What can we learn from Apple’s supply chain?

About a month has passed since Apple introduced its new products: the Apple Watch, iPhone 6 and iPhone 6 plus. The company, yet again, proved how good they are at putting on a great new product launch show. The release of the iPhone 6 and iPhone 6 plus went through the same cycle as all the other Apple products: first there were speculations and rumors, then the supposed leaked pictures from the factory, and finally the product-launch event revealing the latest Apple technologies. But how do they do it? How do they manage to sell 10 million iPhones during the first weekend of the release? The brand recognition, and their strong, loyal customer base might be the reason. However, Apple’s supply chain also deserves recognition. Valuable lessons can be learned from the company’s supply chain processes, a supply chain ranked by Gartner as the number one in the world.

Focused supply chain

One thing that differentiates Apple’s supply chain from other technology producers is the fact that Apple offers only a small variety of products. One of the first things Steve Jobs did after his return to Apple in 1998 was significantly reduce the number of devices made by Apple. From 350 products offered before 1998, Jobs kept only 10. It takes great courage to make such a drastic decision, but Apple is the company that is famous for it. Currently, Apple is producing only 5 different products with 15 total variations of each (excluding variations in memory capacity). The small variety of products share many common parts, which allows for great precision and optimization of the supply chain. However, this strategy is not appropriate for all companies. It is important to evaluate the industry in which the company is operating, its financial capabilities, market position and the strength of its brand.

Strategic suppliers

Previously, the list of Apple’s suppliers was a strategic secret kept by the company. However, in 2012 Apple revealed its supplier list in order to make their supply chain more transparent. Currently, Apple publishes an updated list every year on their official website. According to Apple, about 200 suppliers that are on the list account for a minimum of 97 percent of procurement expenditures for materials, assembly of products and manufacturing.

Apple is working with a relatively small number of strategic suppliers, which has advantages and disadvantages. One of the risks – Apple’s reputation is directly connected to its suppliers. Apple has suffered from a number of scandals, for example, the 2010 suicides at Foxconn, one of the company’s main factories. This shows that a careful screening of new suppliers and close monitoring of the current partners is vital for the company. The multinational corporation should ensure transference of core values and compliance with company’s regulations throughout their supply chain in order to avoid damage to their brand image.

Utilizing a small number of suppliers and manufacturers has advantages as well. Apple is able to build more meaningful and stronger exclusive relationships. It also gives Apple leverage when negotiating prices, as the company guarantees high volumes of production and materials purchased.

Close control

Another important aspect of effective and efficient supply chain management is controlling. Without it, the company’s image can be severely damaged. Due to the aforementioned scandal at Foxconn, Apple received a lot of negative publicity. After a lot of public pressure from NGOs, Apple decided to conduct more audits in their factories and control their suppliers more closely. In 2013, Apple conducted 451 audits at all levels of their supply chain, a 51 percent increase from 298 audits in 2012. There were also 31 surprise supplier audits in 2013. Moreover, in total, these audits covered 1.5 million workers in 16 countries.

Apple also created a supplier Code of Conduct, which together with their Supplier Responsibility standards, aims to ensure that suppliers follow the same principles and values as Apple. The latter document consists of more than 100 pages of requirements which have to be met by suppliers in order to be able to conduct business with Apple.

Further proof of Apple’s tight supply chain control is the fact that demand in Apple’s stores is monitored by the hour and the supply chain can be adjusted when necessary. It only takes 15 days to increase the work force capacity in the Chinese factories where the Apple products are assembled. This comes in especially handy now, after the demand for the iPhone 6 has reached a record high (10 million sold during the first weekend after the release).

The cherry on top – the hogging tactics

Apple is using exclusivity agreements and hogging tactics as a way to secure their position in the market. A recent example was mentioned in one of our supply chain news wrap-up stories, talking about how Apple booked the majority of shipment capacities with UPS and DHL to deliver the iPhone 6 and iPhone 6 plus to their customers. The delivery volume was so immense that other companies were struggling to get their products delivered.

Another example is Apple’s exclusive deal with GT Advanced Technologies Inc., a producer of furnace equipment, which is used to produce synthetic sapphire that cover smartphones’ home buttons and camera lenses. The agreement included a limited ability for GT Advanced to do business with additional clients and a prepayment made by Apple in order to build new furnaces to meet high capacity demands. However, the recent bankruptcy of GT Advanced Technologies Inc. shows that the company was unable to meet the contract requirements.

The loss of the sapphire supplier might be the reason behind delays in the Apple Watch production. However, for Apple it is just a small disappointment, which should not cause significant damage. Due to its market power, Apple is able to negotiate better deals and prices than its competitors. As a result, Apple receives a higher profit margin, even though it uses a lot of custom made parts to manufacture its products.

What other lessons can be learned from Apple’s supply chain? Do you agree that it is the number one supply chain in the world?