources and more agile planning methods that sense product demand are continually incorporated in your supply chain planning.
As many of our Supply Chain Matters readers are aware, the July 4th holiday in the U.S. is a big one. Not only is it the annual celebration of U.S. liberty and independence, complete with numerous concerts, picnics and fireworks demonstrations, the holiday serves as the symbolic kickoff to summer vacation and other family-based activities.
The first two weeks in July is often a period when firms take the opportunity to shut down or scale-back operations to refit or perform major maintenance on manufacturing and other equipment as well as IT applications and systems.
One high tech and consumer electronics manufacturer that will be very busy this summer is that of Hewlett Packard which is in the key preparation stages of splitting the former company into two equally sized companies on November 1st. One company, Hewlett Packard Enterprise Company will oversee operations of the now HP Enterprise division, A $55 billion dollar entity. The other, HP Inc., will oversee operations of the now HP Printer and PC divisions, of equivalent revenue size.
The HP split involves separating balance sheets, facilities, IT systems and applications, including those related directly to the support of HP’s end-to-end supply chain. Purchase agreements among various suppliers must to recast foe each new company along with various special agreements. HP operations currently span 600 locations in 170 countries.
The split comes in the midst of massive headcount reductions that have already occurred across many business and functional groups.
Supply Chain Matters has featured prior commentaries related to the risks in splitting-up HP’s vast and complex supply chain ecosystem of suppliers and manufacturing partners. Most important was the global buying scale of a singular HP that was constantly leveraged among suppliers.
Management of the upcoming split is being overseen by a 500 person Separation Management Office that includes key executives that will make-up both split companies, including HP’s current CIO.
This week, The Wall Street Journal featured an interview of HP CIO Scott Spradley, who described a complex surgery analogy for separating various IT systems. Keep in-mind that HP is primarily supported by an SAP ERP and Business Suite infrastructure and applications backbone. According to the report, HP is about to initiate a global network of IT command centers designed to keep operations humming amid the combined $1.8 billion restructuring effort. The report cites the closing of 2600 internal computing programs that include those supply chain related.
Another sudden twist to this ongoing story comes from today’s WSJ which reports that the executive tasked with leading the HP Separation Management Office announced his departure from HP this week. According to the report, this was an unanticipated setback in what so far has been a smooth transition process.
Obviously it is going to be a rather busy summer across the many halls of HP, particularly the halls of the company’s combined and soon to be separated supply chain ecosystem of suppliers and supply chain support teams.
In the meantime, we extend best wishes to all of our U.S. based readers for a joyous and safe 4th of July weekend.