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 commentary can also be viewed and commented upon on the Supply Chain Expert Community web site sponsored by Kinaxis.

These past few days have brought some euphoric news in the high tech and consumer electronics sector, but I could not help but ponder lessons of the past.  Times of euphoria are a time to celebrate the fruits of long hours and hard work, but after the celebrations, there needs to be some reflection on the complex supply chain challenges that lie ahead.

Two specific timely stories of note are Intel and Apple.

Intel just reported its best financial year ever, recording a 24 percent increase in 2010 revenue and a whopping 167 percent increase in profits from a year earlier.  In reporting background on these results, Intel executives noted growing corporate and consumer demand for personal computers, business demand for server, and robust demand for other Intel products.  Since Intel products represent the lower echelon of high tech value-chains, a speculator year for Intel could portend another great year for the industry. CEO Paul Otellini noted that results can get even better in 2011 as the economy improves and Intel brings new products to market.

However, market analysts have been noting that sales of personal computers are being quickly overtaken by the explosion of sales in smartphones and other mobile devices, and Intel needs to be better positioned to take advantage of this new wave.  Semiconductor technology innovation cycles remain constant, and Intel has again allocated billions for new plant and equipment to support the next generation of chip technology. There are also different channels of distribution and demand fulfillment in mobile consumer devices, and Intel will continue to adjust its product demand forecasting and management processes to accommodate a more dynamic demand signals.

Speaking of this sector, yesterday, Apple continued its unprecedented momentum, reporting enviable fiscal 2011 first quarter results which involved this past holiday buying season.  Apple revenues increased 70% and profits increased 78% from year ago. The company produced $6 billion in profits while generating $9.8 billion in cash flow from operations. Volume shipments were impressive, and included an 86 percent increase in iPhone, and a 23 percent increase in Mac shipments.  However, iPod shipments declined 7 percent from a year ago.

A commentary penned by John Boudreau of the San Jose Mercury Times noted: “Apple’s current performance would be spectacular even for a startup a fraction of its size.” Another Wall Street analyst notes that other similarly sized industry players such as Hewlett Packard or IBM while also growing, are not growing at the 60 percent annual pace that Apple has right now.  Steve Jobs himself noted: “We are firing on all cylinders and we’ve got some exciting some exciting things in the pipeline for this year including iPhone 4 on Verizon, which customers can’t wait to get their hands on.”

However industry watchers have raised cautionary tones regarding the announcement of another undetermined medical leave for Steve Jobs, as well as the ongoing strategic race for market dominance between Apple’s iPhone and the Google’s Android operating systems. Nokia, and Research In Motion are each embroiled in this race for who will prevail in platform dominance. It should be no secret that Apple’s supply chain capabilities, while the envy of the industry, remains constantly being challenged with balancing explosive demand with the realities of constrained supply and constant product innovation cycles.

Members of this community may also have a different lens to what occurred behind the scenes in 2010.  In the midst of the gloom and after effects of two years of severe global recession, high unemployment and generally negative news, consumers determined that having the latest PC, smartphone or tablet computer was a priority.  That caught certain semiconductor, OEM’s and key component suppliers off guard, since capacity and inventory had been cutback and many suppliers were not prepared for the sudden upticks in demand.  Throughout 2010, supply chain teams had to manage numerous component shortage situations and longer lead times, seeking either alternative sourcing, temporary design changes or sheer willpower to insure that customer fulfillment was accomplished.

It was truly a year of ‘rapid response’ and agility.

For 2011 and beyond, the challenges continue, and more caution signs remain.  How long will current consumer demand for the latest gadgets continue when continued high unemployment levels persist?  Commodity costs are rising across the board, and certain rare earth materials have become a bargaining chip in geo-political affairs. High unemployment levels in the U.S. and looming uncertainties of more financial crisis in Europe loom as a dampening effect to consumer demand. Will supply chain teams once again succumb to the ‘bullwhip effect’ of redundant orders and inventory?  New product and innovation cycles continue on an intense, non-stop basis.  One significant glitch or miscalculation and the results can be somewhat disastrous.

Perhaps at this point, readers may be presuming- why is this Ferrari guy being such a curmudgeon? After all, look at all the great things that have happened.

My point in this commentary is to provide some wisdom.

Results and hard work should indeed be a cause for celebration and reward.  But, it is precisely in the times of euphoria that there may be the tendency for leaders to take their eye away from certain longer-term signs.  Perhaps names such as Digital Equipment, Apollo Systems, Wang Systems, RCA or others come to mind.  Each had times of euphoria and perhaps ignored the signs of caution and diligence in always keeping a keen eye out for overcoming constant value-chain challenges. After all, the people, processes and systems that are the fabric of any value-chain are the key facilitators of outstanding performance, and are often the lookout of what is to come.

Bob Ferrari

A posting within the  21^st Century Supply Chain blog peaked my interest to a rather interesting Business Week article, What’s Holding Back Tech, penned by Steve Hamm.. The article points out that spot shortages are showing up in a wide range of components within high tech related supply chains. The products impacted include digital camera modules, LCD screens and memory chips.  The reasons are common with other industry settings, namely that capacity and production levels have been dramatically lowered as the result of the ongoing economic downturn.

The article rightfully predicts that the coming months will prove to be rather tricky as procurement and supply chain planning professionals try to figure out when and how to ramp-up value-chain activities to take advantage of the pending recovery. Nobody seems all that sure of when a sustained momentum will occur in light of the very high unemployment levels that still exist in Europe and the U.S. Many suppliers are in survival mode, and they will be very reluctant to expand production without some form of longer-term assurances as to volume commitments.

I tend to also concur with the conclusion that when the economy gains more sustained momentum, it may take months to bring dormant factories to life since many workers have been let go, and need to be brought back.  Many factories in China have also either closed, or have dramatically cut-back in production activity that can support both expanding domestic as well as export production needs.

As many in our community have pointed out, the old ways of planning production based on historic sales forecasts or classic MRP planning cycles are not going to suffice in this “new normal”.  Instead, a reliance on demand sensing coupled with more rapid planning capabilities that are linked to various business or order planning scenarios will be more important tools for firms.  We may well be entering an era where worst case, best case, and prudent scenarios become the dominant means of planning.  Sales and operations planning (S&OP) processes will have to move toward an analysis of various business scenarios for achieving certain revenue, profitability or resource management needs.  Planning cycles that take weeks to gain answers or provide options will not suffice in this new era.

If there is one clear lesson that came from this past global recession is that changes in markets, and reactions to those changes come at unprecedented speeds.  Just one year ago, planners in multiple industries had no choice but to dramatically reduce inventory, and a global inventory backflush ensued at remarkable speed. 

Constant change, scenario analysis, agility in planning production and capacity planning processes are the skills and capabilities that firms will need to navigate in the  ”new normal”.

if you need some assistance in getting a broader understanding of these needs, send me an email: bferrari at blog1 dot com.

Bob Ferrari

Constant reminders of how difficult the planning and forecasting of product demand can be are ever present in today’s challenging economy.  While readers can often read and view webcasts, white papers and blogs focusing specifically on challenges presented in the consumer products industry, there are many unique challenges in other industries as well. I provided some summarized take-aways outlined in a good article on this subject in a recent post.

Within the high tech and consumer electronics industry, recent quantitative market updates bring forth the true picture of these challenges.  According to press release from market researcher IDC, global shipments of personal computers demonstrated their first decline since 2002, declining 0.4 percent in the October-December quarter, and sinking 3.5 percent in the U.S. IDC indicated an overall 10.5 percent increase in global unit demand for PC’s in 2008. “Despite market optimism early in the fourth quarter, the pace at which the economic environment unraveled and the extent to which PC purchases were affected was faster than anticipated.” stated IDC in its opening statement, a clear indicator of how sudden changes continue to occur in our current worldwide economy.

In contrast, market researcher Gartner Inc., obviously utilizing different market sizing assumptions, indicated there was a 1.1 percent increase in global quarterly shipments and a 10.1 percent decline in U.S. shipments.  Beyond the obvious differences in the implications of these market performance numbers, planners will also need to dive into the details in order to get a true picture of what’s going on in the market, and more importantly, how to effectively plan for product demand in the coming months.  In fact, reported global shipments for each of the PC providers indicate highly contrasting market performance, ranging from a 25.3 percent increase in shipments for Acer, vs. a 6.3 percent decline for Dell.  Thus, while overall market demand may be starting to decline, existing or future demand is more related to specific products that are being positively accepted by consumers or rapidly changing demand patterns that are specific to certain geographies.

Meanwhile, the video game business continued to be a bright spot.  Even though growth slowed somewhat in December, U.S. retail sales of video game consoles, games and accessories amounted to nearly $18 billion in sales, with monthly sales surpassing the $5 billion mark for the first time.  Here again, specific brands and certain game titles demonstrated far different pictures of product demand.

These updates provide more reminders of the existence of high demand volatility in multiple industry settings, as well as the need for companies to be more demand vs. forecast-driven in overall planning. Regardless in what industry you reside, and especially in high-tech, planning and forecasting of demand in this unprecedented economy requires both the ability to dive much deeper into the numbers to ascertain demand patterns for specific products and/or features, as well as the ability to quickly sense at the most detailed level, any changes in demand, as they occur.  The numbers can also uncover potential new market opportunities for your company.

There is no doubt that sensing specific demand patterns within this economy can no longer be accurately accomplished utilizing general or mere spreadsheet forecasting techniques. 

What’s your view?  Is your company experiencing this high rate of volatility in product demand?

Bob Ferrari