In the community of supply chain management, all eyes remain focused on Apple. The reasons are fairly obvious since Apple’s supply chain capabilities inevitably show-up on everyone’s top-five ranking or benchmarking list. As an independent industry analyst and blogger, I pay close attention when Apple shows signs of a strategic or tactical shift, and I sense signs of a shift from Apple’s latest fourth quarter results.
First, some highlights of another blowout quarter. In the September ended quarter, Apple reported a profit of $4.31 billion vs. $2.53 billion in the year ago quarter, coming close to doubling profits. Business performance in the quarter generated $5.7 million in cash flow and the cumulative cash balance now stands at $45.8 billion. Revenues were a record $20.3 billion compared to $12.2 billion a year prior. Full results are noted in Apple’s earnings press release.
Results were clearly lifted by sales of the iPhones, with 14.1 million units shipped in the quarter, over 90 percent more than a year ago. Even more significant, and a testament to Apple’s value-chain and product launch capabilities, the latest iPhone release became available in late June, and Apple obviously implemented a fairly effective marketing and supply chain support strategy to sustain these incredible shipment volumes for the quarter. The company further reported that it sold 4.2 million iPads in the quarter vs. 3.3 million units shipped in the previous quarter. Both of these shipment milestones are noteworthy because Apple was not immune to critical supply shortages during the quarter. We commented in a previous joint Kinaxis Supply Chain Community and Supply Chain Matters commentary that shortages of LCD devices from Samsung were impacting the momentum of shipments during the quarter. In its briefing to analysts, Apple noted that it could have sold more iPhones and iPads.
There was however other important shifts embedded in the euphoria of the results. Apple’s gross margins dropped to 37% compared to nearly 42% in the year ago quarter. Granted, some firms would envy a 37% margin in this economy but nonetheless there has been a shift. There were obviously business reasons that led up to this erosion, not the least of which relates to elements of Apple’s value-chain. Apple’s prime contract manufacturer Foxconn continues to deal with the aftermath of increased incidents of worker suicides and responded with across-the-board double-digit wage increases. Thus far, Foxconn publically indicates that these wage increases will be internally absorbed, but this contract manufacturer is making aggressive plans to significantly ship production to more interior regions of China where wage rates are lower. A glance at Apple’s balance sheet indicates that there has been a significant investment in inventory, close to $600 million over the past twelve months. By my calculation, Apple’s days inventory outstanding (DIO) has climbed to 5.8 days from a average 3.87 days a year ago. While many companies would envy such inventory metrics, nonetheless they reflect a need for Apple to invest in inventory to maintain or accelerate current sales momentum.
Within traditional press and the blogosphere, there are many commentaries relating to Apple’s strategy of tight control of its operating system and platforms. A recent New York Times article, Will Apple’s Culture Hurt the iPhone?, notes that U.S. consumers are currently buying more Android phones than iPhones. The stakes for control of mobile computing are huge, and the battle is yet to play out. Some contrasts are being made to the battle of Macs and PC’s 20 years ago, when Apple similarly insisted on a proprietary platform approach. The Times article rightfully notes that Apple’s current strategy is risky and leaves little room for error. Volume and market share are the prime business target.
The same analogies concern Apple’s value-chain strategy. Strategic supply agreements in flash memory, LCD’s and other key components have served the company well in supporting such enviable volume ramps. Foxconn has in-turn demonstrated a remarkable ability to ramp-up and support higher production volumes in a market with faster clock-speeds of product innovation. It also has contributed its own share of innovation in product design through vertical integration.
Apple has further recognized that supply chain strategy cannot rest on any singular cost tenet or metric, but on insuring that its supply chain has the flexibility and adaptability to support a high volume growth business model. We noted in our Supply Chain Matters coverage of the Supply Chain Council Executive Summit- Dispatch Four, Professor Steve Melnyk’s principles of outcome-driven supply chains. Apple’s current shifts in inventory investment are in our view, an important demonstration of these principles. As Professor Melnyk noted, the supply chain needs to be strategically coupled, value-driven, with the ability to support blended outcomes. Apple’s shifts in inventory investment and continued supply focused vertical integration are evidence of weighting blended outcomes. Apple’s product and business momentum are strategically linked to supply chain, and any major glitches will have impact on market share results.