Is Apple Supply Chain Really the No. 1?

In this article, we will discuss why the supply chain of Apple Inc is different and some analyses that we conduct to capture the essence of Apple Supply Chain.

Apple Supply Chain Excellence

Everything about Apple Inc is the talk of the town. For example, the new iPad, iPhone, Apple Map, or even the environmental and labor issues at its suppliers' facilities. Surprisingly, IT research firm Gartner ranks the supply chain of Apple Inc as the best supply chain in the world for many years. Without a doubt, Apple Inc is the world leader in Innovation, Branding, Customer Service, and Software ecosystems. But, is Apple's Supply Chain really the number 1? This case will show you the analysis of its core processes, challenging issues, and complexities of its operations.

Apple Supply Chain Model

Information about the Supply Chain of Apple Inc is a bit here, there and everywhere, it's tough to find the actual case. To the best of my knowledge, many business schools still use the case "Apple Computer's Supplier Hubs: A Tale of Three Cities" from Stanford University (1996). To get a closer look at the modern-day supply chain at Apple Inc, this case utilizes a content analysis technique. Annual Report (SEC Filing) is analyzed and a simplified supply chain model is constructed as below,

Supply Chain Planning at Apple Inc is the classic New Product Development Process (NPD) example. It's the integration of R&D, Marketing, and various functions under supply chain management. From the above graphic, Apple Inc accelerates the new product introduction by acquiring the licensing and 3rd party businesses. The whole process looks very similar to that of other industries. The interesting point is that Apple Inc has to make the prepayments to some suppliers to secure the strategic raw materials.

Supply Chain Map is the way to express a large system from the points of origin to points of consumption in a simple to understand manner. Information from the annual report is also used to produce the Supply Chain Map.

Apple Inc purchases raw materials from various international sources, then get them shipped to an assembly plant in China. From there, the assembler will ship products directly to consumers (via UPS/FedEx) for those who buy from Apple's Online Store. For other distribution channels such as retail stores, direct sales, and other distributors, Apple Inc will keep products in Elk Grove, California (where the central warehouse and call center are located) and supply products from there. At the end of a product's life, a customer can send products back to the nearest Apple Stores or dedicated recycling facilities. Actually, Apple tries to follow the lean manufacturing concept as much as possible but not six sigma as used by Samsung.

Apple Supply Chain Challenges

What does it feel like to be "Apple Inc"? One journalist indicated that the life of Apple Inc is fairly easy by utilizing its negotiation power. Believe me, the supply chain of Apple has very high risks. There are many challenges to overcome, for example,

- Global economy could affect the Company.
- Some re-sellers may also distribute products from the competing manufacturers.
- Inventories can become obsolete or exceed the anticipated demand.
- Some components are currently obtained from the single or limited sources.
- Some custom components are not common to the rest of the industry.
- Ability to obtain components in sufficient quantities is important.
- Supply chain disruption such as the natural and man-made disasters can be serious.
- The company depends on logistical services provided by outsourcing partners.
- The company also relies on its partners to adhere to supplier code of conduct.

The above information is also from the annual report. As you can see, most of the risks are on the supply side.

How Complex Is Apple Supply Chain?

Some people in the blogosphere said that the supply chain of Apple is not that complicated. So this section will explain some characteristics of the supply chain of Apple through various metrics and compare them with Amazon's Supply Chain.

1. Inventory Turnover
Inventory Turnover is a traditional financial measure to determine how efficiently a company uses its financial resources to create sales, the higher number is the better. Supply chain professionals also use this metric in the inventory management function. The generally accepted calculation is [Cost of Goods Sold / Average Inventory]

Inventory Turnover of Amazon vs Apple Inc

The above picture shows that the inventory turnover of Amazon and Apple is 10 and 59 respectively (cost of goods sold of digital content/downloadable products is excluded). From the face value, Apple seems to be more efficient. Anyway, there is a reason for this. Apple Inc is now a marketing company with no manufacturing facility, but Amazon is a distributor of general merchandise. It's pretty natural that Amazon has to keep more stocks. Then the inventory turnover is much lower.

2. Number of Key Suppliers
Supply chain management is about the relationship between trading partners. Working closely with strategic suppliers will bring a competitive advantage to the firm.

Number of Key Vendors Amazon vs Apple

Apple recently said that they have about 156 key vendors across the globe. This amount of suppliers is quite manageable. Amazon has about 3 million suppliers in total. The top 5% of this is 300,000 suppliers, way more than that of Apple Inc.

3. Number of Warehouse Facilities
In the United States, transportation cost is the biggest portion of the total logistics cost. Then, good management of related functions is essential.

Number of Warehouse Facilities Amazon vs Apple

Apple Inc has the central warehouse in California, but Amazon has approximately 28 warehouses from coast to coast. What Apple has to do is to synchronize data between the central warehouse and its own 246 stores + customers. With the appropriate level of automation, this kind of operation can be done efficiently.

For Amazon, the thing is more complicated than that. Amazon employs many Ph.D. graduates in operations management, operations research, and industrial engineering for network design projects. The reason is that Amazon's distribution environment must be mathematically solved through the optimization method. Typically, they have to determine how many facilities they should have, where serves which market, items/quantity stored in each location, and how to manage transportation between warehouse-to-warehouse and warehouse to customers in order to minimize cost and increase service level.

4. Number of Items (Stock Keeping Unit)
Stock Keeping Unit (SKU) is another indication of supply chain complexity. One model of the phone but different software inside is considered a different item/SKU.

Number of SKUs Amazon vs Apple

Amazon has about 519 million items in its catalog. About 135 million items are physical products. For Apple, they have about 26,000 items (rough estimate, subject to change). The point is that if you have to make a demand forecast, which one will be more difficult for you, 135 million items or 26k items.

5. Product Life Cycle
Put it simply way, the product lifecycle is how long you can sell products (the longer is better).

Product Life Cycle Amazon vs Apple

From the rough estimate, Amazon has some seasonal products such as summer wear. They can only sell it for 3 months max. The life of Apple's key products is way more than 12 months. It goes without saying that the demand forecast of seasonal, short life cycle products is very difficult to estimate.

As you may notice, based on the example characteristics, Amazon's Supply Chain is far more complicated than that of Apple Inc.

Lesson Learned from Apple Supply Chain

The results of the analysis of Apple's processes, challenging issues, and complexities indicate that the success of its supply chain operations depends on how well they manage the supplier relationship. This includes early supplier involvement in new product development, close communication, and supplier performance improvement/evaluation. Then, Apple Inc is dubbed as "King of Procurement."

- Kopczak, L. R. (1996). Apple computer’s supplier hubs: A tale of three cities. Stanford University Case.

- Annual Report of Apple Inc (SEC Filing)

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Last review and update: July 5, 2022
About the Author and Editor:
Ben Benjabutr is the author and editor of Supply Chain Opz. He holds an M.Sc. in Logistics Management with 10+ years of experience. You can contact him via e-mail or Twitter.