Wednesday, September 17, 2014

An “Apple” Inventory Management lesson a day, keeps the competitor away!

Inventory management is a significant factor in deciding whether you have an edge over your competitors or not. If you move your inventory quickly i.e. reduce the days in inventory or increase the inventory turnover, you can increase the free cash flow. Because you can get your inventory moving at a faster pace, you can charge less, which in-turn increases velocity and lower costs more.

When you talk about Apple, you think of Steve Jobs, engineering precision and perfection, compact and beautiful packaging and products that redefine categories. But, in the backend there is an extremely efficient inventory management process that gets the products to the customers while incurring Apple the lowest cost possible. 


Apple had a very messy supply chain. Tim Cook stepped into the picture in 1998 and its supply chain has kept on improving since then. Their “Days Inventory" in September 1999 was about 4.0. It decreased for a few years to 2.5 in 2002. Then it again started increasing because of addition of products in apple’s collection. And now in the September of 2013, it was again decreased unto 4.37 days! They beat Dell at their own game. It performed twice as better as Dell and 5 times better than HP in this front.

Source: http://www.aaii.com/objects/get/93.gif

Source: http://financials.morningstar.com/ratios/r.html?t=AAPL&region=usa&culture=en-US

This means, at any given time, Apple only had about 4.5 days worth of inventory on hand at its stores. That is a magnificent figure for a tech company. Only 1 more company, McDonalds was beating it at the Inventory Turnover rate, which is quite obvious since McDonalds seeks perishable goods.

So, the question here is “How do they do this?”

Technology inventory loses its value as it becomes old. If a competitor announces a better new product and if you have lots of inventory on hand, it is going to take a hit. According to Tim Cook, inventory loses its value about 1-2% value each week. So he wanted to move the inventory faster, which would also save storage costs. He believed that “inventory is evil”.

To alleviate this problem, he cut the number of suppliers from 100 to 24. This increased competition amongst the suppliers to get business from Apple. Moreover, he also shut down 10 out of the 19 warehouses that Apple had at that time. This reduced the stocking costs. Inventory dropped from a month to six days in just a few months.

Moreover, instead of manufacturing their own products, they outsource it to China to its main manufacturer Foxconn. The huge amount of labor availability not only reduces the cost, but also reduces the time to manufacture. Once manufactured, Apple ships products to its customers directly through the manufacturer. This saves time and money.

Moreover, Apple also has a few other “tricks” up its sleeve that it has been using since the Steve Jobs era to take on its competition. Apart from making its suppliers compete amongst themselves for providing cheaper and higher quality materials, it also buys out inventories of important technology components to create shortages in the market and during holidays seasons or peak periods, it also buys out all available air freight and thereby leaving its competitors starving. 

In 1997, to make sure Apple’s new blue iMacs reach its customers in time for holiday season, Steve Jobs bought out all the available holiday air freight space by paying $50 million. That is the kind of muscle that Apple has the audacity of using!

Apart from this, it also takes a fair amount of forecasting for Apple to balance the supply and demand. But, Apple has built such a reputation that even if it gets the numbers off, people are still willing to wait weeks to get their hands on an Apple product. Apple is always ready for unexpected fluctuations in demands. Especially during new product launches when they don’t know how the customers will react.

The iPhone 6 sold out in a couple of hours of the start of pre-booking! People will now have to wait a few weeks to get the new iPhone 6. Apple must be beefing up their factories in China, maxing out on its capacity to make sure all its customers get their iPhones delivered on time. With such a stellar ecosystem in place for Apple, it is going to take another company a lot more effort than they can imagine to compete against Tim Cook and his army!


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