Perspectives from ISB

(Contributed by Joseph A. Hopper)

It’s not every day that we come across the CEO of a Fortune 500 company who earned his stripes as a supply chain / procurement specialist. In a design and marketing-driven organization such as Apple, how could such a candidate ever hope to take the reins? After all, Apple is bursting with capable, competitive, creative leaders.

Lets begin by appreciating the extreme supply chain challenges that Apple faces every day. Love it or hate it, everyone agrees that this is not your usual computer or consumer-electronics company. New product launches are followed by world record-breaking surges of demand (e.g. 5 million iPhones sold on the first day), which peak once again closer to the holiday seasons, then taper off until the next cycle continues. The sheer growth rate of new products has been torrid, resembling the “Tornado” phase of industry evolution described by Geoffrey Moore in his bestselling book Crossing the Chasm.

Compounding the mega-surge effects is a volatile cocktail of exotic materials (e.g. glass back phones), non-traditional engineering (e.g. wrap-around antennas), bright colors, and novel manufacturing techniques (e.g. carved aluminum uni-bodies). Then there are the secrecy mandates, the supplier-turned competitor issues and the Chinese worker-rights headaches that add up to a supply chain manager’s worst nightmare.

Over the years, how did Tim Cook thrive in the face of such challenges? Lets unravel the supply chain secrets that Apple has refined over the years, using the recent example of the iPhone 5 launch.

Restricted Product Variety

One of the key enablers has been placing a few large bets on fast horses. Restricted product variety generates a whole host of volume efficiencies across the supply chain. Curiously, this restriction of choice has not dampened the consumer’s zeal for Apple products; only a single basic iPhone model was added this year, with several variants and older (fully depreciated) models to round out the lower price points. Customers prefer easy to understand options over a wide array of confusing choices.

Common Parts AcrossProduct Lines

Compounding these very formidable volume efficiencies, Apple goes a step further to leverage common parts across product lines. Many companies do this within a product line, however Apple manages to do this ACROSS product lines. The iPod Touch screen, for example, is shared with the iPhone 5. Technologies also exhibit this trend, with Retina displays crossing over to the iPad and Mac. Similarly flash memory, another key component, has been leveraged into the Mac hardware line with the MacBook Air.  Even the iOS and Mountain Lion operating systems show signs of copying each other’s best features and appear to be on a path to ultimately converge. This trend towards incestuous designs reduces the sheer number of child parts and dampens complexity across the supply chain.

Never Rely on Forecasted Demand Alone

What would happen if Apple ordered TOO MANY new iPhones? A product glitch could dampen demand, or perhaps they just become overly optimistic. With over $117 Bnin cash and reserves, a little extra working capital might not hurt too much, but obsolescence and carrying costs could be quite substantial. By accepting pre-bookings online, Apple created a lead indicator to tweak it’s forecasting. More importantly, it sequences country launches in a staggered fashion. If demand for the iPhone 5 product is greater than expected, new launches can be postponed or the number of countries reduced. Similarly, if demand is lower than expected new country launches can be rolled out much faster. This buffer cushions the effect of forecasting error, inevitable in such kinds of mega-launches.

Controlled Shortages Fuel Mass Adoption

For aspirational products like iPhones, MBA degrees, fashion apparel, etc. the product is never what the customer is buying. Rather, ENVY itself is the product. People want what that other people cannot have. In such industries,social proof is the ultimate feature. Take the fanboys and fangirls who lined the streets around Apple stores 3 days before iPhone 5 launch. These lines are not accidental, they are by design. Apple controls availability meticulously to ensure that items must “sell out” on the first day of a new launch. Every item will be available eventually, but only after a sufficient period of sparing distribution.

Note that none of these innovations falls in the realm of traditional supply chain management. Rather, they resemble product design, engineering and consumer behavior. This cross-functional integration of Apple is another hallmark worth imitating. Rather than thinking of ourselves as functional specialists, lets coordinate seamlessly with other parts of the organization and learn what we can from various disciplines. Lets take a cue from Tim Cook, Steve Jobs, and indeed the entire Apple team to manage our supply chains holistically rather than as narrow functional silos.

About the Author

Joseph A. Hopper is a graduate of the ISB PGP Class of 2003. He is an operations consultant with Goldratt India and is associated with the Theory of Constraints Institute. He is starting a blog and welcomes your opinions and comments.