Apple’s Supplier Strategy Aims at Reducing Risks

Stephen DeAngelis

March 21, 2012

Apple’s supply chain has certainly received a lot of attention over the past few years. It has been recognized for its excellence and criticized for its shortcomings. Despite the laurels that have been tossed it way, Apple has not rested on those laurels but has continued to make improvements. In an article I Tweeted about yesterday (@EnterraCEO), Don Clark reports, “Apple Inc. heavily hedged its bets on suppliers of key components for the new iPad, the latest sign of a strategy aimed at holding down costs and risks for the consumer electronics giant.” [“Under the Hood of Apple’s Tablet,” Wall Street Journal, 16 March 2012] Apple didn’t exactly announce what was “under the hood” of the new iPad or who supplied those parts, but Clark reports that “the research firm UBM TechInsights said it took apart several new iPads since they went on sale … and found components with the same functions made by at least three manufacturers in different tablets.” Clearly, using three different parts suppliers is Apple’s effort to make its supply chain more resilient and to mitigate threats from production, shipping and natural disaster problems. Clark continues:

“The components in question include the device’s memory chips and distinctive high-resolution display. Planning production around multiple component sources is not a new strategy for Apple or the electronics industry. The strategy allows a customer to play one supplier off another for lower prices, and minimize disruption if a single factory runs into production problems. But the desire to diversify supply sources has taken on added importance with recent natural disasters, including the earthquake a year ago in Japan and the flooding last fall in Thailand. The multiple suppliers in the iPad suggest Apple is more actively trying to mitigate such risks, says Allan Yogasingam, a UBM technical marketing manager.”

Yogasingam credits Apple CEO Tim Cook with implementing the strategy. As I’ve noted in past posts, Cook has a background in supply chain management (see, for example, C-Level Supply Chain Executives). Yogasingam told Clark, “Tim made his name at the beginning as the master of the supply chain.” Clark continues:

“The breadth of suppliers is one of the more notable elements in the so-called ‘tear-down’ analyses conducted of the new iPad. … There was little surprise as far asIPad3 apparent costs to Apple, UBM found. The firm last week put a preliminary estimate of about $310 on how much Apple was likely to have paid for components in a version of the new iPad that offers 4G wireless connections and 16 gigabytes of data storage. After opening the new device, UBM … estimated Apple likely paid $309 for the components in the new iPad with 4G wireless connections and 16 gigabytes of data storage, a model that sells for $629. That compares with a current cost of $248.07 for components in the iPad 2, or $276.27 when it was first released in 2011, the firm said. Much of the difference from earlier iPads comes from a $70 estimated cost for the new iPads display, compared to a $49.50 current estimate for the iPad 2 display. A separate teardown analysis by IHS iSuppli on Friday found a range of materials costs from $316 for the model with Wi-Fi only version to $409 for the 4G version with the most memory.”

You can click on the above image to enlarge it. It’s a static representation of an interactive graphic that complemented Clark’s article. Clark continues:

“The list of component suppliers in the iPad 2, besides many companies long used by Apple, also includes some names that are less familiar in its hardware. For example, UBM found some models of the iPad contain data-storage chips known as NAND flash memory from Micron Technology Inc. and Hynix Semiconductor Inc. as well as chips from Toshiba Corp., a long-time supplier for Apple’s iPhones and iPads. UBM also found displays in iPads it took apart Friday from Samsung Electronics Co., LG Display Co. and another company it has not yet conclusively identified, Mr. Yogasingam said. Key suppliers of communications chips in the new iPad include Broadcom Corp. and Qualcomm Inc.”

Commenting on this article supply chain guru Bob Ferrari notes that “no company is immune to [supply chain disruptions], even one that has incredible influence and buying power.” [“Visibility to Apple Provides Clear Evidence for Active Supply Chain Mitigation,” Supply Chain Matters, 19 March 2012] Ferrari continues:

“The Wall Street Journal featured an article that extracted from two individual teardown analysis of the new iPad performed by firms UBM TechInsights and IHS iSuppli. … While the strategy may not be a surprise for those who may know of Apple’s internal supply chain practices, the fact that a diversified sourcing strategy is expanding is another indication of [how important] active supply chain mitigation has become. UBM and the WSJ both noted that the breath of suppliers is one of the most notable elements of the recent teardown of the next generation iPad and further speculate that the reason may be a sign that Apple is more actively practicing supply risk mitigation because of the past Japan and other disruptive incidents. A glance at the suppliers of mention also triggers the thought that each supplier’s main operations are located in different geographic regions.”

I have pointed out in past posts that it would make little sense to use different suppliers located in the same geographical area and expect that strategy to strengthen a supply chain against a widespread natural catastrophe. Ferrari notes that the electronics industry isn’t the only commercial sector that has learned lessons from the past year’s natural disasters. The automotive sector is another example. Ferrari reports, “Toyota alone discovered that approximately 300 production locations could be at risk and has now asked these specific suppliers to implement risk mitigation measures.” He continues:

“Kinaxis executive John Westerveld added his commentary that it is shame that if often takes a significant event to make all of the organization sensitized to the importance of assessing supply chain risk and developing risk mitigation strategies. Jim also argues that supply chain risk management should be integrated under the umbrella of the Sales and Operations (S&OP) planning process because of its current scope, process frequency and data utilized to make decisions. This author happens to agree with Jim and encourages our community to have a dialogue of its own regarding this important topic. What we are now beginning to understand is that even Apple, the largest global supply chain influencer, who managed to come through the Japan tsunami and later Thailand floods incidents relatively unscathed, has implemented discernible supply chain risk mitigation. The takeaway for all others is that like other areas of supply chain capability, the gap among leaders and laggards continues to widen, and supply chain risk mitigation is another critical capability within this gap.”

Ferrari concludes by recommending that companies ask themselves three questions. They are:

“Are you educating and influencing your senior management to the need for more active risk management identification and mitigation strategies?

“Do you believe that this responsibility falls under the umbrella of supply chain management, as opposed to finance or enterprise risk management?

“Do you view the S&OP process as a natural extension to inclusion of supply chain risk mitigation?”

The ability to sense supply chain signals and dynamically reconfigure supply chain interactions to mitigate delays and other problems is critical to success in today’s complex and global manufacturing environments. Big data and predictive analytics within a reasoning and learning environment are the practical leading edge in this field. That is what my company, Enterra Solutions, is specialized to tackle and we’re ready to help your company close the supply chain gap noted by Ferrari.