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OM in the News: Apple’s Supply-Chain Secret?

November 8, 2011

 Businessweek (Nov.4-10, 2011) describes the “world of manufacturing, procurement, and logistics ” in which Apple excels.  “Apple has built a closed ecosystem where it exerts control over nearly every piece of the supply chain, from design to retail store”, writes the magazine. “The iPhone maker spends lavishly on all stages of the manufacturing process, giving it a huge operations advantage”.

This is a great article to ask students to read, as it describes the critical role of OM in one of their favorite companies. “Operations expertise is as big an asset for Apple as product innovation or marketing”, says the former head of SCM at HP. With its volume –and ruthlessness–Apple gets big discounts on parts, manufacturing, capacity, and air freight. This enables the company to handle massive product launches without maintaining huge inventories, all the while earning 25% profit margins.

As one example of details in the supply chain, Apple bought up all the available holiday air freight space  to ensure its new translucent blue iMacs would be widely available before Christmas–paying $50 million to do so. The move handicapped Compaq when it later wanted to book air transport.  Apple also decided to fly iPods directly from Chinese factories to consumers homes, allowing the buyer to track the phone’s progress around the world on its web site.

The company recently announced it plans to double capital expenditures on its supply chain to $7.1 billion next year, while committing $2.4 billion in prepayments to key suppliers. The tactic ensures availability and low prices. Because it  locked up all available screens to use in its iPhone4 debut last  year, competitors like HTC couldn’t buy the screens it needed. 

 While life as an Apple supplier may be lucrative because of volumes, Apple  does squeeze prices to the bone, and may require suppliers to keep 2 weeks of inventory within a mile of Asian assembly plants.

Discussion questions:

1. In what ways do Apple’s retail stores provide an OM advantage?

2. How does Apple use SCM as a strategic weapon?

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