Is Apple Changing Its Approach To Supply Chain Management?

Could the tech giant be bringing more manufacturing in house?


Apple’s approach to supply chain management has been one of the main drivers of its success, drawing plaudits for its attention to detail and agility. In 2015, it was even promoted from Gartner’s Top 25 Supply Chains of 2015 to their ‘supply chain masters’ category, having topped the list for three years in a row.

Tim Cook, Apple's CEO, is one of the main factors in this success. Cook was originally brought in by Steve Jobs to optimize the tech giant’s supply chain, and managed this side of Apple’s business for more than 10 years before his promotion. Thanks to his insights and skill set, the tech giant was able to tighten up financially inefficient areas, with one popular supply chain blog noting that, ‘Cook helped perfect inventory management to the point that Apple, which regularly launches big new products, has few of the older ones left at the end of each cycle. It helps the company avoid the trap of having to significantly discount older products.’

The key to its success has been its ability to maintain partnerships with third party suppliers. Cook pulled Apple out of the manufacturing business, instead investing heavily in manufacturing partners. Apple generates revenue in excess of $200 billion a year, and its sheer size means that it can enter into exclusivity deals with partners, allowing Apple to react quickly to spikes in demand and maintain inventory levels. This has also given them a platform to be flexible when the time has come to release new products.

Apple’s resources and close relationships with its partners also allows it to develop the right equipment to make a product after it has been designed, and they often actually invent the equipment with the help of a partner. For example, in 2013, Apple worked with a key supplier to customize robots to manufacture new iPhones and iPads, and spent about $10.5 billion to create these special tools.

These suppliers - of which there are 156, Apple said in 2015 - exist at Apple’s whim, however. Bloomberg found that 16 of their suppliers see more than half of their revenue come from the company, and while they can make a small electronics company huge, they can also bankrupt them in days. For example, earlier this year the iPhone manufacturer ended its contract with Imagination Technologies, its longtime supplier of graphics processors. Following the announcement that it was winding down its use of Imagination’s technology, the company’s stock price promptly fell off a cliff, dropping 70% in valuation. Apple also poached a handful of Imagination’s top executives.

However, Apple’s supply chain is running into problems. The company recently unveiled its new iPhone X, in a highly anticipated rollout that it hoped will revive iPhone sales, particularly in Asia where the device has struggled to gain traction in the past. The phone is loaded with new features, as it should with a $999 price tag, but Apple will not start shipping the iPhone X until November third, far later than its usual shipments, primarily due to issues matching production to new technology. This causes problems for suppliers. According to the WSJ’s Jacky Wong, investor interest lags once a new phone rolls out, causing problems for a supplier as the phones will be shipping into a lackluster market.

KGI Securities analyst Ming-Chi Kuo, who is tapped into Apple's Asian supply chain, notes that: ‘Due to component supply constraints, we estimate current production of the OLED iPhone at less than 10k units per day, which means the model will remain in severe short supply for a while.’ If Kuo’s estimates are correct, Apple will make fewer than 1 million iPhone X units in a quarter - far lower than 4-5 million iPhone X units Kuo estimated would be produced in its first quarter.

The main problem is the new OLED screen. Samsung Display is the supplier of these screens, as OLED technology is dominated by Samsung, but it needs to serve both its parent company as well as Apple. Though Samsung Display and the phone producing branch of the company operate separately, competing demands exist for suppliers, especially when they're working with a market challenger. In order to solve this issue in the future, Apple is reportedly looking at developing its own OLED production source. It has already purchased its own chemical vapor deposition (CVD) machines and is currently working to find a manufacturer willing to work on Apple-owned equipment in order to manage more of its own supply chain, according to 9T05 Mac.

This may not have implications when taken by itself, as it is wholly understandable they wouldn’t want to be reliant on a competitor for such a vital component. However, taken alongside the news that they are getting rid of Imagination Technologies in order to make their own chips, it could be that this is part of a wider long-term strategy to bring its supply chain in-house. Apple's supply chain has worked so well because it's been built on long-term relationships that benefit both them and their suppliers, and significantly changing this will be interesting to watch, though perhaps not for those companies reliant on Apple for revenue.


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