Rather interesting supply chain related news came from Apple, Inc. circles this week.  According to the Wall Street Journal, (paid subscription may be required) Apple plans to begin producing a CDMA version of its widely popular iPhone later this year. This move would allow other carriers such as Verizon Wireless or Sprint Nextel Corp. to offer iPhones to their subscribers.  Currently, Apple offers only a GSM version with an exclusive distribution arrangement with AT&T.

According to this article, Apple is about to embark on a dual contract manufacturing strategy for the iPhone.  Sources close to Apple are indicating that production of the newer CDMA version will be sourced to Pegatron Technology Corp., the contract manufacturing arm of Taiwan based ASUTeK Computer Inc.  Apple also plans to upgrade the current GSM version being produced by contract manufacturer Hon Hai Precision Industry Co.  The Journal notes that sources that one person familiar with the situation indicates that Pegatron is scheduled to start volume production in September, but the schedule could change.  As is the usual practice, representatives from both contract manufacturers have declined to comment.

From my perspective, this new dual sourcing of contract manufacturing for the iPhone is a smart business decision for Apple in terms of risk management.  A second high volume manufacturer provides additional flexibility in capacity and volume ramp-up needs.  ASUSTeK Computer is a well known entity in notebook computer manufacturing for many different OEM’s, and is experienced in the understanding of social and supplier responsibility practices practiced by many of these global OEM’s.  This will add more flexibility in Apple’s social responsibility practices, which have come under some criticism of late in Internet circles. 

Bob Ferrari

In January of 2009, Apple Computer stock went into a tailspin as rumors about Steve Jobs’ failing health fueled speculation of an imminent leadership crisis for this icon of consumer electronics.  Steve Jobs response was to appoint Tim Cook, Apple’s COO and able supply chain leader to the interim post of CEO while Mr. Jobs was on medical leave. I penned a Supply Chain Matters commentary at the time that noted that Cook’s solid supply chain operational background and focus on consistent execution may be just what Apple needed  Our final commentary closed with the following: If you believe as I do that cutting your teeth in supply chain is a great proving ground for “C-level” success, than rest easy.  All will be fine.

It is now one year later, and a Wall Street Journal article reports (paid subscription required) that Mr. Cook has been awarded a $22m cash and stock bonus based on his achievements as interim CEO.  Not bad for one year’s work!

In reality, Mr. Cook’s 12 years of performance speaks for itself and we should not resent the fact those years of grounded cross-functional operational experience and the existence on enviable supply chain process capabilities certainly led credence to his performance bonus. While I have absolutely no quantified evidence, my suspicion is that Mr. Cook may well be the leader in the ‘world’s wealthiest and best paid supply chain executives’ category.

Perhaps there will be more highly experienced cross functional supply chain executives occupying the CEO slot in the future of global businesses.  Then again, all of this compensation might go to their heads and perhaps cloud their former judgment skills.

 Bob Ferrari

It seems that there is no firm, whether big or small, that does not have a concern these days about its products being ripped-off by unscrupulous operators, or finding security concerns within an overseas supply chain. However, when you are a very large global OEM who happens to sell a very profitable product, the mechanisms to attack such activity are wide reaching.

A posting in SiliconValley.com notes that Hewlett Packard is accusing several Asian companies of selling inkjet cartridges that allegedly infringe on HP patents, and in some cases, include components stolen from HP’s contract manufacturing plants. A lawsuit alleges that Microjet Technology of Taiwan and PTC Holdings of Hong Kong sold cartridges that infringe on HP designs. It further accuses another firm, Mipo Technology of selling cartridges containing alleged stolen components. The article notes that from 2005 to 2008, HP has conducted 4620 investigations to seize nearly $800 million worth of counterfeit products within its supply chains.

Lawsuits are a familiar weapon utilized by high tech companies when profits are threatened. In the case of HP vs. Microjet Technology, lawsuits date back to 2001. It seems that in any given year, HP has some sort of lawsuit underway protecting its IP interests in inkjet cartridges. Apple Computer has also been in the headlines of late as it has also filed lawsuits with a major contract manufacturer to protect its intellectual property and patents.  Apple is another high tech company that does not shy from this policing activity.

Not every firm has the resources of an HP to police its supply chain for patent infringement, counterfeits or stolen materials. Constant diligence and supplier monitoring are an unfortunate necessity within today’s extended supply chains.

 Bob Ferrari

In supply chain circles, anytime you write or speak about Apple, it is bound to draw lots of attention.  Dell, once the premiere example of world class global supply strategy and capability, has long-since fallen on hard times, and Apple has assumed nearly every industry analyst’s recognition, including mine, as a world class benchmark in supply chain capability and performance.

I find it, therefore a bit perplexing when some in the blogosphere and media tend to admonish Apple for its supplier and its social responsibility practices.  I suppose it makes for a good headlines and Google search-engine pickup and ranking.  But let us get a bit pragmatic on reality and practices.

A recent incident in mid-February where a media reporter was reportedly roughed-up by private security hired by contract manufacturer Foxconn drew some of this type of negative attention.  As this reporter stood on a public road taking pictures of a Foxconn facility in Longhua, China, private security guards reportedly tried to drag the reporter back into the facility before the local police intervened and calmed the situation.  A commentary of this incident was noted by Philip Elmer-DeWitt on the Apple 2.0 blog.  DeWitt notes that the incident shows “the lengths to which Apple and its suppliers will go to guard Steve Jobs’ secrets… “ and identifies a litany of excessive security measures that have been taken. Jason Busch penned on his Spend Matters blog that “the secrecy with which Foxconn operates is a direct result of a culture of fear with which Apple manages its supply chain”. Jason concludes that “we should hold Apple accountable for its supplier’s behavior in this case, just as we hold accountable companies that chose to ignore-or not discover—other labor infractions within their supply chains.” There has since been a second posting that condemns the standards by which Apple suppliers treat their employees, making reference to a London Daily Mail headline artice: Apple admits child labour was used to build iPods and iPhones in Chinese factories.

Here’s my view, let us be a bit more realistic and more down to earth regarding such commentary. I,to, decry child labor and discriminatory practices, but let us give Apple the credit for finding, reporting and driving remediation of such practices. Apple has been taking-on and tackling some rather difficult and sensitive business cultural issues and is not getting proper credit for doing so. In one instance, the company reports that it has terminated a supplier, and for other instances Apple has established what could be termed as progressive discipline to address abuse elimination.

Apple has always had a culture of secrecy, more specifically, protecting its intellectual and product capital.    It is a company driven by leading-edge product innovation, which has worked very well for Apple in terms of explosive business growth in sales and profitability.  Apple goes to extraordinary lengths to protect its IP.  Just this week, it launched a lawsuit against HTC Corp., a manufacturer of smart mobile phones utilizing Google’s Android operating system, for alleged infringement over 20 Apple patents. A previous lawsuit was filed against  Nokia. With a totally outsourced design and production supply chain, and with production located in countries such as China, the Philippines, Malaysia, and Thailand among others, there are many potential areas for information leakage. In fact, analysts try often to breech information security anywhere in Apple’s supply chain so that they can have the inside story to Apple’s next great product.

Regarding the notion of shoddy labor practices or social responsibility, these same geographic areas have had a history of shady labor practices but positive progress is being made and should be acknowledged.  The realities of China alone are well known to any firm who has elected to outsource production to this region.  It is no secret that the business culture of China places an ultimate emphasis on profits and that such a culture can tend to exploit abundant labor resources for such ends.  But not all Chinese or Asian firms fall under that mantra, especially those that understand the importance of building a solid supplier working relationship with a global brand.

Apple also has oversight for tremendous volumes of unit production in its network of contract manufacturers and suppliers. In its latest quarter which included the holiday surge, Apple pulled off a 60% increase in unit volumes, shipping in excess of 33 million units to consumers.  That is in excess of 100 million units that are flowing through Apple’s value-chain on an annual basis, and that provides the company lots of leverage in overseeing key performance measures for Apple’s suppliers.

The company recently released its Supplier Responsibility 2010 Progress Report. The report outlines the various categories as well as the frequency of audits performed on the supplier base.  The Apple Supplier Code of Conduct includes audits in employee protections, health and safety, environmental impact, business ethics and management commitment.  In my view, it is a fairly wide ranging framework of supplier evaluation and if you have any concerns about Apple’s commitment to social responsibility across its supplier base, take the time to read the report. In 2009, the company conducted audits at 102 facilities including annual audits of all final assembly production facilities, including Foxconn.  That is an average of 5 audits per month. The direct involvement of Apple’s procurement managers is required in reviewing the results of such audits, which adds procurement accountability and follow-up as teeth for setting supplier performance expectations.

How many other companies can cite that level of audit within an outsourced supply chain located in the Asia region? Probably, just a handful. Apple notes in its report that for most of its audits, suppliers stated that Apple was the only company that had ever audited their facility for actions related to supplier responsibility.

In the report, Apple goes further to define what it terms as core violations, the most serious class of violation which requires an immediate corrective action for those cited.  Core violations include underage labor, falsification of audit materials, threats to worker safety or retaliation against workers.  The report specifically outlines what violations were found, which appears to be the fodder that certain media stories are exploiting.  How many global companies are you aware of that would make this type of information visible? Again, just a handful.

The point I’m making is that instead of putting a negative spin on Apple’s policies, we should be commenting and dwelling on the positives.  Yes, the secretive culture is frustrating and perhaps overdone.  And yes, it may be seen as arrogance. But Apple’s success and track record in product innovation, commodity sourcing and value-chain execution speaks for itself. Its Supplier Responsibility Framework has come a long way and is far reaching, to include social responsibility.  What we need are more companies to join Apple in embracing similar comprehensive audit standards, including an active cycle of audits and penalties. The issues of labor infractions and/or lack of social responsibility within supply chains is not in the best interests of suppliers and contract manufacturers, and each know that influential customers like Apple are watching and measuring.

Instead of bashing, perhaps we should praise Apple for its leadership in taking on rather difficult and messy issues related to supply chain risk and social responsibility.

Bob Ferrari

Note: This posting can also be viewed and commented upon in the Kinaxis Supply Chain Expert Community web site.

One of our most favorite and dare I say most reader popular commentaries on the Supply Chain Matters blog is when we comment on Apple Computer‘s quarterly financial and operational results.   It seems that nothing gets in the way for Apple. For the Q1-2010 quarter that ended in December, Apple again impressed.

Apple continues to defy the economy and will surely maintain its number one ranking in everyone’s top supply chain capabilities listing.  The company reported revenues of $15.68 billion, and profits of $3.38 billion in the quarter.  An accounting change allowing Apple to recognize iPhone revenues earlier skewed these results, but nonetheless, the results are an envy of any global consumer electronics manufacturer.  A 58% quarter-to-quarter revenue and nearly doubled profit increase are extraordinary for these economic times.

Unit shipment volumes were again impressive and continue to reflect that Apple’s supply chain fulfillment capabilities stand out as a global benchmark.  Total quarter-to-quarter unit volumes increased over 60%, to over 33 million units shipped. Shipments were fueled by 21 million units of iPods, doubling the September period, and 8.7 million iPhones, a 17.5% from the September quarter.  No doubt, consumers seeking a new iPod or iPhone for the holidays helped to fuel this activity.

In our previous commentary, we noted that Apple was running at a Days Inventory Outstanding (DIO) calculation of 4.48 days and would likely have to gear-up to manage the coming surge in holiday shipments.  Apple indeed increased its overall inventory from $455 million in the September period to $576 million in December, but did so in a highly managed manner. My latest calculation of DIO is 3.36 days which is incredible. The company also generated $5.58 billion in cash during the latest quarter and increased gross margin to 40.9%, more than three points from a year ago.  Apple’s fulfillment capabilities have also expanded globally, and the company reports that 58% of sales are derived from international markets. Recent product teardown analysis also reflects that Apple has also been successful in lowering the material and production costs of both the iPod and the iPhone. With the recent announcement of the new iPad tablet computer, the company is now ramping-up production to begin shipping the unit by March.

In the coming months and years, business schools and supply chain academics will be seeking out business case studies reflecting which companies smartly managed their way through the global recession that began in 2008.  The name of Apple will surely be included in that collection, as one of the few companies that not only grew top-line revenues, but also extraordinarily and efficiently managed a totally outsourced supply chain. At this current rate of growth, Apple will double its revenues and nearly quadruple its profits from 2007 levels by the end of its current fiscal year.

It is no wonder that Apple remains secretive in telling the world about its supply chain business process and IT capabilities. The results speak for themselves.

Bob Ferrari

Disclosure: Kinaxis is one of other sponsors of the Supply Chain Matters blog, and as such provides financial consideration for having its product logo and product information linked to this blog.