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.

In all of the distractions leading up the Christmas holiday in the U.S. and other countries, readers may have missed the headline regarding another explosion occurring at an Apple supplier plant.

Reuters reported that an explosion occurred on December 17 at a manufacturing facility of Ri Teng Computer Accessory Co., a subsidiary of Pegatron Corp, located in Shanghai’s Songjiang Industrial Park.  According to a statement from Pegatron’s CFO, 61 workers were injured with 23 having to be hospitalized.  Reuters noted a report from the Shanghai city government noting that the explosion occurred at about 3:40pm on December 17, at a workshop on the fourth floor of the factory. The facility was designed to manufacture backplanes for upcoming Apple’s iPad products.

The facility itself was reported to under pre-operation inspection and had not started high volume production support operations for Apple.  According to China’s Yi Cai Daily, the Pegatron facility was slated to produce back panel components for the iPad. As reported by Reuters, the incident involves the third explosion in the last 15 months involving Chinese factories belonging to Apple suppliers.  A previous incident in May involved Apple’s prime contract manufacturer, Foxconn, when an explosion killed three people and injured 15 others.  Similarly, the explosion involved the igniting of aluminum dust particles, a byproduct of the manufacturing process.

While some reports speculate a disruption of supply, the real open question is whether this facility was destined to support new product ramp-up for Apple’s pending release of the new version of the iPad.  Pegatron officials report some damage to production equipment but further indicate that adjustments will be made to minimize any disruption. We would concur with other industry analysts that the impact to Apple supply chain flows should be minor.

The explosion however is sure to ignite even more concerns regarding Apple’s supply partners and their track record concerning both worker safety and the safe control of hazardous production processes, and will fuel more legitimate concerns from worker safety groups regarding overall workplace safety.  Apple provides a very high profile target for these efforts.

Apple’s sourcing and procurement teams will no doubt remain busy over the coming weeks in following-up with supplier inspections including reviews of worker safety and handling of hazardous processes. Having been recognized as one of the top global supply chains comes with a responsibility to have teeth to policies directed at supplier responsibility, worker safety and code-of conduct.

Bob Ferrari

The biggest company focused news in global supply chain circles this year has to be a Bloomberg BusinessWeek article that published this weekend. The article’s title is: Apple’s Supply Chain Secret? Hoard Lasers, and we urge all of our Supply Chain Matters readers to take the time and read this article since it represents one of the best in-depth commentaries and reflections regarding the inner workings of Apple’s global supply chain.

As a community, we all have observed Apple’s abilities to launch products with military precision, to have the ability to support product volume shipments the envy of many, and to undercut competitors in scale and price, all without missing a heartbeat. Supply Chain Matters has posted many commentaries related to Apple’s closed knit ecosystem, the latest being our own view of the company’s extraordinary strategic supply chain capabilities. Readers know all too well about the secrecy that Apple affixes to all of its business processes and credit should go to Bloomberg writers Adam Satariano and Peter Burrows for performing a fantastic feat in journalistic interviewing and detective work. The authors conducted over a dozen interviews with former employees, unnamed suppliers and management experts surrounding Apple’s internal supply chain, to stitch the picture of global supply chain strengths and overall capabilities.

Without taken away the thunder of the article, we can summarize some key highlights:

• Apple began its innovation in global supply chain capabilities upon the return of Steve Jobs in 1997, and his subsequent hiring of Tim Cook to lead overall supply chain operations.
• Apple takes extraordinary measures to maintain secrecy of information related to its products and supply chain activities, even to the point of deploying electronic monitors and auditors to monitor potential information leaks.
• Apple not only “thinks big” in product design and capability, it also does the same in designing and deploying required supply chain capability. The company plans to double capital expenditures in 2012, nearly $7.1 billion, on its supply chain capabilities, along with an additional $2.4 billion in pre-payments to strategic suppliers. There is also more reinforcement and acknowledge of Apple’s ability to lockout competitors in strategic supply of key components such as LCD screen and flash memory. One executive “with a major parts manufacturer” is quoted as stating that his/her company declined a $1 billion payment from Apple because it involved committing much of its existing manufacturing capacity.
• Life as an Apple supplier is indeed lucrative, but comes with many requirements for agility and responsiveness to Apple’s needs, while having to deal with Apple’s slow payment cycles.

In a July commentary, we called attention to an article that differentiated closed vs. open supply chains. We reflected that closed supply chains, like that of Apple, have come to the forefront as a result of corporate strategy needs, in essence, making the supply chain a fabric to pronounced industry advantage. A closed, strategic supply chain has important people, process and technology skill implications, and stems from an orientation of thinking big and broader vs. supply chain as a collection of cost centers to be driven to maximum cost competitiveness.

A closed, strategic supply chain may not be appropriate for every enterprise, or may lack the leverage that a mid-sized business can leverage.  After all, Apple has had the ability to garner extraordinary product margins and profitability in its overall business model. But upon reading this BusinessWeek article, we can all certainly gain an understanding of what thinking big and bold really equates to for Apple, not only in product design and innovation but in a focus that supply chain capability and investment absolutely does matter as well.

Why not drop a copy of this Businessweek article on Apple’s supply chain on the desk of your CEO and CFO with the caption: “worth reading and worthy of discussion”.

Bob Ferrari