Explain why would it be interesting to study this Case Analysis? APPLE INC.: MAN

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Explain why would it be interesting to study this Case Analysis?

APPLE INC.: MANAGING A GLOBAL SUPPLY CHAIN

Jessica Grant was an analyst with BXE Capital (BXE), a money management firm based in Toronto.2 lt was February 28, 2014, and Grant was discussing her U.S. equity mandate with BXE's vice-president, Phillip Duchene. Both Grant and Duchene were trying to identify what changes, if any, they should make to BXE's portfolio. "Apple is investing in its next generation of products, potentially the first new major product lines since Tim Cook took over from Steve Jobs,''she said. Apple Inc., the world's largest company by market capitalization, had introduced a series of consumer products during the past dozen years that had transformed it into the industry leader in consumer devices.

Apple managed a global supply chain with creative development in the United States, outsourced manufacturing in Asia and components sourced from suppliers around the world. Apple was in the centre of a complex ecosystem that prod uced market-leading consumer devices. With $160 billion 3 in cash in February 2014, the company was well -capitalized. Despite its commercial success, Apple's stock was at $524.47 on February 28, 2014, 25 per cent below the $700 level it had reached in 2012 . Cook reassured investors that the firm was focused on the future, and it had a solid pipeline of new products .This was his way of signalling to stakeholders that he would be able to run the firm following the death of Steve Jobs, one of Apple's co-founders and the man responsible for rebui lding the firm. "We're working on some things that are extensions of things you can see and some that you can't see,'' Cook said at Apple's annual shareholders' meeting on February 28, 2014. Industry observers were skeptical that the company could deliver new product successes:

It is unclear whether the spread-sheeting-loving, consensus-oriented, even-keeled Cook can successfully reshape the cult-like culture that Jobs built. Though Cook has deftly managed the iPhone and iPad product lines, which continue to deliver enormous profits, Apple has yet to launch a major new product under Cook; tal.k of watches and televisions remains just that . . . in the day­ to-day at Apple, Cook has established a methodical, no-nonsense style, one that's as different as could be from that of his predecessor. Job's bi-monthly iPhone software meeting, in which he would go tlu-ough every planned feature of the company 's flagship product, is gone. "That's not Tim's style at all,'' said one person familiar with those meetings . 'He delegates.

Nevertheless, it was clear to Jessica that Apple's product range would get more complex in the next few years. As part of her analysis of Apple's stock, she wanted to take a look at the company 's supply chain to see if she could gain some insight into whether to continue with Apple as a key holding in BXE's fund.

APPLE INC.

Apple Computer was founded on April I , 1976, by Steve Jobs, Steve Wozniak and Mike Markkula to manufacture and distribute desktop computers. Both Jobs and Wozniak started tinkering with computing devices in a time when enthusiasts who wanted a fully functioning computer had to assemble the parts by themselves from individual components . They struck a deal to sell an initial order of 50 units of their "Apple 1"computer to a local computer shop, and negotiated a 30-day credit term to pay for the parts, effectively using their suppliers to fond the startup.After selling 200 units of the Apple I , Wozniak improved the design and showcased the Apple II in April 1977.Needing capital for the next phase of their company, they brought on Mark kula, a marketing manager at Intel who had retired after making millions on his stock options. The company became the largest private manufacturer of personal computers in the United States and held its  i nitial public offering in December 1980, thereby creating 300 millionaires.

Although it had a great product , the team at Apple soon found that fBM's entry into the market in 1981 would change the industry. By 1983, IBM's personal. computer (PC) became the best-selling computer in the United States, heralding the beginning of its domination of the PC market. Even Apple's popular 1984 Superbowl conunercial,6 combined with a heavy marketing campaign, was not enough to stop IBM 's growth. Jobs left Apple in 1985. The company stumbled along for the next decade, and even though it launched a line of lllacintosh computers, such as Quadra,Centris and Performa, it failed to gain traction in the marketplace. Worse, its retail partners, such as CompUSA and Sears, did not devote resources to displaying its products properly . Apple also suffered from a perception that its machines were more expensive than comparable Windows PCs. The company had poor operating controls and inventory management, fail.ing to properly estimate demand for its products and leading to both stock-outs and excess inventory .7

Apple squandered its goodwill from the 1980s Maci ntosh era. In 1996, Microsoft was one year into the launch of Windows 95, which was turni ng out to be a very popular operating system. Apple's sales of Macintosh computers fell dramatically and Apple, in an attempt to reverse the trend, began licensing the Mac operating systems to third -party manufacturers. From 1993 to 1996, Apple went through three CEOs: John Sculley, Michael Spindler and Gil Amelio.8

ln 1996, Jobs returned to the company as CEO at a time when Apple's future was in question. Apple's market capitalization had fallen from $11.6 billion in 1987 to $3.l billion at the end of 1996. In 1996, sales were $9.8 billion . In the early 1990s, Apple had begun licensing its Mac operating system to third-party manufacturers who would prod uce their own lines of devices powered by Mac's operating system. Its licensing model was similar to that employed by Microsoft,allowing the operating system producer to earn additional revenues by selling copies to generic computer manufacturers. With the objective of reasserting control over its product , one of Jobs' first decisions was to stop Licensing Apple's Mac operating system. This resulted in a fall in computer unit market share from 10 per cent to 3 per cent. Throughout this time, Apple continued to manufacture its own devices. Ln 1997, Jobs announced a partnership with Microsoft that would see the latter invest $150 million in Apple and release the dominant office software -Microsoft Office -for Macintosh . At the time of the announcement, Apple's market capitalization had continued to fall to $2.5 billion .

Between 1998 and 2001, Apple launched iMac compu.ters as a line of revamped PCs that focused on design. The computer body was made from bright colours, such as green, blue and purple.The line sold well and provided the spark for Apple's retum to prominence. Jn May 2001, Apple announced that it would be opening its own retail stores to enable it to educate consumers and to grow its market share. In October 2001, it introduced the iPod portable digital audio player. Supporting the iPod was the iTunes music store, which was stocked with downloadable songs.At a time when the biggest record labels were worried about pirated songs being downloaded to MP3 players, Apple negotiated a deal with the five largest labels to be part of iTunes.The success of the iPod helped to revitalize Apple's prospects, building a strong financial base from which the firm could grow.

By 2004, Apple was able to gain better control over its supply chain by working with new suppliers on proprietary parts for which Apple would provide upfront capital in return for volume commitments and a lower overall price per unit. Apple's growing clout a llowed it to work with its suppliers to launch a series of new products containing significant technological advancements, such as iPod Video, iPod Touch and, by 2007, the iPhone.Concurrently , Apple expanded its retail store base beyond the United States, opening its first Japanese store in 2003. From 2007 to 2013, Apple's success with its music players allowed it to upgrade its iPhone and iPod line­ up, introduce new Mac computers and other products such as Apple TV, and develop its application (app) store, where third party developers listed their apps for consumers to download . In April 2010, Apple reinvented the tablet computer market by launching i ts iPad. With its slim design, multi -touch screen and touch-sensitive keyboard, the iPad was an instant commercial success. For consumers, the iPad was a portable computer and entertainment device, allowing them to respond to emails, watch videos, play games, and browse the Internet, among other things. While Apple still used retail partners to distribute its products, it sold 70 per cent of its products and services directly to consumers and businesses (see Exhibit 1).

Jessica had seen many reviews stating that Apple's success was due to a combination of design, functionality, marketing and an ability to modify production to meet spikes in demand . She read an article about Apple's launch of its iPhone 5 in September of 2012, including a demonstration of the new phone by the vice-president of marketing for Apple, Phil Shiller.Nine days away from that product's official launch, Apple was confident enough in its just -in-time supply chain that it had not yet begun to ramp up production . The company had an aggressive schedule to meet as the iPhone 5 eventually sold at a rate of 3.7 million units per week for the first three months . In addition, it was available in I 00 countries from 240 mobile phone carriers. Intrigued by Apple's ability to coordinate its supply chain on a real -time basis, Jessica started to dig further for details of the firm's operations. She decided to focus 011 one product , the iPhone, and understand how Apple managed to bring that prod uct to market.

The iPhone's Supply Chain

Apple's iPhone supply chain was global, tying together a research and development base in the United States, 156 suppliers, assembly operations in China and retail stores, some of which were its own Apple­ branded stores.Jessica began to trace the path of Apple's iPhone from inception to delivery to customer.

New Product Development

Apple's management team kept a short new product development cycle. Whereas a traditional product lifecycle - for a new car model, for example- might ·span four to five years, Apple's iPhone lifecycle was closer to one year. Exhibit 2 provides a list of iPhone models since the first version was launched in June 2007, and Exhibit 3 shows iPhone unit sales by the quarter. The new product development department coordinated a wide variety of stakeholders, including internal groups, such as hardware, software and production . For example, the industrial design team headed by senior vice-president, Jony Ive, worked with the production team to ensure that products could be built in large volumes . Instead of outsourcing its manufacturing to third-party service providers -as in the case of Samsung10 -Apple preferred to control the entire supply chain internally. Unlike other electronics manufacturers that might outsource the entire production -and management -of their supply chain to a third-party service provider, such as Solectron or Flextronics, Apple designers worked in close proximity with suppliers.Quite literally, the designers would often spend "months living out of hotel rooms in order to be close to suppliers and manufacturers, helping to tweak the industrial processes that translate prototypes into mass-produced devices ."

Creative design and engineering was managed in California, where Apple developed new technologies, acquired licenses for intellectual property and made bolt-on acquisitions of technology finns whose products could be used in Apple's ecosystem of products and services. Concurrently , Apple conducted market research and product -testing to refine the upgrade being considered . Cost data were put together, including a list of parts and suppliers, and an estimate of what it would cost to assemble the iPhone. Potential quality defects were identified and plans were drawn up to mitigate risk.ln 2013, Apple continued to invest heavily in research and development (R&D) to ensure that it would have innovative products in its pipeline. R&D spending was $4.5 billion in 2013, up from $3.4 billion in 2012 and $2.4 billion in 201 l.

Apple's devices -unlike Dell's -were available in a limited number of configurations, a deliberate product strategy that allowed its supply chain processes to be streamlined. Apple's technology competitors typically had separate R&D departments and separate profit and loss accountability for each product segment. ln contrast, Apple was highly integrated, with centralized R&D and accounting for the entire company .13

Procurement

Apple products contained key components that were often sourced from a single manufacturer . Because the different mobile phone firms often used the same components, key parts from a single, popular supplier were regularly out of stock due to overwhelming demand. To counteract this supply issue, part of Apple's procurement strategy was to purchase suppliers' production capacity in advance in order to ensure the steady supply of key parts (see Exhibits 4 and 5). In addition, Apple had a program that allowed it to buy capital equipment for suppliers in exchange for both supply assurance and achieving cost targets. As a percentage of the selling price of an iPhone, Apple captured approximately 60 per cent as gross margin, and suppliers such as LG and Samsung captured another 5 per cent to 7 per cent as revenues (see Exhibit 6 for a breakdown of the distribution of value from the sale of an iPhone). Product demand was forecast 150 days in advance and updates were continually sent to suppliers to allow adjustments in production schedules. Apple's procurement team used sales targets to manage production ramp-up issues and place material purchase  commitments, making pre-payments  if  necessary .15 It reacted  to changes in  sales forecasts by altering the orders, often at a moment's notice. Depending on forecast demand, Foxconn was known to wake up its workers -even at midnight -to meet sudden spikes in orders from Apple:

One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves.Apple had redesigned the iPhone's screen at the last minute, forcing an assembly :lineoverhaul. New screens began arriving at the plant near midnight. A foreman immediately roused 8,000 workers inside the company 's dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over I 0,000 iPhones a day."The speed and flexibility is breathtaking,"the executive said. "There's no American plant that can match that."

These alterations had an impact on both components and assembly labour requirements . Every quarter, for its current slate of products, Apple reviewed its inventory levels, adjusted its demand forecast, and monitored its cost of components. New products in the development pipeline were added to the review as well.

An analyst estimated that the bill of materials for the iPhone 5 ranged from $199 to $230 for sub-models that retailed for $649 to $849 (see Exhibit 7). The production of the iPhone began with orders placed to 156 component suppliers around the world. lt was normal for Apple to sign exclusivity agreements with key suppliers. f or example, when I ve found a U .S. laser equipment supplier that made $250,000 machi.nes to cut precision holes, an agreement was signed to secure hundreds of the machines for manufacturing Apple's products . According to observers, maintaining control over suppliers was important. Apple's decision to managea "closed ecosystem" enabled it to negotiate large discounts on components . This gave the company access to flexible manufacturing volume in the event that demand was high, and savings on other supply chain costs, such as air-freight.17

Apple engineers worked closely with suppliers to update manufacturing processes and technology. For example, new tooling equipment was designed to cut the MacBook's unibody shell. Apple's insistence on exclusivity and its high volume of purchases meant that competitors often had to wait for key components, such as screens. "To manufacture the iPad 2,"for example,"Apple bought so many high-end drills to make the device's internal casing that other companies' wait time for the machines stretched from six weeks to six months, according to a manager at the drillmaker."18 These delays had a material impact on competitors. In May 2005, news about Apple ordering DRAM chips sent Samsung's stock price tumbling in one day, erasing a staggering $10 billion of the electronics giant's market cap.

For suppliers, Apple's high-volume orders and offers to invest in capital equipment had both benefits and drawbacks. While suppliers enjoyed profits due to the high volumes ordered by Apple, the latter expected detailed breakdowns of suppliers' costs for manufacturi ng labour, materials and even projected profit. Suppliers were also expected to keep two weeks of parts inventory in close proximity to assembly plants. In addition, the cost to carry parts was borne by supp:liers as Apple stretched out its payables to as long as 90 days after the parts were used . Apple's offer to pay for machi nery and its firm commitments to future supplier volume were not typical for the electronics industry, which traditionally preferred to negotiate the lowest possible combination of price and volume commitments per order.The following is an example of a deal negotiated by Apple with a key supplier:

Apple struck a deal with GT Advanced Technologies Lnc., a maker of furnace equipment that is used to produce sapphire materials that cover smartphone lenses and home buttons . Apple received an exclusivity agreement from GT Advanced for the furnaces in exchange for making a prepayment of $578 million .GT Advanced said it would pay Apple back over five years starting in 2015. The deal has "limited our ability to take additional"business , Thomas Gutierrez, GT Advanced 's CEO, said in a conference call with analysts.GT Advanced said in its announcement that revenue from the division that includes the kinds of machines Apple is buying will increase to 80 per cent of the company 's total business, predicted to be $600 million to $800 million, up from 31 per cent previously. To maintain their independence, some suppliers chose to decline Apple's orders and capital, realizing that Apple's negotiating tactics would leave them with slim profits . A major parts manufacturer declined to commit its manufacturing capacity to Apple's products, even refusi ng a $1 billion upfront payment from Apple.The manufacturer was worried that Apple's insistence on committed capacity and low prices woul.d have an impact on sales to its other customers. Product Assem bly

Final assembly of the iPhone 5 occurred in China, at Apple subcontractor Hon Hai Precision Industry Co., better known as Foxconn, at a cost to Apple of $8 per unit. Foxconn, founded in 1974, was an original design manufacturer for clients such as Apple, Sony, Nintendo, and BlackBerry . Based in Taiwan, it was the world 's largest electronics manufacturer with 1.23 million workers in 2012.ln 2012,Foxconn generated $2.7 billion in net income from $4.2 billion in revenues. Foxconn had factories in Asia, Europe, Mexico and South America . Apple's competitors, in contrast, tended to outsource production of their smartphones:

In June 2011 , it was reported that Nokia outsourced its Windows Phone handset production to Compal Electronics .1

In December 2013, BlackBerry, in an attempt to tum around its business, outsourced its hardware production to Foxconn,2

Even Samsung, a large conglomerate, announced in December 2013 that it would be outsourcing the production of its low-end smartphones .3

Several iPhone components req uired labour-intensive assembly operations with complex quality control processes.For example, Apple had run each iPhone camera module through a battery of tests before it could be inserted into an iPhone.One of the key tasks for subcontractors was coordinating the sourcing and hiring of the temporary labour used in testi ng and assembling individual components. For example, for a group of 24 companies with 28 plants in Malaysia that were supplying assembly services to Apple's component suppliers, receiving assembly orders meant that they bad to focus efforts on hiring thousands of temporary workers . These firms looked to draw workers from developing Southeast Asian countries such as Indonesia, Cambodia, Mynamar, Vietnam and Nepal.

When the iPhone 5 forecasts were developed, one of Apple's top component manufacturers, Flextronics, put out a call for 1,500 additional temporary workers to assemble a camera component. Labour was hired via a network of recruiters and subagents, all of which were tasked with finding people on short notice. For a job that paid approximately $178 per month, temporary workers paid as much as $1,000 in fees -to recruiters. Flextronics arranged for workers to board scheduled flights from their home countries to Malaysia, where they were transported to the company compound. Housing was provided, and workers were expected to work 12-hour shifts per day. Flextronics accounted for the fluctuations in orders by hiring or terminating temporary workers as needed. Ln the example cited above, 4,500 temporary workers began assembling iPhone 5 camera components in October 2012. But the workers were laid off in mid-January 2013, eliciting comments from the pu blic that they had been unfairly treated . In response, Apple pointed to its supplier code of conduct, which had clear policies governing abusive practices such as harassment, involuntary labour and human trafficking .23 Due to Apple's just -in-time supply chain, which placed significant responsibility on the shoulders of suppliers, component delays had an impact on Apple's inventory projections . Sharp Corp, a supplier of iPhone displays, notified Apple that its output had fallen behind schedule as it struggled with high costs and debt servicing obligations.24 Finished components were consolidated at Foxconn 's China factories, where thousands of workers assembled the components into iPhones. Aside from the general labor required to test components and assemble devices, another critical advantage for Apple was that global suppliers provided engineers at a scale that its U.S. suppliers could not match . Apple's executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company 's analysts forecasted that it would take as long as nine months to find that many qualified engineers in the United States. In China, it took 15 days.

On the assembly side, managing a huge workforce and keeping to tight schedules was difficult. A Foxconn factory was closed in Taiyuan, China in September 2012, following a riot among its 2,000 employees. In the summer of 2013, Foxconn began restricting workers to nine hours of overtime per week .25 To ensure that secrecy was maintai ned throughout the assembly process, Apple placed electronic monitors in select boxes of parts and followed the components remotely -from Cupertino -in case there were leaks.

Logistics

In 1997, Jobs' return brought Apple a  renewed focus  on  revamping  its  supply  chain  management capa bilities. That year, Apple was facing a $1 billion backlog of orders that frustrated the management team . The firm looked at innovative ways to speed up the supply chain, even using expensive air-freight when most computer firms were relying exclusively on shipments by sea. fn 1998, Jobs even pre-purchased all available holiday air-freight, paying $50 million to ensure that Apple 's new iMacs could be delivered to stores for the holiday sales rush.The move had the added benefit of shutting out rivals -such as Compaq Computer -from using air-freight as a transportation option. In fact, when it came time to ship its new iPod products in 2001, Apple discovered it was cheaper to ship them directly to consumers from its suppliers' assembly plants in China . Apple relied on intennediate warehouses at UPS and Fedex and had its own warehouses in Elk Grove, California. It had to ensure that its many sales outlets -online stores, retail stores, direct sales force, wholesalers and retail network -had the product stock they needed according to the demand forecast.

In addition,the company had a reverse logistics system as well,encompassing the management of warranty claims, trade-ins and Apple's recycle and reuse program.Managing reverse logistics effectively contributed to Apple's success, both on a cost level and on a customer service experience level. Traditionally, when a customer sought to return an electronic prod uct, he or she would have to bring it back to the store with a receipt, and the store would take the item back, issue a refund, then hold the presuma bly defective item until it could be delivered back to the manufacturer . In contrast, Apple allowed consumers to enter data about the defect on the Apple website,adding the unit's serial number to identify purchase details (including date of purchase, location and information about the customer). Within half a day, Apple would send the customer an email indicating if the product was still under warranty and providing details about how it would be returned . Within 48 hours, a pre-addressed, pre-stamped box would arrive at the customer's door-step, sent by express parcel service. A shipping label and a receipt for the return were both included in the box, along with secure foam packaging and even packaging tape. By calling a central dispatch number, Apple's assigned courier -UPS, FedEx or DHL -would come and pick up the item directly from the customer's house or office. By providing rapid service through its reverse logistics function, Apple improved customer satisfaction, lowered the number of calls to its technical support senrices and eliminated the likelihood of customer error when processing a return (by using an incorrect address, for example). Getting the electronic product back into Apple's service depots allowed them to diagnose and return the item to the customer rapidly, or fix the issue and sell the refurbished product as an "Apple Certified . Good as New" product in its Apple Store. Apple 's close management of its logistics system extended to packaging devices in plain boxes to "avoid detection," and monitoring "every handoff point -loading dock, airport, truck depot and distribution center -to make sure each unit was accounted for."29

Retail Experience

Apple had 424 retail stores in 16 countries around the world. In addition, its online Apple Store was available in 39 countries. The company 's retail stores were typically located at high-traffic locations in quality shopping malls and urban shopping districts. By operating its own stores in desirable high-traffic locations,Apple was positioned to ensure a high-quality buying experience and attract new customers .The stores were designed to simplify and enhance the presentation and marketing of the company 's products and related solutions. The retail stores employed experienced and knowledgeable personnel who provided product advice, service and training and offered a wide selection of third-party hardware, software, other accessories and peripherals that complemented Apple's products . Apple could monitor product sales by store by the hour and it relied on this information to tweak its production forecasts on a daily basis . According to one article: "If it becomes clear a given part will run out, teams are deployed and given approval to spend millions of dollars on extra equipment to get around the bottleneck ." The company also invested in programs to enhance reseller sales by placing high-quality Apple fixtures, merchandising materials and other resources within selected third-party reseller locations . Through the Apple Premium Reseller Program, certain third-party resellers focused on the Apple platform by providing a high level of prod uct expertise, integration and support services. A side-by-side comparison of Apple's iPhone 5 with devices rrom key competitors can be found in Exhibit 8.

Looking Forward

At the end of fiscal year 2013, Apple had $171 billion in sales,with market capitalization of $457 billion .31 There were rumours that Apple was going to announce a stock split, something it had only done three times in its history : on June 15, 1987, on June 21 , 2000 and on February 28, 2005.

Jessica noticed that Apple continued to invest in its supply chain. At the end of 2013, Apple was investing $I 0.5 billion in new technology -including assembly robots and milling machi nes -to ensure that its products could be made more quickly and more cost effectively. In fact, Apple's supply chain was ranked number one in a list prepared by Gartner Group, an analytics firm (see Exhibit 9). Selected financial information from three competitors - Samsung, Bla.ckBerry and Nokia - is shown in Exhibit 10. One observer noted that: Apple is increasingly striking exclusive machinery deals . . .outspending peers on the tools that it then places in the factories of its suppliers, many of which are in Asia. 'Their designs are so unique that you have to have a unique manufacturing process to make it,' said Muthuraman Ramasamy, an analyst with consulting firm Frost & Sullivan, who has studied the use of the machinery. 'Apple has so much cash that they can invest in cutting-edge, world-class machinery that is typically used for aerospace and defense.'33

Finally, Jessica pored over financial information from 1996 to 2013, as well as important segment information (see Exhibits 11 and 12), before summarizing her notes on Apple's supply chain. Then she started to prepare a one-page outline of the pros and cons for her presentation to Phillip Duchene.

Explanation / Answer

This case study is interesting as we need to study the how change in management affects the profits and share prices of Apple. After Steve Jobs, the share prices of Apple dwindled and though Tim Cook is promising an improvement in near future, market is skeptical about whether to invest in Apple or not.

The change in management style will also have an affect on the operations of Apple. Steve Jobs, owing to his far-sightedness, had proposed and implemented backward integration to own the manpower and manufacture equipment. He also resorted to forward integration to possess the Apple stores which were to be used for managing customer relationship and holding workshops for Apple’s products. The efforts of Steve Jobs had made the supply chain of Apple very effective and systematic. Jessica Grant had the concern whether Tim Cook can continue with the legacy of Steve Jobs or not. Tim Cook was not perceived as a great visionary as Steve Jobs. So Grant was having doubts about Cook’s corporate future approach for handling Apple.

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