The following commentary also appears on the Supply Chain Expert Community web site.

About a month ago,we penned a Supply Chain Expert Community commentary reflecting on how any sort of news, positive or negative, emulating from Apple’s supply chain, can directly impact a company’s stock valuation.  That applies not only to Apple itself, but also its suppliers. The sheer scope and volume of Apple’s value-chain should cause any supplier to covet Apple’s business and volume scale.  Where the phenomenon of a negative market valuation drop was once attributed to a major supply chain disruption or snafu, when it comes to Apple, it can be any negative news deemed significant by equity markets.  Our readers are probably aware that both Apple and Samsung provide a rather unique industry relationship. While they each compete in the same markets for consumer electronics devices, Samsung has been a long-term key supplier of various supply components for Apple.

Thus, in yesterday’s financial media, are reports of the near $10 billion drop in the market valuation of Samsung, after a Taiwan based publication reported that Apple placed a rather large contract order for 12 inch DRAM chips with Japan based Elpida. As was noted in our late April commentary, Elpida, a DRAM chip competitor with Samsung and Hynix Semiconductor, among others, previously filed for bankruptcy protection, and has become a takeover candidate. We cited a Bloomberg Businessweek report characterizing Elpida as “the hottest takeover in tech”, because of the implications of changing the fundamental competitive dynamics of the DRAM market based on supply contracts with Apple.

A Reuter’s article reporting on the Samsung impact quotes an Asia based equity analyst indicating that the shift in supply contract implies that Apple does not want Samsung or Hynix to dominate this market segment.  Reuters also reports that U.S. based Micron Technology Corp. are in talks to acquire Elpida, and the prize has just become more valuable.

In essence, Apple continues to practice smart supply management, insuring a competitive dynamic and balanced supply risk exists across its supplier base. In a March Expert Community commentary, we highlighted how Apple had sourced multiple suppliers for device memory, high-resolution display and NAND flash memory for the company’s iPad products.

Here’s another evidence point. Financial media is today reporting that Apple is sourcing a bigger screen for the upcoming new release of the iPhone. This 4 inch diagonal screen (contrasted with the current 3.5 inch screen) is reported to be sourced at suppliers LG Display Co., Sharp Corp. and Japan Display Inc. Consider that in March, Hon Hai Precision Industry Co., the parent of global contract manufacturer Foxconn, invested $800 million to take a 46.5 percent stake in Sharp’s LCD production facility in Sakai, western Japan. Japan Display was previously formed from the merged LCD production entities of Sony, Toshiba and Hitachi, that each decided to consolidate as one to garner more volume scale. If sourcing reports turn out to be accurate, Apple would, in essence, be balancing geographic related risk (Korea and Japan sourcing), and supplier and scale risk in having LCD supply alternatives beyond Samsung.

Being the goliath in terms of volume and scale of the consumer electronics value-chain comes with tremendous influence for long-term revenue and capacity planning.  At the same time, such influence must include a balance of risk and influence.  We should all take notice of Apple since it continues as a benchmark in these practices.

Bob Ferrari

I pen this commentary on a Friday after a very long week involving extended travel and consulting services activity.  Knowing that I’m overdue for my weekly Supply Chain Expert Community commentary, I thought I would come up with something different, a fruit analogy related to supply chain capabilities.

Lately, many commentaries related to global supply chain business process capabilities focus on Apple, which often, and deservedly, lands on every supply chain analyst’s top ranking and many business media related articles.  Many in the supply chain expert community can point the finger at this author for often penning commentaries highlighting Apple, but I’m not alone in doing this.  Lately, much of Apple’s supply chain capabilities have come to light, both positive, and not so positive.

An analogy that can come to mind is that of the shiny apple, which distinctively sits in the fruit basket and can easily be identified in its familiar image and taste. This apple is very delicious, somewhat tart, but consistently delivers on taste. Some content of the apple is used to make or blended to make other delicious products such as pies, cakes or juices.  Because the apple is so shiny, and because the apple is loved by millions and millions of consumers, sometimes the apple gets attention that it does not necessarily desire.  Sometimes the apple can develop blemishes.

The apple also competes with other fruit for consumer tastes.

Let us turn our attention to another fruit, the orange.  It has a rather complex structure, there are actually embedded layers within the orange, each providing a piece of juicy, and yes, sometimes tart , but fairly enjoyable taste. The orange does not garner all the attention of the shiny apple, but the reality is that it is slightly bigger, and can serve multiple purposes.  You can eat the orange itself, either at breakfast, or as a daytime snack. The orange peel is utilized in baking recipes and sometimes the pulp can is used in other products or snacks.  The orange itself can be converted into delicious juice, a huge market seller. You see, the orange also serves as a multi-purpose fruit, but perhaps more behind the scenes.   Because its peel is pebble-like, its blemishes are more easily ignored.

Can you guess what our orange analogy equates to?

Our analogy points to Samsung.  A global giant, not only in smartphones and tablets, but also in major consumer electronics value-chain components such as semiconductor chips, high-resolution  LCD displays and memory components.  Last week, business media began recognizing Samsung as the global market leader in smartphone shipments.  According to market forecasting firm Strategy Analytics, Samsung shipped 44.5 million smartphones in the first quarter compared with Apple’s output of 35.1 million units.  Business media has been quick to declare Samsung the market leader, surpassing both Apple and Nokia.  Once more, according to the Financial Times, the company recorded record quarterly profits, with its mobile division accounting for 73 percent of that total operating profit.  Because Samsung is a major supplier to Apple and other brands, this vertically integrated producer also gains additional benefits in overall market unit volume sales.

While Apple seems to top many rankings in supply chain capabilities, Samsung does not. Its unit volumes, supply chain breadth and volume output shine above others with few glitches or supply disruptions. Global consumers have obviously embraced Samsung mobile devices as an alternative to Apple’s iPhone, by witness of these latest results. As our orange analogy notes, Samsung also can play a very influential role in the innovation of future products, since it is positioned as a major value-chain player.

The shiny apple does indeed get lots of visibility in the fruit bowl, but we had better pay attention to the orange as well. That includes ranking of global supply chain capabilities.

Bob Ferrari

Supply Chain Matters just came across a timely article published by Forbes, Apple’s Secret Plan for Its Cash Stash that we recommend for mandatory reading and discussion among senior supply chain and procurement sourcing executives in the high tech and consumer electronics sector.

In the article, author Connie Guglielmo cites an assessment made by Katy Huberty, a Morgan Stanley analyst that Apple may be deploying a portion of its current, rather lucrative capital appropriations budget in buying dedicated production equipment to outfit new and existing facilities within its existing supply chain. The author also cites unnamed sources who follow Apple as indicating that Apple is already executing this plan. The premise is that with a majority of current cash sitting in offshore accounts, protected from higher U.S. tax rates, that capex spending on expanding offshore capacity is a compelling use of this cash.

More importantly, the plan, as outlined, was cited by Morgan analyst Huberty as “frankly ingenious” and Supply Chain Matters would add the term brilliant. By providing dedicated production equipment to suppliers for sole use in producing Apple products, Apple can both lockout other competitors to supplier capacity in producing mobile phones or tablets and relieve certain suppliers of the risk of volatility in planning output levels  and incurring expensive capital costs. Apple has the opportunity to benefit from future depreciation expense benefits while its huge production volumes are assured by basis of owning its own production equipment.  The plan, if carried out, challenges the classic contract manufacturing model that has a premise of transferring expensive manufacturing assets to a supplier in order to achieve higher return-on-assets.  Given the recent labor practice audits underway CM provider Foxconn, we would logically assume that Apple may also consider higher levels of factory automation in its capex planning. Huberty estimates that a combination of strategies related to Apple’s pre-payment to suppliers for products coupled with a dedicated investment in production equipment could translate to a 15-20 percent cost savings per year, as well as afford the opportunity to produce lower cost versions of Apple products for broader geographic markets. That analysis may be conservative.

Of course, the success of this plan is highly dependent on Apple’s current suppliers, and in a certain sense, the reaction of consumers.  Removing equipment expense and providing more automation reduces a contract manufacturer or supplier to that of host supplying direct labor and utilities, limiting opportunities for margin growth. On the one hand there are compelling benefits, on the other, it can lockout certain suppliers from integrating further value-added components in their production strategy as well as lockout any potential future thrusts to release their own branded mobile phones, tablets or television products, at least not, involving Apple owned equipment. Keeping other customers will involve the need for more space and capacity, with the question of who funds that expense.  On the consumer side, the open question remains as to whether Apple’s investment in advanced production equipment cannot be made in country where the majority of Apple products are being sold.

Whether or not this plan comes to full fruition, industry executives representing both large and smaller firms had better be keeping abreast, since Apple may well be exercising a disruptive strategy that shifts industry supply chain balance for years to come.

Bob Ferrari

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

The following is a guest blog commentary appearing on the Supply Chain Expert Community web site.

Being named the most valuable company in terms of market capitalization, with the ability to rack-up almost $33 billion in annual profit, and being cited by Barclays Capital as “the most disruptive force in tech”, comes with a lot of expectations and visibility to any misstep. However, behind the headlines lies one supply chain savvy company.

Last week, financial news headlines were buzzing with all sorts of potential negatives pertaining to Apple.  Five consecutive days of stock declines has Wall Street scribes speculating as to whether the constant successes of the Steve Jobs era of Apple might have peaked. Stories continue to permeate regarding ongoing intellectual property lawsuits, potential price collusion in e-books, and yes, significant hiccups involving Apple’s supply chain.

Where should we begin.

Many social media and traditional reporters have been reflecting on the implications of the ongoing labor practices audits occurring at contract manufacturer, Foxconn, which began in February. Last week came news that environmental conformance audits would be conducted at one or many China based major suppliers. In our point-of-view, the company is becoming much more proactive in demonstrating to customers that Apple takes social and environmental responsibility very seriously.  The remainder of the industry will in-turn, have to deal with the same realities.

Also in February, Japan based mobile DRAM chip provider Elpida, which is a supplier for both Apple iPad and iPhone products, filed for bankruptcy protection.  That opened the door for what Bloomberg Businessweek describes last week as “the hottest takeover plays in tech” potentially involving  takeover from another DRAM competitor which could leverage volume contracts with Apple.  Eipida’s DRAM chip plant in Hiroshima Japan has over 40 percent of output dedicated to Apple. Whomever ends up with Elpida could well change some of the dynamics of competing with LCD industry leader Samsung Electronics.

Last week brought another major development from a supply chain lens. Communications chip provider Qualcomm warned that current supply of wireless chips cannot accommodate existing demand related to 4G network support.  Specifically, Qualcomm has been shifting to a 28 nanometer chip design family to accommodate performance needs of 4G chips for device makers. In its warning, Qualcomm executives specifically cited the supply shortfall to Apple’s transition from predominate 45nm chips in favor of the 28nm design. That is a rather telling indicator that Apple’s plans for its next release of the iPhone will include 4G network support. Qualcomm has increased its overall unit output requirements by 5 million for the current year, and rest assured, Apple will be a beneficiary.

Media and analysts will continue to speculate and make checks across many tiers of the Apple value-chain regarding added bad news or potential setbacks but perhaps that same media should exercise a reality check-in with the greater supply chain community.

For this describes today’s current state of dynamic supply chain management, especially when it involves a firm with the significant high volumes of Apple, the great Kahuna of SCM.

Problems and/or setbacks will arise with current or planned future volumes, and a high volume supply chain requires lots of contingency and back-up plans. New product plans will shift because of highly changing market requirements, and those shifts will be accommodated by strategic suppliers because of the volume clout that Apple represents. Suppliers can encounter financial difficulties, and sourcing and procurement teams will respond with contingency plans and safeguards. Unplanned natural disasters such as the floods that occurred in Thailand impacted available capacity with companies such as Dell, HP suffering consequences, but Apple’s large supply contracts were leveraged at the potential expense of other industry OEM’s.

News concerning Apple’s supply chain should not be of concern since they together involve what we in the supply chain community would term “resiliency”, the ability to overcome any setback to support business needs and business outcomes.  In the specific case of Apple, the primary competitive differences are in the overall strategy, planning, execution and analytical capabilities directed at having world class resiliency and supply chain clout.

Bob Ferrari

The business and supply chain management community has had time to reflect on the recent announcement of labor violations discovered by the Fair Labor Association in audits of Apple’s massive Foxconn contract manufacturing facilities. As can be expected, the responses vary in perspectives. Labor rights advocates feel that Apple’s efforts demand constant scrutiny. Other business media have opined that this development is a sign of strategic shifts or an overblown reaction to the reality of low-cost manufacturing environments such as China.

We cite three articles of particular interest.

In a Washington Post blog entry, Jena McGregor noted that the stakes for Apple are far higher than that for Foxconn.  By proactively responding to working condition findings, CEO Tim Cook could face the wrath of Apple shareholders for eventually increasing supply chain costs. McGregor astutely points to far bigger stakes, namely that Apple walks a fine line by not also pointing the finger of labor abuse to other high tech competitors such as Amazon, Dell and HP who also manufacture in similar facilities within China. Supply Chain Matters expressed similar opinion months ago when the Apple’s social responsibility efforts initially became very public.

The New York Times, who managed to provoke Apple with its superb in-depth article of Foxconn working conditions has been rumored to be attempting to gain positive favor with the company.  That aside, an April 1 article penned by Nick Wingfield places a rather positive spin to this development, namely the new direction and sensitivity that CEO Tim Cook has steered for Apple.  According to NYT sources, Steve Jobs never visited the factories in China where Apple products were made. Conversely, Cook, who has spent a lot of time in factories, is steering Apple toward higher levels of leadership and visibility to respond to greater scrutiny by media and consumer groups reflecting  on how its products are manufactured and how serious the company is committed to labor rights.

We were somewhat surprised to read a posting from Supply Chain Digest which implied that Apple’s issues related to working conditions and pay were quite modest, with the implication that this was no big deal. With all due respect, that comment completely misses the mark.

When a company like Apple is deservedly ranked number one on nearly every researcher’s top supply chain listing, the ranking comes with a high bar of expectations.  We all expect Apple to set world class benchmarks in many supply chain capabilities including supplier and social responsibility.  Apple may be feeling the heat, but there are many other firms dealing with the same challenges.  It is a rather, big deal, one that does not provide simple solutions, and one that should not be hidden.

Today, The Wall Street Journal is reporting that Hon Hai Precision Industry, the parent of Foxconn, announced plans to “significantly” raise wages for its employees located at its headquarters in Taiwan, which is expected to take effect in July.  Readers may recall that last year, when Foxconn finally announced meaningful wage increases for its assembly workers in China, a ripple effect of other cascading labor rate increases incurred throughout China’s southern manufacturing regions.

In a Supply Chain Matters commentary posted in mid-March, we provided our point-of-view that many current signs point to the need for changing supply chain strategies for Apple, some of which may be conflicting. There are a number of strategic directions to which Apple’s supply chain can shift, but any will be dependent on the business and customer outcomes desired by the company.  A socially responsible supply chain may be a component of that direction, and the fallout will not just be Apple alone.

The time is long overdue for high tech and other industries to find a balance point between supply chains driven by cost and those that may also be driven by innovation and social responsibility.

Bob Ferrari