Saturday, September 13, 2014
APPLES’S SUCCESS MANTRA: INVENTORY MANAGEMENT
Inventory management encompasses all activities involved in maintaining the optimum number of each inventory item. The main objective of inventory management for companies is to provide continuous production, sales and customer service levels at the lowest cost. Inventory management is very important as it is the largest current asset item in the balance sheet and improper inventory management can lead to losses and business failures. Having inventory sitting on the books is a huge risk, because if it's not being sold, it has to be accounted for. Research in Motion (RIM) paid a $485 million pre-tax non-cash charge just a few months ago related to its unsold PlayBooks inventory.
Apple Inc. has always been known for its innovative products and exemplary design. However Apple has become one of the most successful companies because of its inventory management strategies. The secret to apple’s success is the obsessive control it has over their inventory. Apple found that the best way to control costs and meet customer’s needs is to find the right balance of inventory in locations around the world.
When Steve Jobs, who is viewed as a design maximalist took over the reins at Apple Inc., the distribution of the company was in a mess. Tim Cook, the Chief Operating Officer at that time transformed Apple’s model. He replaced Apple’s practice of manufacturing in house with contract manufacturing and led distribution with his “inventory is evil” view. In technology companies, inventory depreciates very quickly. Estimates from Apple Inc suggest that inventory loses 1% to 2% of its value every week under standard conditions. Thus, Tim Cook’s strategy from the very beginning was to reduce inventory, cut down on warehouse and make suppliers compete between themselves. He cut down the number of component suppliers from 100 to 24 and forcing companies to compete for Apple’s business. Keeping very little inventory on hand is very important because of warehouse costs. Technology manufacturers cannot afford to keep too many products in stock because of the highly competitive nature of the technology industry. A new innovation or sudden announcement from a competitor could change the dynamics of the entire industry and bring down the value of products in inventory. Forecasting sales accurately and not having excess inventory is important as new products quickly cannibalize the old ones in the technology industry
By 2013, Apple had 154 key suppliers (way lower than amazon) which enabled them to have better relationships with suppliers and kept one central warehouse which was in perfect sync with the 250 apple owned stores. Having a small number of stock keeping units improves the accuracy of forecasting. In addition to this, the long product life cycle of apple products (more than 12 months) facilitates accurate forecasting. Apple forecasts demand not only for products but what technologies the customers would like to buy in the future. This allowed Apple to lock down suppliers in long term contracts and created enough demand for suppliers so that other competitors could not obtain the latest technology and parts which further decrease their competition.
Apple is the current market leader in the way it manages its inventory. Two indicators of apple’s dominance are inventory turnover and days in inventory. Inventory turnover shows how many times a company’s inventory can be sold and replaced over a specific time period (higher the number better) whereas “Days in Inventory” is the time that a company takes to sell all of it’s inventory ( lower the number better). The following table compares these two indicators for various companies:
In 2011 Apple performed 2 times better than Dell, 5 times better than HP, 4.5 times better than Blackberry, and 5.5 times better than Motorola. Previously, Apple has sold each and every unit of iPad®2 it could make thus eliminating wastage.
In its recent quarterly reports, Apple introduced a bit more details on their inventory: in Q1 2014 Apple had $2.1 billion in inventory (a good number compared to $170 billion of sales in fiscal year 2013), split in $1.6 billion in finished goods and $525 million in components. And they are planning again to not have any inventory unsold in time.
Apple has been extraordinary in managing its inventory. Most of its inventory is carried at its retail stores, and anyone who has ordered from its online store will notice that products are frequently shipped directly from the manufacturing facilities in China. Apple never takes possession, so it never bears the risk of eating write downs of those products. Thus, I feel that Apple’s strategy of creating competition among suppliers has given Apple a competitive edge over other companies
However, stiil no other company’s product creates the hype and buzz as Apple products do with thousands of people lining up outside stores to get their hands first on the new piece of Apple technology.
This poses a question:
Has Apple’s unique inventory management strategy allowed it to create the “hype” and deliver on the promise of delivering its new products days after new product announcements while other companies take weeks or months to launch their new products?