Tuesday, February 12, 2013

Secret of the 600$ billion company!

How did Apple become a $600 billion company? It’s not just by having hot products and constantly innovating. It’s something much more basic – something every company should strive for. Since this week’s main focus of study is maintaining a perfect inventory, this article will focus on the trends and practises Apple follows to lead the race.

There are a couple of things making a successful phone maker the world’s largest company in market cap and if we knew them all we’d be starting our own company, but one of the most universal lessons one can draw from Apple’s success is that inventory management is very, very important. And despite Apple having this aura of innovation it deserved with the iPhone and the iPad, and despite Steve Jobs being widely perceived as a product guy and design maximalist, he did not appoint a techie or a designer to manage Apple. He appointed Apple’s most disciplined inventory manager, former Chief Operating Officer, Tim Cook. And this alone is telling.

There's good reason that Tim Cook is now Apple's CEO, after earning his stripes as Cupertino's COO for many years. Despite the fact that he's not a "product guy" like Steve Jobs was, much of Apple's operational prowess and unparalleled supply chain is directly attributable to Cook. He started at Apple shortly after Jobs' return as the last millennium was winding down. Prior to his arrival, Apple's manufacturing, distribution, and supply operations were a jumbled mess. It was his call to withdraw from manufacturing in favour of using contract manufacturers, as well as to close down warehouses all over the world. Importantly, this was around the time that Dell was making a name for itself by pioneering the build-to-order model with computer assembly, which inevitably became a model of efficiency for the whole computer industry.

Cook has always viewed inventory as "fundamentally evil." He's noted that inventory typically loses roughly 1%-2% of its value per week under normal conditions, but can depreciate faster when times are tough. He even compares it to milk that's about to go bad: "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. "Having inventory sitting on the books is a risk in itself, because if it's not being sold, it's bound to be written down eventually, which can be painful. Research In Motion felt this when it had to eat a $485 million pre-tax non-cash charge just a few months ago related to its glut of unsold PlayBooks that were sitting and collecting dust.

This vision is what has allowed Apple to fully harvest its technological breakthroughs. 37 million iPhones sold in Q4 2011 shows incredible inventory management. And while previously Dell was the front-runner of a build-to-order model, Apple is currently clearly the market leader when it comes to the way it runs inventory.

To measure this, analysts usually turn to two indicators.“Inventory Turnover” shows how many times the current inventory balance of a company could be sold and replaced over a specific period. The higher the number here, the better.

The second indicator is “Days of Inventory.” This is a similar metric showing how long it would take for a company to sell through all of its inventory. In other words, days of inventory indicates how much inventory a company holds. The lower the number here,  the better.

And looking back, you’d see that Apple has been historically extremely efficient with its inventory. Actually, often times when you order online, the product is shipped directly from China, so Apple doesn’t even have to look at it at all. When demand goes through the roof, Apple reacts relatively quickly with huge hiring sprees over at Foxconn. And the recent extremely well-orchestrated iPad launch only underlines one of the biggest advantages Apple has - delivering a product within a few days after the announcement, while other companies take weeks and often months.
This is a company that sells hundreds of millions of hardware gadgets all over the world and yet it doesn't actually need to stockpile its goods. So, do you think there’s any company that can beat Apple’s well established record? 


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