Sunday, November 9, 2014

Apple: Inventory Management

Apple is widely known for innovation and design, however few people understand Apple’s success is framed around how they handle inventory. In fact, Gartner – the word’s leading IT research and advisory company, ranks Apple’s Supply Chain as the best in the world between the years 2010 and 2013.

Tim Cooks (the current CEO of Apple) believes that when it comes to technology products, such as laptops, tablets, and smartphones, inventory depreciates very quickly, losing 1-2% of value each week. He quotes, “inventory is fundamentally evil… 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.”

Cook’s vision helped Apple ascertain technological breakthroughs; over 37 million iPhones sold in Q4 of 20111 displays highly successful inventory management. Previously, Dell had been the front-runner of a ‘make-to-order’ model, however Apple is currently the dominant market leader when it comes to running inventory.

Inventory Turnover and Days of Inventory:
To measure this success, analysts typically use two indicators: Inventory Turnover, and Days of Inventory. Inventory Turnover shows how many times the current inventory balance of a company could be sold and replaced over a specified time period (the higher the number, the better). The formula is as follows:

Days of Inventory is a similar metric, which displays how long it would take for a company to sell through all of its inventory. It simply indicates how much inventory a company holds; the lower the number, the better. The formula is as follows:

Reviewing historical data, Apple has been viewed as extremely efficient with its inventory. Often, when a customer orders online, the product is shipped directly from China (so Apple doesn’t even have to look at it). When demand increases substantially, for example – during a new product release, Apple reacts quickly with massive hiring sprees at Foxconn. See Figures 1 and 2 below for data on Apple’s highly efficient inventory management.

Apple Supply Chain Operations:
Essentially, Apple purchases necessary components and materials from various suppliers; subsequently, they get shipped to the assembling plant in China. From there, Apple’s products are shipped directly to consumers who purchased from the online store.

For other distribution channels (i.e. retail stores and other distributors), Apple keeps and ships their products at the central warehouse and call center located in Elk Grove, California.

Apple Inventory Management:
Cook’s strategic goals from day one as the new CEO was to slash inventory, cut down on warehouses and make suppliers compete between each other. In 2012, Apple was said to effectively turn inventory every 5 days (another reason for Gartner to place Apple’s supply chain as best in the world).

Keeping minimal inventory is crucial because of warehouse costs and competitors. Technology manufactures are simply unable to afford to keep too many products in stock; a sudden announcement from any competitor or new innovation may change everything and suddenly bring down the value of products in inventory.

Closing Comments:
It is true Apple pushes to have fast inventory turnover; however, it seems in 2011, it made a change of not rushing selling. This change came with the launch of the iPad 2 and consisted of selling the products the second day after they were delivered to shops. Was this measure created to ensure smooth inventory tracking and little to no errors of inventory inaccuracies? Moreover, is inventory management Apple’s true secret their Supply Chain success?


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