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Report Indicating the Assembly of the First iPhone in India

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In late January, we alerted our Supply Chain Matters readers to a report indicating that global smartphone and consumer electronics provider Apple was nearing a deal to manufacture its products locally in India. In March, we updated readers to a report from The Wall Street Journal that production could begin in a matter of 4-6 weeksiPhone 6 und 6 Plus 324 267 300x253 Report Indicating the Assembly of the First iPhone in India

The WSJ reports today that initial trail-run pilot production of the Apple iPhone SE model has now begun in Bangalore. (Paid subscription required) with devices scheduled to ship to customers across India this month.

Taiwanese contract manufacturing services provider Wistron is reportedly managing local manufacturing of iPhone6 and 6S smartphones from an existing production facility located in Bangalore, and longer-term plans include a production facility to be in the southern state of Karnataka. The report cites market research data indicating the smartphone ships across India grew 18 percent annually compared to 3 percent globally, thus making the country a very attractive growth market.

According to the latest report, domestic pricing for the iPhone SE still remains unclear, with speculation that Apple would want to maintain its gross margins.  Government officials in India are apparently pressuring for a lower domestic price.

The report again notes that the government of India is very supportive of an Apple manufacturing presence in the country, noting that it represents a sense of great pride for its citizens. Officials in the state of Karnataka are reported as eagerly cooperating to ensure that the future domestic manufacturing site means Apple’s needs.

We view Apple’s manufacturing strategy concerning India to be quite savvy, one that when completed, can provide a lot of market and supply chain benefits down the road. The key however, as always, will be Apple’s pricing and distribution strategy for smartphones managed in this country.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Apple’s iPhone Supply Chain Begins Ramp-up for the Big Release

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Several published reports are indicating that Apple’s supply chain is now gearing-up for the release of the new family of iPhone models later this year.

Asia based DigiTimes recently reported that semiconductor fab producer TSMC has received orders from Apple for production of the next generation 10nm A11 processor chip that will be included in the new models. The report cites sources as indicating that production was once affected by issues involving stacking components in the backend integrated fan-out packaging process, but have subsequently been resolved. The open question is when TSMC will be able to support full-scale chip production. Citi analyst Roland Shu has indicated that volume production is expected by July.

The South China Morning Post reports that Foxconn has been designated by Apple to be the sole contract manufacturer for the planned top-of-line model also due out  later this year. This most expensive and full-featured iPhone Pro model is reported my multiple sources to include a 5.8-inch light-emitting diode (OLED) touch screen, 3D facial recognition, front and back glass casing and augmented reality applications. There are indications that the Pro model could retail in the $1000 range.  According to the report, Foxconn was selected as prime manufacturer for the Pro because of its demonstrated experience in this CM’s ability to ramp-up Apple’s more complex new products.

The MacRumors site features a chronicle of all three of the rumored iPhone 8 models, including features and functions.

Other CM’s mentioned for the other planned model variations are Pegatron and Wistron respectively.  Supply Chain Matters is of the belief that this upcoming iPhone 8 model cycle will the largest test to-date of Apple’s supply chain segmentation strategy, specifically the three CM’s and the suppliers feeding component parts.

Other suppliers mentioned in the report include:

  • Samsung Electronics for the OLED panels.
  • Sharp and JDI for LCD panels.
  • AAC Technologies for miniature acoustic systems.
  • ASM Pacific Technology for the alignment bonding system used on camera modules.
  • Luxshare Precision Industry for wireless charging componentry.
  • Corning for glass screens.

 

Given the current streaming information, it would appear that product design has been solidified and the iPhone supply chain is now engaged for manufacturing ramp-up activities.

From our Supply Chain Matters lens, one thing is certain, Apple’s Sales and Operations and supply chain planning teams are going to be very busy in the coming months. If all goes according to plan, the 10th Anniversary of the iPhone will wow aficionados with one of the most expensive and full-featured devices to-date, along with other models at different price points. If any of the usual hiccups or snafus occur, teams will perform their usual response plans to ensure that global channel available meets plan. The biggest challenge will be in planning the proper model-mix plans among all planned three models.  During the last holiday season, the premium iPhone 7 Plus became supply constrained because planners did not initially plan for the actual demand for the full-featured, more expensive model. This year, the stakes are higher, along with the ability to gage and sense expected consumer demand.

It will all be fascinating to observe.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Articulating Supply Chain Needs in the Language of the C-Suite

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Q1 economic data provides some important signposts for industry supply chain teams, especially in their increasing needs to boost agility and responsiveness to overall supply chain capabilities. By our lens, the data reflects that supply chain leaders must more than ever, be able to translate needs and requirements in the language of the C-suite and in the notions of desired business outcomes.  Boardroom 300x200 Articulating Supply Chain Needs in the Language of the C Suite

We have often admired Oracle CEO Mark Hurd’s ability to demonstrate how to effectively communicate in the language of the C-Suite. That includes his observations that in a global economic environment where economies grow 2-3 percent on average, and where investors expect or demand far higher returns, something must give. He describes CEO priorities as concurrently managing for growth as well as cost savings.  Companies must take market-share from competitors or out-innovate the competition in products, added services or business capabilities, or risk the peril of being out-innovated by an industry disruptor. Hurd then provides meaningful evidence of how Cloud-based technology and applications can address the needs of top-line growth with lower overall costs.

Latest Data

Last week, The Wall Street Journal reported (Paid subscription required) that in the first quarter of 2017, the largest U.S. companies have been booking their strongest quarterly profits in five years, mostly from keeping a lid on spending for new projects, plants, and headcount. According to the WSJ, data on capital expenditures suggest that companies remain somewhat cautious on large expenditures. The report observes: “Profits at S&P 500 companies jumped an estimated 13.9 percent in the first quarter, growing nearly twice as fast as revenue.” While there is some notable industry exception such as declining growth and profitability for food and consumer staples providers, business leaders have been generally pleasing investors with attractive returns while being rather stingy on investments other than stock buybacks and added dividends.
As noted in a prior blog commentary, data related to U.S. GDP growth in and PMI activity in the first quarter adds some uncertainties for businesses. The report indicates that some businesses have reluctantly increased select hiring because of overt needs to increase overall productivity as top line revenues grow in environments that are generally lean in their ability to support added business needs.

Turning to hiring, the Labor Department reported that the unemployment rate in the United States dropped to a ten-year low of 4.4 percent while hourly earnings are up a mere 2.5 percent, on average, from a year earlier. Likewise, our view of various global PMI indices among key global regions such as the Eurozone and Asia indicate that manufacturing and supply chain employment is on the rise, albeit a gradual rise.

Thus, the job market is tightening, particularly for skills that are in high demand such as automated manufacturing and analytics based supply-chain decision-making. Supply chain leaders are fully aware of existing cross-functional talent need shortfalls and that challenge is likely to increase in the coming months.

Our sense is that the U.S. economy, and perhaps certain Eurozone economies are once again reaching a tight job market where in-demand people skills will be even more difficult to acquire without boosting compensation and benefits. Skilled employees will quickly understand their added worth in a tightened labor market. For emerging and mid-market manufacturers and services providers who must always operate on lean budgets, the people impacts will be more magnified.

 

Existing Realities

Industry supply chains are literally caught in the middle of these forces.

Pressures to meet the needs of digital process transformation and the online Omni-channel environment remain unabated. The quest for added supply chain cost savings continues across many industry sectors. Those pressures are passed along to suppliers and services providers across multiple tiers of the supply chain with the result that agility or responsiveness to new business opportunities or for product and process innovation are hampered across the product value chain.

In many cases, legacy processes and backbone systems have not changed since the era of client-server computing and point-to-point integration of transactions and data. The result has been more augmented processes and added spreadsheets to support needs for quicker decision-making demanded by the business. IT is now under enormous pressure to reduce infrastructure and data integration costs, because of these same business forces. Supply chain teams are likewise losing resources that were supporting the various patchwork processes.

Something must give and we believe many supply chain leaders know it.

 

Communicating the Language of C-Suite

Communicating in the language of the C-Suite implies advocating plans for the supply chain to support business priorities and desired outcomes, including supporting top-line revenue growth while continuing to reduce costs and improve productivity and timely decision-making.

The forces of digital transformation are twofold. First, transformation leads to meeting changing customer needs and expectations as well as added areas to support top-line revenue growth. Second, digital transformation provides supply chains the ability to leverage advanced Cloud-based computing and technologies that avoid needs for major legacy system upgrades that risk major business disruption. Cloud adoption places the burden of any added or changed IT infrastructure, data security and systems growth needs on the Cloud services provider.  The result can be a more predictable recurring operational cost line on the budget with the ability to leverage needs for digital transformation along with needs to support required people productivity needs.

The IMF recently increased its forecast of global growth to 3.5 percent citing building momentum for the Eurozone, China, and the United States. If that occurs, businesses will be under the gun to again boost shareholder returns, take maximum advantage of added growth opportunities while continuing to boost productivity and cost savings.

Now is the time to advocate supply chain process, technology and people needs in the vernacular of the C-Suite. It requires a twofold agenda for helping the business to increase revenue and customer growth while better controlling costs and worker productivity. It is also about enabling smarter, more informed, and timely decision-making prediacted on anticipating market and customer needs.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Another Example of SKU Proliferation Leading to Cost Complexity

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Yesterday in one of our news feeds, we came across a report on FoodBusinessNews regarding snacks producer Snyder-Lance, and it efforts to address an ongoing challenge to increase profitability. We view this report as a typical current day example of how the C-Suite turns to the supply chain as a prime barometer and facilitator of needed cost savings.

The report outlines a “comprehensive and aggressive performance improvement plan” that a result of recent first-quarter financial results falling behind management expectations., according to the interim CEO. A number of factors were attributed to the sub-standard performance that were described as category softness, lower net price realization, unfavorable mix, cost headwinds and certain execution lapses. Some or most of these phrases should be familiar to our readers in consumer packaged goods, food, and beverage companies since most of the industry has been whiplashed by many of these same forces.

What is rather interesting and noteworthy are statements that overall business complexity drive increases in costs. Snyder-Lance has identified five priorities to attack the complexity problem which include manufacturing and supply chain streamlining efforts. That includes a realization that a proliferation of SKU’s (stock-keeping units), half of which only contribute a reported 5 percent of revenues, the other-half, the majority of revenues.

SKU proliferation is a familiar challenge in supply chain business planning, one that dates back quite a few years in CPG and consumer brand-oriented product areas.

There are many causes.

Companies that undergo periods of active merger and acquisition cycles will often inherit both added distribution channels as well as associated SKU’s. Likewise, companies with inherit multiple channels of distribution are often subjected to such risks.

The snack food area is particularly vulnerable because snacks are often subject to impulse buying within multiple outlets including neighborhood convenience stores, dispensing machines, convenience restaurants, food purveyors catering to service firms such as airlines, passenger trains, ferries and the like, and the typical member warehouse and retail grocery chains. A new market twist is that of online grocery basket shopping which online providers such as Amazon, Wal-Mart, Target, and other online retailers have introduced.

In fact, this analyst is of the belief that SKU proliferation is again becoming a more widespread problem because of the new realities of online retail. Retailers themselves are finding themselves bloated with SKU’s to address different sales channels, be that physical store where snacks are purchased in bulk or online on an induvial basis.

Another challenge that Sales and Operations (S&OP) teams are quite familiar with is the relationship dynamics of sales and marketing, who advocate for creating separate SKU’s for what they believe will be new and upcoming customers. After all, a separate SKU allows the new customer to gain personalized product and at the same time, more definitive tracking of a channel’s sales volume.

There is little doubt that SKU Proliferation indeed can drive complexity and supply chain inventory and distribution costs. Advanced inventory management or inventory optimization tools help in identifying and addressing problem areas. The resolution, however, involves a lot of internal supply chain cross-functional and external sales and marketing collaboration. It is also a condition and a watch out that should be factored in the analysis of the increased costs related to supporting today’s more focused online business models.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Supply Chain Matters Commentary on Apple’s Fiscal Q2-2017 Performance

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Apple formally reported its fiscal Q2-2017 financial performance this week, and continuing our Supply Chain Matters tradition, we add some supply chain perspectives to this latest performance. The world’s most admired and most watched supply chain warrants continual observation.  Apple Logo Supply Chain Matters Commentary on Apples Fiscal Q2 2017 Performance

Revenues

The Company posted quarterly revenue of $52.9 billion compared to revenue of $50.6 billion in the year-ago quarter. International sales accounted for 65 percent of the quarter’s revenue, which is continued reinforcement of where Apple’s growth markets reside. However, reviewing detailed performance for key growth regions reflects concerns for sales momentum:

Greater China– a 14 percent year-over-year sales decline as well as a 34 percent decline from fiscal Q1.

Rest of Asia Pacific– a 35 percent decline from fiscal Q1

Japan– a 22 percent decline from fiscal Q1

Wall Street research reports such as Seeking Alpha report that China local smartphone manufacturers Oppo and Vivo have had robust sales growth at lower price points which are attributed to Apple’s declining momentum in the country. Some in investment circles question whether Apple has a viable growth strategy for China, given the level and price and performance points among local competitors.

On a positive note, the category of Other Revenue which makes-up the iWatch, AirPods and other hardware grew 31 percent year-over-year. Regarding the latter, indications are that supply remains constrained. Services generated $7 billion in revenues an 18 percent year-over-year increase.

A couple of years ago, this author put forth the premise that Apple’s supply chain serves two primary purposes- one being customer needs, the other being the fuel to sustain the growth of services and content related revenues. That strategy is obviously working.

Unit Volumes

iPhone volumes in the latest quarter were reported as 50.8 million vs. a 51.1 million performance in the year-earlier quarter. Apple reported that during the recent quarter, channel finished goods inventory was reduced by 1.2 million units, compared to a channel reduction of 250,000 units in the year earlier period. That action likely implies that supply chain planners are preparing for the introduction if the highly anticipated 10th Anniversary Edition iPhone later this year, and thus are trying to ensure that channel inventories do not exceed new product introduction targets. Apple reported exiting the quarter well within the target of 5-7 weeks’ channel inventory.

To offset volume declines, average ASP was reported as $655, up from $642 in the year ago quarter. That reflects a sales execution strategy that continues to prioritize margin performance.

In the briefing to analysts, Apple executives further indicated that the product mix planning imbalance involving the iPhone 7 Plus and the iPhone 7 that occurred in the holiday quarter took some weeks to resolve, but balance was restored in the latest quarter.

The other closely watched iPad volume performance reflected 8.9 million units sold vs. 10.2 units sole in the year earlier period. Apple recently made price adjustments to the iPad product line-up to spur added sales volume. In the financial performance update with analysts, Apple indicated that there were some supply constraints with the product during the quarter. Channel inventories were reported as flat during the quarter.

Profitability

Operating income was reported at $14 billion while net Income grew 5 percent year over year to just over $11 billion. The takeaway headline for business and Wall Street media was the overall cash position, which reached $256.8 billion in the recent quarter, a sequential increase of nearly $11 billion. That overall number rivals that of some foreign countries, as well as very large corporations, and continues to fuel lots of speculation regarding Apple’s next strategic move. And, a good majority of this cash sits in overseas accounts, forcing Apple to borrow money to fund existing U.S. investments.

Political and Market Spin

If you have been keeping-up with our various Supply Chain Matters blog commentaries related to Apple over the past few years, you would likely get the impression that the supply chain strategy is to strive to have the lowest cost, yet market to be the premium brand. That includes leveraging its vast unit volumes to continuously extract price concessions from suppliers, and to source all volume manufacturing within China where direct labor costs, although increasing, are still quite attractive over developed market regions.

In this latest quarterly financial report, Apple went out of its way to stress its ongoing investments in the U.S. economy, indicating that the company spent more than $50 billion among U.S. suppliers, developers and partners and supported more than 2 million jobs, including the 80,000 with the Cupertino area. That is a wide swath of data collection. One wonders what the total jobs number is across China and other lower-cost regions.

In a move, likely to placate the current Trump Administration political environment, CEO Tim Cook disclosed shortly after the report of financial results that his company would later this month formally announce the creation of a $1 billion fund to promote advanced manufacturing jobs in the United States. He further indicated that the May announcement will include identity of the first company chosen to invest in.  Do not be surprised if that company turns out to be an existing contract manufacturer.

Let’s also keep this announced investment in some perspective, namely that it represents a rather small percent of existing cash. To draw just one comparison, in the recently completed quarter, the company allocated a total of $10 billion to repurchasing of its stock and on dividend payments. That is just one quarter’s investment. According to a report by The Wall Street Journal, since 2012, Apple has allocated $200 billion of cash to shareholder interests.

Apple further stands to gain if the U.S. Congress passes a corporate tax reform plan that includes an attractive rate to re-patriate cash held overseas.  Perhaps Apple can add to its initial $1 billion investment sometime next year.  Perhaps Apple can buy another manufacturing company such as Tesla, that is also investing in advanced manufacturing techniques.

Above comments aside, we do compliment Apple on its advanced manufacturing investment decision.

Looking Ahead

Turning our lens to the remainder of 2017, all eyes will be turned to product development efforts related to the highly anticipated 10th Anniversary Edition iPhone, with many industry observers anticipating lots of consumer pent-up interest to upgrade to this edition.  That again places more challenges on both product development and the supply chain teams. Product development is likely being influenced to pack as much new innovative technology, such as OLED screens and new software features such as augmented reality into the new models. Supply chain teams want to ensure that product designs were factored for design for supply chain considerations and to avoid the product mix planning snafus that occurred with the introduction and actual sales trending of the iPhone 7 Plus. As we have continually observed, the supply chain has continuously had to overcome initial manufacturing yield challenges with component designs that push the technology envelope. The next three quarters will likely be no different.

Obviously, more chapters to be written in the case study of Apple.

Bob Ferrari


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