Analysis of The Supply Chain Strategy of Apple Inc

We decided to analyze the supply chain strategy of a company that has consistently been on the top ranks of Gartner’s “Supply Chain Top 25 Ranking” - Apple Inc. Apple’s complex supply chain is attributed to the fact that this Fortune 500 company has multiple suppliers located in different parts of the world - primarily in United States, China, Japan and Taiwan. Apple’s manufacturing facilities are predominantly located in China, where their products are assembled and shipped in bulk to various parts of the world for sale. Since Apple’s manufacturing happens overseas in low-cost countries, it has a complex logistical network because their upstream suppliers are distributed all over the world, the assembly of their product happens in the Asia Pacific region and their largest downstream consumer base is in the United States. This network, in the case of product distribution in the United States, involves both intermediate warehouses in partnership with UPS and FedEx, and warehouses in California that store finished bulk products which are brought in from manufacturing locations in China. This means that since most of Apple’s final assemblies happen in the Asia Pacific region, they spend large amounts of money in logistics costs, import/export fees and warehousing costs for bulk shipments of products. Apple’s distribution to final consumers happens through three main avenues - online sales, in-person Apple retail stores and through partnerships with retailers like Amazon, Best Buy, Target, cell phone carriers like AT&T, etc. Staying in line with its mission of being a “high-cost, low-supply” company that offers innovative products to consumers, Apple has grown considerably in size since it was first founded by Steve Jobs. Therefore, Apple’s procurement organization also enjoys a certain brand name advantage that increases its bargaining power during negotiations with suppliers. Because of this, Apple enjoys cost as well as newest technology advantages in the purchase of the resources it requires for the mass production of its multiple product lines.

Since most of Apple’s production occurs in China, the company has strategically localized its supply base in the Asia Pacific region. Firstly, this creates a major problem for Apple, since it is unable to consistently monitor its labor quality standards along its upstream value chain. One of Apple’s iPhone Casting suppliers, Catcher Technology Co., recently came to the media’s attention because the workers in its Chinese manufacturing facility brought to light the issue of having to stand for 10 hours a day and handle hazardous chemicals without being provided proper protective wear. Apple, therefore, was under scrutiny for not appropriately auditing its suppliers to ensure that their products are not being produced under unfair labor conditions. Multiple issues mentioned in the annual supplier quality report released by Apple include, but are not limited to, bonded labor, debt labor, lower than agreed wages paid and poor safety conditions at overseas suppliers’ work facilities. We recommend that Apple raise its supplier quality standards by refusing to partner with suppliers who do not meet standard Good Manufacturing Practice (GMP) certification requirements - both for direct and contractual suppliers. Apple may further Impose higher standards on quality checks along the complete value chain - for product technology-related quality and to combat logistical complexities attributed to their complex global supply chain network design. They can ensure product quality standards by encouraging suppliers to employ more supplier quality engineers on-site at their locations to constantly perform checks on large batches of products that are coming off the production lines prior to being shipped for assembly. Such an investment would encourage lower PPMs at suppliers’ manufacturing facilities, while also ensuring that Apple is holding its supplier responsible for complying with its quality standards. Apple should also consider auditing its suppliers for fair labor practices by using the standards from the Fair Labor Association (FLA) as a benchmark. Further, they could implement strict controls on labor wages and discourage underage and debt bondage at supplier locations.

Secondly, given its immense bargaining power with suppliers, Apple’s relationship with its suppliers tends to become “one-sided”, especially with smaller suppliers whose revenue almost completely depends on Apple’s business. Due to their dominant position in the consumer electronics industry, Apple enjoys price-setting advantages and can negotiate the most favorable price and quality of materials for production of its multiple product lines. Because of this, suppliers get fewer profits and their businesses fall prey Apple’s control by being mostly, or even completely dependent upon Apple to sustain its revenues. Apple also has strict non-disclosure agreements (NDA’s) for its products that are in development stages, thereby creating a situation where suppliers may not be aware of the production requirements well in advance of launch time. Once the information is communicated all the way from Cupertino, California to the suppliers in China regarding product design, capacity and tooling requirements, it may already be close to the product market launch time. This creates situations of pandemonium at Apple’s overseas suppliers as they struggle to provide short lead times to fulfill short product launch timelines at their existing capacities. To keep up with Apple’s timeline, suppliers may have no option but to employ additional workers in mass and extend work hours at their manufacturing facilities to meet demands, thereby resulting in unfavorable labor conditions. In such situations of high pressure, suppliers have to decide whether they would be willing to go bankrupt if they fail to meet Apple’s requirements, since a lot of these suppliers depend on Apple as a major source of their revenues or apply force on their labor to churn out the products based on the enforced timelines. Unfortunately, the suppliers choose the latter option of overworking their workers to fulfill the need for additional capacity in short lead times.

To illustrate, the issue of short lead times to accomplish on-time launch demands was a burden borne by Samsung, Apple’s OLED screen supplier for the recent iPhone X launch. The iPhone X was supposed to have been ready for distribution in the market soon after the phone was introduced at the Steve Jobs Theater on September 22nd, 2017 alongside iPhone 8 and iPhone 8 Plus. However, the iPhone X was not ready for sale in the mass market until November 3rd, 2017 due to lack of capacity at Samsung’s OLED production facility. The delay was attributed to lack of on-time communication by Apple regarding capacity requirements and since Samsung was the only feasible supplier with the competency and technology to produce the exact size of the required OLED screens to meet the iPhone X’s technical specifications. Therefore, Apple’s on-time launch struggled due to the lack of timely communication by them to their sole OLED supplier regarding capacity needs, thereby placing unanticipated pressure on Samsung to increase their capacity manifold in a short period of time. This, once again, highlights the one-sided relationship, where Apple exerts last-minute pressure on its suppliers to deliver products on-time while upholding appropriate quality standards.

To prevent Apple’s suppliers from feeling burdened with capacity ramp-ups closer to launch time, we recommend that Apple encourage “early supplier involvement” company-wide for all products that are in development stages. For example - Apple could involve its largest supplier, Foxconn in the design phase of its projects, thereby keeping Foxconn in the know about the technical requirements, as well as potential capacity requirements to reduce overall constraints and launch-related difficulties in the execution phase of a mass production project. This would further encourage on-time deliveries and fair labor conditions by allowing Foxconn to accommodate the required production capacity well in advance with pre-existing resources, as opposed to mass hiring and firing of employees based on last minute capacity ramp-up. Another recommendation we have for Apple is for it to localize production of parts that they require suppliers to sign NDAs for within its own manufacturing facilities. We recognize that this would involve a high set-up cost for Apple, but over the long-run, they will benefit by ensuring that the technical specifications regarding product design are not compromised by suppliers who might be manufacturing products for Apple’s competitors. This will encourage lower PPMs for highly technical component parts and will result in lesser defects of Apple’s final products. Moreover, it will encourage on-time launches by making Apple self-sufficient in its capacity planning ahead of time, thereby not having to depend on its suppliers for last-minute capacity ramp-ups.

In conclusion, the electronic giant, Apple, is currently marred with strategic gaps in their value chain, most significantly because of the longer communication lead times arising from their value chain complexity. Looking forward, we believe that Apple could benefit from employing sound communication strategies with its suppliers and other service vendors, thereby ensuring minimal material flow hiccups. In addition, we recommend that a stronger monitoring and control plan be devised to ensure better working conditions at the manufacturing facilities (direct and sub-vendored) under Apple.