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?
References:
I look the site it was a very good and very informative in many aspects thanks for share such a nice work.
ReplyDeleteChicago Third Party Logistic Warehouse