The Apple Outsourcing Strategy Evaluation

Outsourcing Many companies outsource large portions of their supply chain. There are different strategic reasons for this - to save money, to focus on marketing or design, or simply because the production in their industry is centered on a specific area. Apple is among the many companies that outsource production, and they do it for a variety of reasons Part of the outsourcing decision simply relates to strategy.

Apple focuses its American operations on tasks for which the United States has a competitive advantage, and does the same with its production. The company's design and marketing functions are largely based on the United States. This is because talent in those fields is oriented towards Western countries for marketing, and towards Silicon Valley specifically for consumer technology design. Apple thus takes advantage of a cluster in the Silicon Valley. Clustering is a phenomenon where an industry is centred in an area (The Economist, 2009).

The talent that works in that industry ends up in the area, and people can move between companies, bringing about exchange of ideas. Additionally, clusters tend to foster start-ups, people leaving larger companies and starting up their own businesses. This in turns attracts capital to the area, and other services that are essential for the industry to thrive. Clusters therefore become centers for competitive advantage in an industry, and Silicon Valley is the single most important cluster for technology, especially consumer technology.

Apple may be one of the major drivers of this today, but the cluster existed when Apple was founded, and that led to the company being successful. Within Silicon Valley, Apple has access to the best people in the software and consumer electronics fields, and a highly-refined knowledge about trends and other industry facets important to its business. But Apple outsources production to China, and for many of the same reasons that they maintain their design function in Silicon Valley. First, China has a technology manufacturing cluster.

The companies that assemble Apple products tend to source their component parts from manufacturers that are located in the same part of China. These clusters typically serve most of the consumer electronics industry as well. If Apple produced in the U.S., it would still have to important component parts from China to be assembled domestically, and the reality is that it is easier and cheaper to ship finished goods than it is to ship component parts, and logistically it makes more sense.

Suppliers not in China are also in the region -- Taiwan or Southeast Asia, and this means that lead times for ordering are shorter, making the entire production process less risky (Rapoza, 2012). Goldman (2012) notes that China also enjoys a cost advantage. This is not just because Chinese workers assembling the devices are paid less -- though that is a factor. The operations in China are more efficient as well, something that is a function of Chinese labor laws, or lack thereof.

Workers at Apple's contractors are housed onsite, and can be mobilized quickly to meet surges in demand. They are typically willing to put in long hours, in particular when new products are being launched. There is just a lot more flexibility with the workers in China than there would be with American workers, and the streamlined effect that gives the manufacturing operation means lower costs as well (Goldman, 2012). This raises an interesting point, because it moves beyond the obvious cost advantage.

For Apple, the ability to get product to market has proven a key advantage. First, this is an industry that traditionally has had a very short product life cycle. New iterations of products are introduced at most once per year, and the companies at the leading edge of innovation typically seek a means of getting ahead by bringing new products to market at a very rapid pace, so that they can incorporate their latest innovations. For Apple, the company's releases were so popular that stockouts were common.

The problem is that perpetual stockouts creates opportunities for competitors to win business. The industry thus demanded that very high volumes of high quality goods would have to get to market quickly. For Apple, having suppliers with this specific ability became one of the most compelling cases for outsourcing, and they were willing in many cases to pay above average rates to get this. There is also the shareholder argument. Agency theory holds that corporate management are hired by the Board, who are themselves agents of the shareholders.

The duty of management, therefore, is to seek to enhance shareholder wealth. Most shareholders of Apple are institutional, and their bargaining power only serves to enhance this argument -- they have no mandate to see Apple produce in-house. All these institutional investors are interested in is getting better returns on their investments. Management seeks to do this through outsourcing strategies that not only lower costs but enhance the company's competitive advantage (Chen, 2012). It is worth knowing, however, that Apple did not always outsource to China.

The company formerly produced its computers in the United States, and was proud of that fact (Chakraborthy, 2012). This begs the question of when and why did the company change its policy on the matter. Was it after China joined the World Trade Organization in 2001, a move that quickly resulted in that country being cost-competitive and eviscerating manufacturing jobs in the West.

The author makes the argument that the cost argument simply does not apply to Apple, because its customers already pay a very high premium, and the company itself would still be wildly profitable even if it produced in-house, in the U.S. That outsourcing allows it to be more profitable might well just be a fringe benefit, but for the interests of the institutional shareholders, who doubtless would pressure Apple to offshore its production. Arguably, it all boils down to the shareholders.

Apple wants to have more efficient production, again something that is easier to achieve through outsourcing, but again this is something that it wants to both maximize revenues and solidify its market position, both things that benefit the shareholders. So the real question is whether there is any rationale for Apple that does not come back to the bottom line? The outsourcing strategy itself has been incredibly successful.

Apple is focused on its core competencies, which are in design and in marketing, while allowing the companies that assemble its devices to specialize in manufacturing. This form of comparative advantage helps both companies, and arguably both countries as well. The two companies look at their respective strengths and realize that they are best if they put all of their respective resources into maximizing these strengths. Apple is great at design, and needs U.S.-based.