Apple is famous for its 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, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list since 2013.
Tim Cook, the current CEO of Apple, a company that reached 260.17 billion in revenues in 2019, 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 transforms 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 its 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."
Back in 2011, a comparison of how tech companies managed their inventory 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.
Apple annual inventory peaked in 2017, with a value of $4.8 billion. In 2018, the company saw a 18.52% decline year-over-year but they bounced back quickly and they had $3.8 billion in inventory in 2019, a 3.79% increase vs. 2018.
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.
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."
Looking back at the last five years, Apple's inventory turnover hit its lowest point in September 2018: 37.2x. That means Apple turned their inventory every 10 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 queues in front. This measure was taken to make sure inventory tracking runs smooth and there are no errors to lead to inventory inaccuracies.
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