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What you may not know about Apple’s supply chain model

Posted by CeMAT Team on 20-Oct-2017 13:24:14

What you may not know about Apple's supply chain

Tech reviewers and self-professed geeks are about to have all their dreams come true with the release of the Apple iPhone X; the long-awaited smartphone phone that combines 10 years of innovation, R&D and user-experience into one, sleek, glass-encased device.

When new Apple products come to market, consumer hysteria kicks in. Portable chairs begin to appear in orderly formations outside Apple retailers, the Apple online store crashes in the mania of panicked (but excited) purchasing, and people everywhere begin to formulate their plans as to how they can most efficiently acquire one of these new, fiercely desired products.

We’ve all become used to this new pattern of crazy consumers that have come out every year since the first iPhone was released in 2007. But most of us don’t know about the supply chain challenges Apple incurs as they struggle to keep up with unprecedented customer demand.

Very happy Apple customer that just purchased the first generation iPhone

In this post, we’re going to take a look at Apple’s supply chain model, and how it operates in times of unmanageably high, global demand and you may be surprised about what's holding them back. 


Apple’s supply chain model


Apple first became a major player in the technology scene back in 1976, and since then they have continued to churn out innovative products that have both the software and hardware to back up the hype. Their logistics and distribution strategies were studied by Stanford University in 1996 in a paper called Apple Computer’s Supplier Hubs: A Tale of Three Cities where they outlined a very crude model of their supply chain:


Image source.

When you look at the above graphic, there doesn’t really seem to be anything that different in Apple’s supply chain from other industries. They begin with new product introduction by acquiring 3rd party businesses and licenses, and most likely due to high volume of Apple’s production, they are also required to make prepayments to some suppliers (fun fact: in 2002, Apple made a repayment of $100 million to an Asian supplier for a period of just 9 months).

On looking at the strategy behind their supply chain, it’s really just a regular, tried-and-true set-up that consists of Apple pooling together raw materials to be assembled in a plant in China. It's when we look more closely at the details that we begin to see why Apple is struggling to maintain an efficient and fast-responding supply chain. 



Apple’s supply chain challenges

Apple has been criticised for having a supply chain that isn’t complex enough, but in an industry where new digital technologies are constantly disrupting traditional processes, it’s also fair to say that too much complexity is also a bad thing.

But this isn’t the issue for Apple. Regardless of whether or not people say Apple’s supply chain isn’t complex, any distribution and production network is filled with independent parties and components that have rippling effects on proceeding events.

In 2012, Chairman of Hon Hai Precision Industry Co, one of Apple’s biggest suppliers, said that they simply couldn’t fulfil the demand requested by Apple, and since then, Apple has constantly struggled to produce enough iPhones for their eagerly awaiting customers upon launch.

When you compare Apple to an old-hand at supply chain management like Amazon, it starts to become clear where the kinks in the Mac armour appear. Amazon is mostly known as a distributor of general merchandise, and because of its wide variety of offerings it has lower inventory turnover than Apple. On the other side, Apple is essentially a great marketing business that outsources the production of its products to third parties. It’s marketing and production cycles peak at particular times of the year when new models and software become available.

However, given the fact that Amazon manages roughly 135 million items in its catalogue, and Apple only manages roughly 26,000, it’s fair to say that Apple isn’t doing the greatest job of effectively forecasting demand based on past performance.

It's true that Apple is dubbed as the King of Outsourcing, but even though they outsource everything, they seem to struggle most with managing their supplier relationships. This may be because they keep information on new products under-wraps until they are ready to produce it, which places pressure on the suppliers to produce high volumes of items in a short span of time.

It’s not that Apple is incredibly inept at managing their supply chain, it’s just that they are not innovative enough in this particular area to overcome their challenges. Maybe they should consider bringing production of some items in-house. Or maybe they could take the risk of getting their suppliers involved earlier on in the research and development stage. Or maybe they should even consider investing in better supply chain management technologies, but who's to say they already aren't? 




So what about the customer experience?


Figuratively speaking, Apple has probably disappointed millions of customers by not having the exact model in stock at the time of purchase. But it doesn’t seem to deter customers from flocking to their products (see above image). If any other organisation failed to provide the exact product a customer wanted at that specific time they want it, the customer would simply retreat online to find the next best alternative.

But this isn’t the case. Even though Apple customers have to line-up for days or deal with delivery delays of weeks, all while paying a premium, the demand simply hasn’t stopped. It brings into question the importance of the customer experience when looking at Apple as a case study. They obviously aren't performing badly as a business, but it's interesting to look into their success and failures in general. 

Do you have any suggestions as to why this may be the case? Does Apple have a product that much superior that customers are willing to forego the experience? Or is the demand behind Apple really just marketing? Let us know what you think in the comments below.


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Topics: Supply Chain Management