Wednesday, September 17, 2014

“Inventory is Evil”… Well done Tim, Apple Is Yours.

"You kind of want to manage it like you're in the dairy business. If it gets past its freshness date, you have a problem" says Tim Cook, CEO of Apple Inc.

Albeit not really a “product visionary” like his predecessor, Tim Cook more than makes up for it with his impeccable inventory management and operation skills. In 1998, when he joined Apple Inc. as Head of Operations, the distribution of the company was a mess. One of the major steps taken by Cook and Jobs initially was to exit the manufacturing business and begin outsourcing the production. A bold move, one would say, considering Apple was going through a decline in revenues and dwindling profits made it harder to invest in new ventures. Accumulated inventories worth $1,775 million were lying around in Apple warehouses in 1995.

Another step, bouncing off the outsourcing the manufacturing, was to cut down on the number of component suppliers from 100 to 24, a masterstroke in hindsight. It made companies compete for Apple’s business and gave Apple leverage in component pricing negotiations. Additionally, warehouses were reduced from 19 to 10. He focused on cutting down the inventory in a big manner and by the end of his third quarter at Apple, the inventory was down by 80%! Cook’s strategy of “slash inventory, shut warehouses, run manufacturing close to the bone” worked wonders for Apple and immediately had Steve Jobs looking at Tim Cook to succeed him. In 1998, Apple Inc’s profits rose to $309 million, compared to the $1045 million loss it made two years ago. The Macintosh was a particular gainer of this strategy, and Cook cut the production process for making an Apple computer from four months to two.

Today, although most people credit Apple’s success to their revolutionary products, few know that a key role in it becoming a leader is its exceptional inventory management. A study released by Gartner shows that Apple turns over its inventory about 74.1 times a year, which is once every 5 days. 

In terms of “Inventory Turnover” (indicates how many times the current inventory could be sold and replaced in a certain period) The higher the Inventory Turnover, the better.

A second indicator is “Days of Inventory” i.e. how many days would it take for a company to sell off all its inventory. In other words, it is the amount of inventory that a company holds. The lower the Days of Inventory, the better.

In terms of both these vectors, Apple rules the roost. Dell comes in second despite the fact that it prides itself as working on a build-to-order model.

Having inventory on the shelf is of little use to a corporation. It loses its value (about 1 to 2 % every week) and eventually needs to be discarded. Learning from the case of Apple and Tim Cook, we can conclude that efficient supply chain management is key to companies reducing avoidable costs and in turn increasing profit margins. 





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