Apple is famous for innovation and design. But few people know that the way Apple handles inventory is also a factor that led to success. As a matter of fact, research firm Gartner ranks Apple’s Supply Chain as the best supply chain in the world every year from 2010 to 2013.
Tim Cook, the current CEO of Apple, a company that reached 170.9 billion in revenues last year, was before the company’s Chief Operations Officer. He had joined Apple in 1998, the same time Steve Jobs re-entered the company, and he transform Apple’s messy operations into a success, becoming COO in 2005 and CEO in 2011.
Tim Cook believes that when it comes to technology such as smartphones, tablets and laptops, inventory deprecates very, very quickly, losing 1-2% of value each week - “inventory is fundamentally evil” he says. "You kind of want to manage it like you're in the dairy business. If it gets past its freshness date, you have a problem."
A comparison of how tech companies managed their inventory in 2011 shows Apple was performing much better than Dell, HP, Blackberry (RIM) and Motorola. Using the Inventory Turnover formula that shows how many times a company’s inventory can be sold and replaced over a specific time period (so the higher the number the better), in 2011 Apple performed 2 times better than Dell, 5 times better than HP, 4.5 times better than Blackberry, and 5.5 times better than Motorola.
In July 2011, Apple sold every ipad 2 it could make, creating no wastage with unable to sell inventory.
In its recent quarterly reports, Apple introduced a bit more details on their inventory: in Q1 2014 Apple had $2.1 billion in inventory (a good number compared to $170 billion of sales in fiscal year 2013), split in $1.6 billion in finished goods and $525 million in components. And they are planning again to not have any inventory unsold in time.
Also according to reports, Apple exited the Q1 2014 with inventory almost in balance with demand for both the iPhone as well as the iPad, unlike last year when the iPhone 5 and the iPad mini were highly supply-constrained.
How does Apple run its supply chain operations?
In a nutshell, Apple purchases components and materials from various suppliers, then gets them shipped to the assembling plant in China. From there, products are shipped directly to consumers (via UPS/Fedex) who bought from Apple's Online Store.
For other distribution channels such as retail stores and other distributors, Apple keeps products at Elk Grove, California (where central warehouse and call center are located) and ships products from there. At the end of product's life, customer can send products back to nearest Apple Stores or dedicated recycling facilities.
How did Apple manage to have such a great inventory management?
Tim Cook’s mantra was from the very beginning to slash inventory, cut down on warehouses and make suppliers compete between themselves.
"When Cook initially took over Apple's supply chain, he cut down the number of component suppliers from 100 to 24, forcing companies to compete for Apple's business," writes San Oliver from Apple Insider, "He [Cook] also shut down 10 of the 19 Apple warehouses to limit overstocking, and by September of 1998 inventory [stock on hand] was down from a month to only six days."
In 2012, Apple was said to turn inventory every 5 days! And that was part of the reason the research firm, Gartner, placed Apple’s supply chain the best in the world, with Dell and Samsung ranking next in the electronics category, turning their inventory aprox. every 10 days, respectively 21 days.
Keeping as little inventory on hand as possible is very important. Why? Because of costs with warehouses and competitors possible hits. Technology manufacturers can’t afford to keep too many products in stock because a sudden announcement from a competitor or a new innovation could change everything and suddenly bring down the value of products in inventory.
By 2013, Apple was dealing with 154 key suppliers (way lower than Amazon for example), which facilitates better supplier relationships) and kept only one central warehouse in perfect data sync with the aprox. 250 owned stores.
Foreseeing sales levels accurately and not having excess inventory is absolutely crucial in the computer industry, especially when new products quickly cannibalize the old.
Not having too many SKUs helps correct forecasting (in 2013, Apple had 26.000 SKUs, way less than other technology manufacturers). Another facilitating factor is having a longer product life cycle and Apple has more than 12 months for its key products.
And forecasting demand doesn’t come only in the form of what products your customers will buy, but also on what kind of technologies will be in demand for the next coming years, allowing the company to reduce costs with suppliers by placing orders for longer term. This also leads to creating enough demand for suppliers, so that other competitors cannot order the components and hence limiting imitations.
Although Apple was always pushing to have fast inventory turnover, it made a change in 2011 of not rushing selling. The change was implemented with the launch of the ipad 2 and consisted of selling the much-awaited products the second day after they were delivered to shops, despite the customer ques in front. This measure was taken to make sure inventory tracking runs smooth and there are no errors to lead to inventory inaccuracies.
If you are manufacturing or distributing electronics, you might have something to learn from the above. We are also curious to hear your stories too! Contact clara [at] tradegecko.com if you want your story to be covered here.
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