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OM in the News: A Crack in Apple’s Supply Chain

November 25, 2014

apple glassShortly before 7 a.m. on Oct. 6, the CEO of GT Advanced Technologies called Apple with bad news: GT, which was to supply Apple with superhard sapphire screens for its new iPhones, had just filed for bankruptcy. The filing surprised Apple. Only one year earlier, Apple and GT had hailed a $1 billion plan to build an Arizona factory that would produce 30 times as much sapphire as any other plant in the world. Instead, the alliance turned into a rare—and public—misstep for Apple, whose strict management of its global supply chain has helped it become one of the world’s biggest companies. “From the making of the first iPhone in 2007, Apple repeatedly has pushed its suppliers to achieve the improbable, while driving hard bargains on price and time to market,” writes The Wall Street Journal (Nov. 20, 2014).

GT’s meltdown underscores the promise and peril for Apple suppliers. An Apple deal can generate billions in revenue. But it also means adapting to huge fluctuations in demand, at razor-thin profit margins and little room for error. “This is not easy money,” said one longtime Apple supplier in Asia. GT’s COO told the bankruptcy court that Apple had turned his company into a captive supplier, “bearing all of the risk and all of the cost. GT couldn’t make a profit at Apple’s dictated pricing.”

Apple turned to GT while seeking to solve a big problem with iPhones: scratched or broken screens. Sapphire is one of the hardest materials on earth, now typically produced synthetically, in furnaces that reach more than 3,600 degrees. It also is expensive—more than 5 times the cost of glass. Apple consumes 1/4 of the world’s supply of sapphire to cover the iPhone’s camera lens and fingerprint reader. Early last year, the company began looking for a much larger supply, to cover the iPhone’s screen. Producing sapphire proved to be the biggest problem. It takes 30 days and costs $20,000 to make a single ingot.  Apple claimed more than half the GT ingots were unusable.

Classroom discussion questions:

1. Why did the venture between Apple and GT fail?

2. What issues face companies that supply one major customer?

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