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.

The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site.

We have penned a number of commentaries regarding Apple’s extraordinary supply chain operational management capabilities, the latest being last week’s posting, Apple’s Secret Sauce Should Be No Surprise to the Supply Chain Community.  This week, more public news has surfaced regarding Apple’s strategies and capabilities, specifically two different developments. Keep in my mind, Apple’s corporate culture is one of high secrecy and information in the public domain only scratches the surface to what’s actually going on. Apple continues to cast a very wide net in assuring production capacity and capability, and at the same time, is becoming a more influential force for overall consumer electronics supply chains.

Over on the International Business Times web site, Carl Bagh noted that Apple is again plugging strategic and tactical holes in its long-term supply strategy, placing a $7.8 billion order for key LCD, NAND memory and other electronic components from Samsung Electronics.  As noted in our previous commentary, while competitors scramble to launch alternative products in tablets and smartphones, Apple continues to aggressively negotiate long-term supply contracts with strategic suppliers, potentially locking-up key industry capacity.  In his commentary, Baugh cites DigiTimes as reporting that LG Display will benefit from a 35 million unit order for iPad displays in 2011, but also is not able to singularly meet Apple’s growing thirst for these displays. Also noted are Apple’s co-investments with key suppliers in building more manufacturing capacity, including Sharp Corp.’s $1.2 billion investment to build a new production facility for small and medium sized LCD displays.

On the supply chain social responsibility front, SiliconValley.com reported yesterday that last June, at the height of the incidents of worker suicides at Foxconn International, Apple’s largest volume contract manufacturer, COO and now acting CEO Tim Cook was quietly dispatched to China to personally meet with Foxconn management. The extraordinary but non-public visit of Apple’s highest ranking operations executive was intended to send a rather serious message, Apple was not going to tolerate these worker suicide incidents and wanted a remediation plan.  An Apple social responsibility report noted that Cook was accompanied by two experts in suicide prevention, which spawned later interviews of more than 1000 Foxconn employees. Keep in mind that some other companies might have issued a wide distribution press release noting such a visit.

The article also highlights other social responsibility actions that Apple has undertaken, including 97 first-time supplier audits in 2010.  Of particular note, 40 percent of these suppliers noted that this was the first time any large customer had audited their facilities.

Apple continues to cast a rather wide and profound influence across consumer electronics supply chains.  The question remains, are these strategies forcing Apple’s competitors to struggle for their required capacity and inventory, and will the industry be challenged with yet another year of supply and innovation challenges?

Supply Chain Matters readers, add your observations.  Has Apple’s continual influence in product innovation and supply contracting increased the stakes for competitors, or has it benefitted the industry as a whole?   Can consumer electronics players all benefit from Apple’s strategies?

Bob Ferrari

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

About a year ago, Sony Corporation initiated a massive corporate restructuring after announcing its first annual loss in more than 14 years. Sony had a significant profitability crisis which specifically involved its consumer electronics and games businesses and Chairmen and CEO Howard Stringer was forced to take direct operational control of all operating businesses.

In May of 2009, Supply Chain Matters provided a commentary, Sony’s Supply Chain Challenges, in which we noted that the restructuring would involve aggressive cost reduction goals for Sony’s supply chain. Taking on a challenge to reduce overall material costs by 20% in two years has proven to be challenging for companies in profitable times, let alone in crisis situations. I noted that Sony would have no choice but to move quickly, given the economic and industry conditions that were occurring in the consumer electronics sector.

The corporate restructuring included a combined manufacturing, logistics, and procurement organization led by a longtime Sony executive, Yutaka Nakagawa. At the time, various reports indicated that the company would close three plants in Japan by the end of December 2009, and the number of plants around the world would be reduced to 49 from 57. Other efforts noted were that the company would also slash material costs by 20% ($5.3 billion USD), and cut total suppliers to 1200 from the current 2500 by March of 2011.

In a rather sudden and dramatic turnaround of events, last week Sony announced that it has actually turned a profit in its latest fiscal quarter and will narrow its previous full-year loss projections. A Wall Street Journal article notes (paid subscription may be required) that in the area of supply chain, Sony has already cut costs by $3.63 billion USD. That is indeed rather aggressive in such a short period of time. The article further notes that Sony has closed 20% of its manufacturing plants and now eliminated 20,000 jobs, 4000 in excess of last year’s target. In the area of material costs, the WSJ article makes note that Sony has targeted a 15% cost reduction for the PlayStation 3 by March 2011. Currently the company loses six cents for every dollar of PS3 hardware sales.

Upon reading the executive briefing transcript published on Seeking Alpha, there is management acknowledgement that the bulk of the supply chain cost reductions thus far were achieved mainly from top-down senior management directives specifically targeting headcount and excessive inventory levels. Payment terms to suppliers have apparently been extended although it’s difficult to decipher from the transcript. There is also an acknowledgement that no business processes or systems changes have occurred thus far.

The picture for Sony in its first year of crisis has the appearance of top-down, slash and burn cost cutting. While these efforts did result in the required significant take out of cost, the real work related to supply chain process transformation still remains a work-in-process for Sony. This next phase will be more significant in terms of making the right moves to insure that Sony’s supply chain capabilities can sustain both continued efficiency and adaptability to changing business conditions. I trust that Sony’s supply chain teams will utilize more advanced analytical methods in navigating this next phase since we all know that cost cutting alone does not bring the ability to innovate for customer fulfillment needs.

Supply Chain Matters will continue to monitor and provide ongoing commentary.

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.

A posting penned by Anthony Zumpano on the Brandchannel blog does a great job of articulating the latest holiday supply snafu involving Sony.  The consumer electronics producer who recently announced its Reader Daily Edition e-reader device is warning consumers that component shortages will delay shipment of the devices until at least December 18, if not later.

In his posting, Anthony comments that this is nothing new for Sony.  “In 2000, it was the PlayStation 2. In 2005, the PlayStation Portable.  In 2006, the PlayStation 3. This year, it’s the Sony e-Reader that many people want, but few will be able to get in time for the holidays.” He nicely puts to bed the conspiracy theory notion that these shortages are purposely created to create hype among consumers.  While the Barnes and Noble Nook device is experiencing similar supply shortages, Amazon’s revamped Kindle is “in-stock”.

As a supply chain industry analyst in 2005 and 2006, I often commented on the supply chain challenges of Sony, in light of its consumer electronics competitors.  Combinations of a rather complex electronic component design and other missteps fueled the shortages and Sony paid the price in market share loss to both Nintendo and Microsoft. Sony can ill afford to play out this same scenario for the upcoming 2009 holiday season. To Sony’s defense, Supply Chain Matters has previously commented on recent high-tech industry reports that spot component shortages are indeed showing-up in many areas because of previous severe cutbacks in capacity and production levels brought on by the global recession. The ongoing message is that traditional planning and product marketing strategies will not suffice in this new era of post-recession recovery.

Supply chain actions, as always, will tell the final story.  Perhaps Sony’s supply chain team, along with the FedEx and UPS air force will save the day for sales and marketing.  Stay tuned for the results.

Bob Ferrari

This week, there were two significant announcements involving major Japanese consumer electronics companies. They both had common themes, namely needs to grow revenues and profitability, as well as better compete within the new emerging global economies. They plan to do so by outsourcing design and production outside of Japan, and in my view, these announcements are yet another data point in the new structural changes involving  post-recession global supply chains.

Hitachi Ltd., suffering from its worst annual profit loss in the company’s history, is turning to an outsourcing strategy to produce its televisions for the U.S., European and other markets.  This move is part of a major re-structuring announced on July 1.  According to a Wall Street Journal article (subscription may be required), the move is an effort to stop the bleeding within its television unit, which accounted for most of the current $1 billion-plus loss at Hitachi’s digital products division.

Like other Japan based consumer electronics companies, Hitachi had previously differentiated its television products with in-house design and sourcing of major components as well as final assembly production.  The latest restructuring calls for a move toward outsourced sourcing of components and contracted manufacturing. Potentially two Hitachi-owned television assembly plants in Mexico will be sold, and a television plant in the Czech Republic will be leased out.  Hitachi will only manufacture products in Japan to support its local Japanese market.

On another front, in order to compete more effectively in the new developing economies, Panasonic Corporation is planning new lines of appliance and electronics offerings tailored to appeal to ultra-cost conscious consumers.  A separate Wall Street Journal article (subscription may be required) indicates that these products will be locally designed and manufactured within targeted regions, with razor-thin product margins.  Similar to the Tata Nano automobile, while product features will include the bare minimum, local designers will target innovation and simplicity, providing the most attractive price and feature point for these new emerging consumers. Panasonic’s efforts reflect an admission that these margins cannot be achieved by its original Japan centered sourcing model.

In my editorial opinion commentary that I was invited to write for the 21^st Century Supply Chain Blog Expert Series, I noted that in the forthcoming post-recessionary growth cycle, for certain products, the most cost efficient value-chain can trump the more costly product innovation focused value-chain.  The latest moves from both Hitachi and Panasonic are I believe, are yet another acknowledgement of this evolving trend.

The benefactors will be designers and contract manufacturers who reside or operate in the new evolving economies.

Bob Ferrari