A collection of resources and commentary providing an introduction to supply chain management and related systems for students, practitioners, and anyone else interested in learning more about how to design, manufacture, transport, store, deliver, and manage products.
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.
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
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.