Apple’s secret to building the world’s number one supply chain

Every time you “unbox” an Apple product, you will see the words “Designed by Apple in California”. This is where the “magic” that brought Apple to the top begins. In fact, its market value doubled from $1 trillion to $2 trillion in just two years. The revenue of “missing apple” could not be so high without the supply chain that is considered the number one in the world.

The person behind the Apple supply chain

Tim Cook used to be in charge of supply chain at Apple, creating one of the most efficient production and supply systems on the planet. He managed the division for more than 10 years and experienced the position of CEO before becoming General Director (CEO).

According to Fortune magazine, Mr. Cook gave the book “Competing Against Time” to a colleague. This is a book about using the supply chain as a strategic business weapon. Apple controls every aspect of the user experience and the way the business is run. In doing so, they can streamline and make it as efficient as possible.

In 1998, when he returned to the company he founded, Steve Jobs faced a serious problem, that was Apple on the verge of bankruptcy. So, he turned to Tim Cook – a manager with 16 years of experience, especially passionate about supply chain management. Soon after, Apple bought $100 million in air freight for the year-end shopping season. Deciding to buy a few months in advance allows them to relax while other computer manufacturers struggle during the holiday season, which is the biggest shopping season. Next, from 1999 to 2001, he changed the supply chain at the Apple stores, separating retail and inventory.

He also quickly negotiated new agreements with contractors in China and other regions. Understanding his partner’s desire for steady cash flow, he offers lucrative, long-term contracts that give Apple unprecedented control over the manufacturing process, even when not directly involved or involved. next to production. He reduced the number of suppliers by 75% and forged closer relationships with the rest. He even suggested that they move closer to other Apple-affiliated factories to reduce costs.

It can be said that, among current CEOs, Tim Cook is the one who understands the supply chain best. What makes him and Apple stand out is that when designing hardware, they only look at the type of device it takes to produce. The first priority is to create a good product, easy to use, beautiful design. If the right device is not found, they will invent and/or create the device with the help of a partner or find a way on their own.

For example, in 2013, Apple worked with an important partner to customize the production robot for iPhone and iPad. The company spends up to 10.5 billion USD to produce special tools. Few businesses reach this level of detail when it comes to the source supply chain. Most will accept the limitations of equipment and design products around the capabilities of machines, rather than creating an entirely new type of tool. From 2011 to 2016, the amount of money Apple spent on machinery and equipment grew. The company considers this as a differentiating factor to improve profitability.

The key to economic success

According to the Apple product manufacturing process, most of the research and development (R&D) takes place in the US. For example, once the planning is done, the company will buy raw materials to make the iPhone. To buy enough necessary materials, the company cooperates with about 200 global enterprises. For example, Africa provides ore, Japan provides cameras, Korea provides memory cards, Germany provides semiconductors. All these components go to Foxconn – which owns 12 factories in China – to assemble iPhones. The iPhone is then airlifted from China to Apple or UPS/FedEx warehouses. They continue to be delivered to the customer’s home if ordered online or at a retail store.

Apple has two types of relationships with suppliers: collaborative and synergistic. Partnerships occur when each company needs the other’s core competencies to maintain customer value. On the other hand, synergies occur when many organizations work together to create something more valuable than the addition of the individual components.

Apple designers must maintain both types of relationships when working with suppliers. For example, suppliers provide human resource management, while Apple provides innovative ideas, forming partnerships in the development process. To illustrate, for new designs like the MacBook’s unibody shell, Apple designers will work with their supply partners to create the new device. The two sides need each other’s core competencies to meet market demands. Designers work closely with various suppliers to turn prototypes into mass production devices. In other words, when Apple combines with many suppliers, their relationship brings something that affects the whole world.

Two types of relationships help Apple preserve its dominant position in the technology industry. To stand out even further, Apple uses a strategy called differentiation: offering something unique compared to its industry peers. However, the most important strategy by far is to use outsourcing instead of near-sourcing. Outsourcing involves assigning production to another firm, while near-sourcing involves moving production closer to the point of sale. The outsourcing strategy helps Apple save significantly on production costs because labor costs in China are much cheaper than in the US.

For example, assembling a 4G iPhone in China is $158.57 cheaper than in the US with the same number of hours worked. In addition, if the iPhone is assembled in China, the net profit margin on selling each iPhone is 71.7%. If assembled in the US, this figure is only 25.2%. So outsourcing is one of Apple’s most prominent strategies for financial success.

The Covid-19 pandemic has greatly affected many businesses, but not Apple. According to company data, from April to June 2020, Apple achieved a profit of 11.25 billion USD, up 12% over the same period in 2019. That data proves Apple owns a strong supply chain, prevent damage from temporary problems such as epidemics.

Thanks to a smart strategy, Apple is the first US company to reach a value of $ 2 trillion. The company’s success depends on the relationship with its partners. Leveraging both differentiation and outsourcing strategies, Apple has strengthened its market value and net profit margin. While the supply chain isn’t perfect, it continues to bring enormous economic value to the iPhone maker.