Apple's supply chain management strategy and supplier responsibility practices

Purchasing and Supply Chain Management: Apple

Apple Inc. (previously Apple Computer, Inc.) is one of the largest American multinational companies that designs and markets consumer electronics, computer software and personal computers. The company began in the business of personal computers but has expanded into a giant of global reach (lLinzmayer 1999). Currently, they are best known for McIntosh computers, the iPod, iPhone, and iPad. They are the proprietors of the Mac OS X operating system and the iTunes media browser. They offer the iLife suite of multimedia and creativity software, iWork productivity software, and Aperture for professional photographers. Their current list of offerings is extensive and includes other applications for specific industries or uses.

Apple's current distribution system includes a chain of their own retail stores in ten different countries around the globe. They also have an online store where they hardware and software products are sold. Apple's major competition is Microsoft. These two giants continually compete for the top position. Apple's success largely hinges on the ability to manage their suppliers. Supply chain management has become one of the most important factors in maintaining a competitive advantage and is one of the reasons for Apple's most recent recovery and surge to the top of their market.

Supply Chain Management at Apple Inc.

Apple takes supply chain management seriously. They have published a Supplier Responsibility guidelines that outlines exactly what is expected of their suppliers. They expect high standards from their suppliers who must meet a number of conditions, not only regarding the product that they offer, but in the way they treat their workers and in categories such as environmental responsibility as well (Apple Inc., "Supplier Responsibility," 2009 ). According to this guideline, Apple conducts regular audits of their suppliers to make certain that they continue to meet the high standards that they expect. Apple takes a leadership stance and has a considerable amount of power over their suppliers. They tend to treat their suppliers as if they were an extension of the Apple Corporation itself. They have the ability to dictate terms and how their suppliers will do their work, how they will pay their employees and many other factors of the supply relationship that are not a traditional part of the relationships between suppliers and buyers.

Apple's suppler responsibility policy gives them an unequal distribution of the power in the relationship. They can issue fines and sanctions against supplier who do not meet standard and who break the rules (Apple Inc., "Supplier Responsibility," 2009). Suppliers have little negotiating power in the supplier-purchaser relationship with Apple. Either they can comply with the terms that Apple sets, or they will not be a supplier for Apple. Once a company decides to become a supplier for Apple, they agree to abide by the stringent rules and high expectations that Apple demands from them.

Apple believes in taking a proactive approach to supply chain issues. They have clear sets of rules and expectations. Their approach to supply chain management is one of the key reasons why they are able to offer the superior products that have brought them to a place of world leadership in specific categories of consumer electronics. Apple has developed a training program specifically for their suppliers and their employees (Apple Inc., "Supplier Responsibility," 2009). Apple has a high degree of oversight of their suppliers. They do not simply demand that they offer quality parts on time, they make certain that their suppliers meet the highest quality standards possible.

Apple Inc. takes on a parental relationship with their suppliers. They are differentially structured so that they have the greatest amount of power in the equation. They have guidelines in six major areas of their supplier's operations and have numerous subdivisions within these major categories. Apple manages oversight in the area of Labor and Human Rights, Health and Safety, Environmental Impact, Ethics, and Management Commitment (Apple Inc., "Supplier Responsibility," 2009). Apple Inc. holds their suppliers accountable for meeting these requirements and for providing quality service and products to them. Apple's active management of their suppliers allows them to maintain the quality that their own customers expect.

Supply Chain Problems and Solutions

Apple's approach to supply chain management remains one of the crucial factors that is tied to their success. Interruptions in their supply chain can mean a chance for Apple's competition to step in and steal some of their business. Recently, a glitch in one of their major suppliers in China, Foxconn Electronics, created the ability to meet consumer demand on iPad2 and iPhone 4 (Trefs Team, 2011). Apple has grown faster than its competition in the iPhone area, but there is a concern that labor issues and material issues at Foxconn could threaten to slow down Apple's growth.

These supply concerns are particularly troublesome for Apple, as their competition does not face these same concerns. It is possible that Apple's customers might not be willing to wait until supply catchers up with orders and might opt for one of their competitor's systems. Apple has built considerable brand equity and is known for a loyal following, but supply chain problems could change this dynamic.

In addition to problems with major a key supplier, the recent earthquake in Japan created even greater concerns. The Japanese earthquake affected not only Apple, but its competition as well. The earthquake shut down many facilities and led to product constraints (Trefs Team, 2011). This created a rise in costs for certain key components in the product. Apple agreed to absorb these additional costs in order to maintain customer loyalty and to decrease the chances that their customers would switch to a lower priced brand.

Apple's decision to absorb additional costs associated with higher component prices due to the earthquake allowed suppliers to resume smooth shipments quickly, resulting in better than expected iPhone sales for Apple (Trefs Team, 2011). Apple was not the only electronics supplier to have supply chain problems associated with the Japanese earthquake. Some lost entire plants and will take a long time to recover. Apple's management of its supply chain helped to more quickly overcome many of the supply chain issues related to the earthquake.

Typically, supply-related issues can have a negative impact on demand, but in the case of the earthquake, everyone was affected and consumers could be expected to be forgiving, as it was a natural disaster. However, other supply chain issues can be seen in a negative manner and can affect future demand. The earthquake in Japan gave Apple a chance to stand out in their consumer's mind, as the one's who had an excellent solution to reduce the impact of this disaster. In doing so, they were able to turn a negative into a positive in terms of building consumer confidence.

Apple did fair better than many of their competitors during the earthquake through no action of their own. As it turns out, Apple sources five major components for the iPad2 from Japan. These include the electronic compass, battery, touch screen overlay glass, dynamic random access memory (DRAM), and the NAND flash (Rassweiler, 2011). Many of these suppliers reported that their facilities were undamaged, but transportation and logistical issues getting their own supplies and transporting the finished supplies was still problematic. Employee absences due to transportation still creates supply problems. Japanese suppliers cannot fully commence production until the aftershocks cease and internal infrastructure problems have been resolved, which could take quite some time (Rassweiler, 2011). These supply problems came at bad time for Apple, as they were just preparing to ramp up production of the iPad2 to meet stronger than expected quarterly sales (Rassweiler, 2011).

Other supply problems also plague the ability of Apple to meet iPad2 demand. Apple's supply of NAND flash ha come under scrutiny as well, due to the need quality problems at Toshiba's main facility. As a result, some wafers had to be completely scrapped (Rassweiler, 2011). However, these components are available from other sources, including one U.S. supplier. This demonstrates the need for diversification of suppliers in the supply chain.

Solutions to the Supply Chain Problem

The Japanese earthquake taught everyone several important lessons about supply chain management. It highlights the need for contingencies and risk management strategies to protect supply and protect order and sales. Apple already takes several measures to help avoid disruption of their supply chain. Unfortunately, they depended heavily on many major components from Japan that were essential to their product. They suffered better than some of their competitors and worse than others.

Apple has several policies that helped to pad them from supply chain interruptions. Investors typically forgive supply chain interruptions, as long as demand is not affected (Frommer, 2011). Demand was stronger than ever for Apple's products, which means that investors should not see a reason to downgrade the stock and it should not affect stock price (Frommer, 2011).

Apple takes several measures that allowed them to survive the Japan earthquake disaster. They have a policy of pre-buying and pre-paying components (Frommer, 2011). This shielded them from many of the price shocks felt after the earthquake and it made them a supplier priority as soon as the Japanese plants came back online and were able to get components out for shipment.

Supplier diversification is a key supply chain risk reduction strategy. As the supply chain grows to include an increasingly global geographic territory, the chances for disruption of the supply chain increase. Having a number of alternate suppliers is always an important supply chain risk management strategy. This high standards that Apple holds all of their suppliers to helps them to maintain quality if alternate suppliers are need to be called into action. The Japanese earthquake highlighted the need to develop a geographically diverse network of suppliers as well. The earthquake in Japan was so widespread that it had a larger impact than a localized event.

Apple has an effective supplier diversification policy, but the Japanese earthquake highlights the need for geographically diverse suppliers as well. Some of the components in the iPad2 are only made by a single supplier, such as the touchpad glass (Rassweiler, 2011). When this component was disrupted by the earthquake, manufacture stopped completely. Apple needs to examine the risks associated with single supplier, highly specialized components, against the financial costs of acquiring secondary suppliers for all components. Common components are less problematic than highly specialized components. This principle stands for any manufacturing process, not just consumer electronics.

The Japanese earthquake was a great teacher about risk management in the supply chain. Apple had several strategies in place that reduced its vulnerability in some cases. However, it also discovered that highly specialized single supplier components still had the ability to halt the entire system, regardless of all of the other good measures that they had taken combined. This case highlights the importance of supplier diversification and the need to have a backup supplier for every component in the manufacturing process. This case demonstrates how the inability to supply even one component in a complex process, regardless of how insignificant the component might seem has the ability to stop the supply chain dead in its tracks. Apple is an excellent case for the study of supply chain risk in the event of a disaster.