Tuesday, February 11, 2014

Learn from the best, Apple's inventory management.

For the 6th year in a row, Apple’s supply chain management system has come out on top in a study by Gartner group. A major part of this credit goes to how Apple’s manages its inventory.

The inventory of a company consists of goods currently owned but not sold. Though inventory is considered as an asset to a company, it has two major costs associated with it, procurement and holding. The company needs to decide how often to order goods from the suppliers (procurement) and how much to order, so as to bear the minimum storage costs (holding). Though there are theoretical models that help companies get this balance right, few have perfected the art as Apple.

Apple showed the world how seriously it took its inventory managements when Tim Cook, Apple’s former Chief Operating Officer was chosen as its next CEO by the late Steve Jobs. Jobs always recognised the importance of a good inventory management. With the fear of obsolescence plaguing the industry, Jobs took the most straightforward way out. He never let the inventory pile up for that long. The current inventory turnover ratio of Apple is around 41.72 (using inventory assets from 2013 and 2012). This means that Apple turns its inventory every 8.7 days. That iss extremely high for a consumer electronics company. In 2012, Apple’s turnover ratio was as high as 76 (according to Forbes), which brings it inventory turns to every 5 days. It was only second to McDonalds, which turns its inventory every 3 days. However, McDonalds deals in perishable goods and does not source its products all the way from China. This is important because with such an intense inventory cycle, Apple runs the risk of stock-outs if there is the slightest delay in procuring goods.

If you come to think of it, Apple does have a very efficient way of dealing with customer orders. As a customer, you will be buying off of Apple’s inventory only if you buy certain products online or if you visit the the nearest retail store in you area. In most cases, your products are shipped directly from factories in China. This minimises the stress on Apple’s warehouses. In this case however, we would need to consider a point of technicality as to when apple considers a product to be procured by them. When it lands in their warehouses, or when it is manufactured in the factory.

There is no doubt that inventory management is largely dependent on the industry and also on the industry sector. There is no single formula that works like a charm. Apple, however has given the industry something to learn from.

References:
http://beginnersinvest.about.com/od/analyzingabalancesheet/a/inventory.htm
http://www.phonearena.com/news/Apples-secret-sauce-for-success-is-inventory-management_id28558

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