Wednesday, September 24, 2014

Apple’s Sourcing Strategy

Apple’s Sourcing Strategy

Blog for Week 5
Yvonne Zhang

Based on the ranking from Gartner, Apple is the top of supply chain excellence, followed by McDonald and Amazon. At least 97% of Apple’s procurement expenditures for materials, manufacturing and assembly of products are finished worldwide in 2013. In 2012, Apple sold approximately 120 million iPhones, 60 million iPads, 35 million iPods and 15 million Macs. None of these iPhones were produced in the US, expect vital components, and nearly 85% were assembled in China.

Source: Apple – Supplier Responsibility

Why Apple obsessed to outsource its production line to other countries, especially in Asia? Steve Jobs once claimed that it was not because of the cheap labor in Asian countries, but those factories could produce much faster with quite a large scale and flexibility. One of Apple’s well-known suppliers is Foxconn, which is a Taiwan company. They can produce thousands of iPhones each day with relatively lower cost of labors. Apple also found another supplier, Pegatron which is also a Taiwan company, to produce iPad and some versions of iPhone. Apple has already had so much outsource suppliers, why the scales of suppliers still keep increasing?

       There are four reasons.
  • Risk Diversification. With the aim to build a stable supply chain, multiple suppliers can help Apple react faster to problems or disruptions and become more flexible.
  • Capacity Management. The demand of Apple product has increased, especially from two large emerging markets, China and India. 10 million units of iPhone 6 and iPhone 6 Plus were sold in the first weekend. Apple needs to increase its capacity more quickly to meet the demand.
  • Margins Sustenance. With multiple suppliers, Apple could increase the bargaining leverage in order to maintain the low cost and high level of profitability.
  • Supplier Innovation. New suppliers are more willing to invest capital to improve operation efficiency and high quality of product to obtain reliance from customers. Apple can easily benefit from the growth of new suppliers.

Even though outsourcing effectively helps the labor reallocation and specialization of the company, with such amount of suppliers, Apple also has to face potential risks. For example, the labor problems happened in China: low wages, excessive overtime, dangerous conditions, etc. One solution is that Apple increase the wages of high tech labors and improve the working conditions, which will significantly increase the cost of production and shrink the profit. Or Apple could move its major assembly factories to other low-wages countries, such as Vietnams, Philippines, but it has high transaction cost to switch suppliers. So what will be the best practice of Apple to choose suppliers in the future? What will Apple do to face the potential risk from suppliers and make its sourcing strategy?



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