Apple's Supply Chain Secret
businessweek.com
businessweek.com
Apple [..] sometimes doesn't pay until as long as 90 days after it uses a part [...]
I think only "lame". With $80B and 40% margin, company with that reputation...
Manufacturing is hard. And very expensive. Organize processes, buy machines and raw materials, pay the labor. And then comes Apple and gives itself a loan (basically, it's a loan) from a manufacturer.
No, sorry. It's lame.
PS - Just as a perspective: I help part time in a company my father and brother own (retail and manufacturing company). Even thou other businesses in the industry and the country do the same thing as Apple, they don't. I'm disgusted by that practice here...so, why not be disgusted by it when Apple does it?
Paying late in manufacturing is all over the place, 30 days is considered acceptable, 60 the absolute limit, but paying 90 days late is just something Apple can get away with because of it's size and "occasional ruthlessness".
It's also not unusual for companies to pay later than the agreed dates, but no-one has said Apple's doing that.
Aside from being (in my opinion) a bad business practice, it's also lying to the shareholders. You see, that $80 Billion figure would be smaller if they'd pay the manufacturers in a reasonable timeframe.
I didn't jump in because I particularly care how Apple pays vendors, but because many people on HN are considering freelancing and bootstrapping, and they should know: big companies are never going to pay them on time. Keep cash in the bank.
Your comment about Apple's balance sheet is pretty silly.
Apple has 90 days of non paid supplies on the books (and $80 billion in the bank - "cash and investments" as stated in the article).
If they'd (OK... IDEALLY) pay all of them at once and continue paying supplies as they get delivered, only then would their balance sheet look realistic.
Or, am I missing something?
By delaying payments Apple can use the cash for other short-term investment opportunities. In Apple's case, their accounts payable is probably in the billions. As an example: If Apple has a $10 billion accounts payable and instead of paying it right away they waited for 3 months and invested that $10 billion on short-term securities with a 10% return, Apple would earn $1 billion in that 3-month period vs. ZERO if they paid their liabilities right away.
Accounting:
1) Buy parts for $1000
debit Parts Inventory $1000 credit Liabilities - Accounts Payable $1000
2) Pay vendor
debit Liabilities - Accounts Payable $1000 credit Cash $1000
The single man startups I worked for would pay their invoices promptly, while multi-nationals seemed to consider "net 30" to mean they shouldn't even consider paying until 30 days after receipt, and seemed to have a policy that they wouldn't pay until hassled.
* We don't have a payments/procurements department, so "payment" usually means me, Dave, or our finance person just cutting a check.
* We derive no meaningful benefit from withholding payment (pennies of interest, versus hundreds of dollars of lost cycles).
At giant companies, carefully managing payables probably makes an enormous difference. When you say "operations excellence", stuff like how vendors are paid is one of the first things many people think of.
The payments department won't even look at the invoice if it's missing that.
Incidentally, I know a wholesaler [1] in London which sells at almost cost price. It makes most of its profits from sitting on the cash it takes for 60 days, before paying it to suppliers.
There are many factors beyond the quality of product that go into a purchasing decision - things like hype, accessibility, and most importantly, price.
Apple never had much a problem with great design or building hype, but the real reason for their success over the last 15 years has been their ability to provide customers better access to their products and to provide them at more competitive prices.
The iPhone is ( by most accounts ) a superior product to the Blackberry. However, no one was going to buy an iPhone for $900, and without this impressive supply chain, Apple wouldn't be able to get the profit margins they want at $600 ( or $200 subsidized, which is also supply chain management ).
Product is important, and as a culture that builds things, HNers tend to focus on that ( the green light conversation in these comments being proof of that ), but all the logistics of how a product is delivered are just as important as the product itself - and maybe more so - in building a successful company.
Every other company in their space is still stuck on figuring out how to distribute tech support resources to customers by asking them to wait on hold for an hour. That's an hour worth of time doing absolutely nothing productive that shows up on the 800 number's bill. That's a bunch more call center hardware to maintain in order to manage the queue of people on hold. That's less productivity per operator, because customers who are pissed off about being on hold for an hour are harder to work with, and because dealing with that for 8 hours a day is an excellent way to lose your own motivation. Let alone that a bad support experience is a good way to make sure a customer doesn't become a repeat customer.
Most, I'm sure. But personally the first time I saw light shining through my metal laptop, I was amazed, a little delighted, and slightly confused about how they were doing it (because, as the article mentions, the holes are too small to see).
...now I know the answer: the lasers are so expensive and in such short supply it would presumably create a bottleneck in the production - esp given the surface area of the logo and thus the amount of holes needed.
Also, I'm not sure how the computer would look without a logo interupting it. I guess almost every other manufacturer comes close to this, but I think an Apple computer would feel wrong with a a view of unbroken alumninum.
Exactly. Buying billboards on the most expensive streets in the world is very expensive. Having your customers sitting lined up in a row in coffee shops with their laptop lids with the lighted apple logo pointing outward to the street on these very same streets must be very valuable advertising. I'm constantly amazed when I walk by coffee shops and see the typical 75% apple market share, when just a decade ago they were really a niche player.
It's only when it's off that they would miss out - but most of the time if my laptop is out of my bag then it's on.
It still took them a while to put them on the right way up. The first few laptops they sold with the Apple logo on the lid, they were oriented so they were "right way up" for the user when the lid was closed. That made them all upside down in all those tech conference shots from the stage...
There is already something similar on one of the numerous android handsets out there where the 4 hardware keys turn 90 degrees when you switch from portrait to landscape mode. Not quite as polished, but similar in concept.
You can verify that by changing the display brightness, the logo will change brightness accordingly. Or just hold the turned-off laptop in front of a bright light source, the apple-shaped hole wil, be visible through the screen
Using them on a much larger area would make them a lot more visible as a whole, even without light. The result would probably look like a vaguely apple-looking smudge. Somehow I don't think it would pass.
That bar is actually a series of those small holes to let the light through. The green light for the metal casing came later IIRC.
I did. I used microscopic lens to see how they are made, you will see concentric holes that are microns wide.
I was amazed too, I knew it only could be made by lasers but I was delighted how someone could have that original idea. It is brilliant, and so elegant.
Arguably, knowing that the laptop camera (or the wireless keyboard bluetooth pairing) is not active is not as useful information.
http://venturebeat.files.wordpress.com/2011/11/macbook-air-w...
I'm still looking for the old shots (from around 08) which had a few nice shots of the unlit holes (the holes are much smaller than they appear here.)
That's ~$25 million for just 100 of those lasers. If they bought hundreds of them, that means they paid tens of millions or even over $100 million just for that light effect.
Is the magnetic power supply attachment worth $10 more (actually yes it is!)
Or the lack of 'Intel' inside 'designed for blah' stickers all over the case - these cost Apple $5
Or the way the lid fits to the case when closed with no gap, or the rounded corners of the windows on MacOS?
When I went to WWDC10, I was struck by the small detail of the conference security wearing black polos with the Apple logo and "Security" under the logo. At most conferences, the security is wearing jackets straight out of action movie central casting (e.g. "SECURITY"). I thought that was a nice small detail - to attire the rent-a-cops in Apple gear. But, now, reading this, I think they may have been full time Apple security staff. Security is paramount.
And believe me, they take every aspect of security into account.
Say 'People who are really serious about making and selling a product should make their own production, supply and store chains' or 'People who are serious about their product should take ownership of all stages of that product.'
http://www.quora.com/Apple-Inc-2/What-would-be-a-good-use-of...
In Apples case this strong position is not only visible in the supply chain management but it is clearly present in all their stack. Another example is their supremacy in software.
I think that this is one of the great lessons from Steve Jobs, takin your time to control and develop everything internally it is feasible competitive approach.
They use the rapid response of a huge open ecosystem of software developers, while still having a lot of control.They do it this way because in software , time to market is very important.
For the hardware part, which normally changes less often(slower phone buying cycle,phones are integrated and not modular like PC's, relatively long time before new electronic components become mass market) and time to market is less important(relative to software) , they use a closed ecosystem, in order to extract most of the profit.
http://5by5.tv/criticalpath/10 and http://5by5.tv/criticalpath/11
One classic anecdote is that leading up to a hurricane, Walmart did some data mining and found that poptarts sold like crazy when hurricane watches were declared. Within hours they had dozens of trucks heading to the Florida coast filled with poptarts and they made a lot of money that way.
Unless you have a fast, flexible logistics system and the analytical smarts to back it up, you can't exploit changing circumstances like that.
Edit. Source of Walmart anecdote is here: http://www.nytimes.com/2004/11/14/business/yourmoney/14wal.h...
If they'd doubled the price, that would be another matter, but that's not what they did.
And after the Brisbane floods, brooms, shovels and gloves were in short supply.
the sibling comment to mine references a huge volume of pop-tarts being shipped to florida in preparation for a hurricane. if during mid-shipment the weather changed, wal-mart would call up the supplier, cancel the order, and all the trucks would return the pop tarts to their suppliers at no cost to wal-mart. with pop tarts it isn't such a big deal because they don't spoil, but farmers who supply wal-mart will get shipments of spoiled produce returned to them if wal-mart decides they don't need quite as much volume that week. and they just have to deal with it, because they can make more money getting screwed by wal-mart than they can selling to ethical companies.
Essentially, if you get in bed with Walmart, you will make the money you want in the short term, but eventually, if you want to keep that money coming in, you will lose control of your pricing.
This doesn't even get into exclusivity requirements for products, etc.
See Snapper lawn mowers, for some insight to this process.
Make a deal with the devil... and you'll end up at the behest of the devil.
They do. And they'll start making demands about how you run your business (e.g. "stop buying this local, you need to buy it from China and here are a list of companies we recommend you use"). You will have lots of sales through Walmart but you have to be careful that they don't destroy your business on a whim. See Dill Pickle Co for an example.
That nationwide Wal-Mart "every day low price" cannibalized sales of smaller pickle units at other stores and Vlasic saw it's profits on pickles fall 25%.
In unrelated news, Vlasic filed for bankruptcy a few years later.
The entire tale is told in much better narrative by a 2003 Fats Company article: http://www.fastcompany.com/node/47593/print
But any company making a deal with Walmart should know this by now, so who is really to blame?
The issue quickly becomes a "damned if you do, damned if you don't" issue. If you supply them, they quickly drive your margins to the point where you have to offshore to stay in business. If you don't supply them, you get cut out of the largest retailer in the US and lose that way. Either way, you are screwed.
As I mentioned earlier, if you replace your ERP system (or upgrade it past a certain dollar point), you have to modify it so that Walmart has direct access to the internals. This means that they're placing (and cancelling) orders directly in your system without intervention (if you aren't careful, this can foul up your staffing). This also means that they know your costs, expenses and margins. You aren't going to have any negotiating power when it comes time for them to lower your prices.
Do a little research next time.
The only people who really hate walmart are unions. Both consumers and suppliers love them. Small businesses have mixed feeling - yes walmart eats some of their business, but having a store near a walmart is great for them.
Calling the idea of this "fiction" is a bit disingenuous, imho.
And if they "committed" to buying all the output, why weren't there repercussions from breaking that commitment?
And it's Walmart who hates unions. Their profit depends on exploiting human labor as much as possible, so they don't like anything that gives workers a fairer shake.
The distribution centers mean they can purchase huge levels of inventory at discounted terms. Running their own logistics means that they can break up pallets into smaller shipments appropriate for each store. So stores need less space to carry inventory, and they can purchase and store huge amounts at lower cost per sq. ft.
The other thing the logistics does is gives them an advantage in transportation cost. Although (I've heard) the margins in ground transport are slim, running your own ground transport saves money, allowing for lower prices to the consumer.
Walmart's size also contributes to their "efficiency". They can buy in larger quantities than their competitors and try to exert downward pressure on suppliers' prices. They can also nab exclusives and put them on the shelves for less than competitors.
According to him, Wal-Mart's corporate relocation assistance consists of a Wal-Mart truck and some random employees from a local store packing and stuffing your possessions in a semi.
Their distribution centers have timeslots for incoming trucks measured in ten-minute increments. You miss your ten-minute window to park the truck, you're locked out until they can find a space to fit you in.
If you update or replace your ERP system, your contracts with Walmart require you to integrate the new system with Walmart's. If you weren't paying attention upfront, the required changes can quickly make your ERP implementation explode over-budget.
Edit: I've thought about it some more. There are parallels but important differences.
The main one is products. Apple design the products themselves, have a very limited product range, and are more intimately involved in manufacturing than Walmart is.
Walmart has a much more complex supply chain problem. Thousands of products, with a changing mix based on seasons and perishability, taken from far more sources and distributed to far more locations.
http://en.wikipedia.org/wiki/Monopsony
Thanks for teaching me something Jacques :)
Could someone explain what that means more specifically? That they don't have to have a large stock?
Doesn't this controvert the earlier statement: "Because of its volume ... Apple gets big discounts on parts, manufacturing capacity, and air freight."
They also have an identical deal with another supplier, so they can play them off against each other if they need to renegotiate. Most companies would just go with whichever supplier was cheapest, but Apple may find it cheaper (in the long run) to keep the competition going.
That wouldn't make things cheaper since the cost of storage would simply be passed on to Apple by the manufacturer. The point being made is the supply chain has everything built just-in-time with minimal storage needs across the board.
Both Apple and the manufacturer wouldn't be storing much of anything. Everything is built in time to ship.
The reason that Apple keeps a similar deal with another supplier is if anything goes wrong with the other company. So in the previous example, if in week 5, Fukushima happened, and the first company was unable to keep production up, Apple could go to the other supplier and keep up production, with a very short(maybe a couple of weeks) delay. This is vital, since Apple doesn't maintain that much inventory of new parts.
The other benefit to this setup is that it allows Apple to almost instantly double their supply inputs for new product releases or for the holiday season. If necessary, Apple can use both suppliers to get 200,000 screens per week, then just rent a few warehouses for the temporary storage of new products or the holiday rush inventory.
Inventories are buffers, in an idealistic scenario(perfectly efficient) we don't need them. I order something, they make it and they give me instantly, no need to store it).
In reality we need them, but Apple have very efficient logistics that make them minimal, compared with other companies, that can't control as much as the supply chain as Apple does, or can't use air planes to send their devices(so their products arrive weeks or months late, infuriating their customers).
This is an oversimplification of course, there is way more about it, like demand-offer time lag problems, any operations research or logistic book will support you if you are interested.
Some of the inventories translate in to parts and bolts sat in the warehouses of Apple's suppliers.
But more of the inventory reduction comes from precise demand prediction and great control of the whole chain from production to delivery. In short, Apple works with its upstream suppliers to secure the ability to manufacture and transport then dispatch tens of millions of gadgets from scratch(read: silicon and aluminum) in weeks and maintain the quality and price point. So many things could go wrong and Apple would be left with nothing to sell. for example iPad's channel inventory is only 4-6 weeks deep, and that's for the big box retailers, for Apple's own brick and mortar store it's even less. It works for Apple instead of disastrous through unexpected manufacturing difficulties and natural disasters or accidents because of Tim Cook's ironclad control.
Now, the ODM/OEMs have become brands and the folks who once were the main participants in Apple's supply chain are now directly competing with Apple. Breathless articles aside, are we really sure that Apple's supply chain is much shorter/faster than those of Lenovo, Dell, HTC, Sony or, holy hell, Samsung?
I also have a hard time seeing how $25M worth of lasers is a supply chain innovation; most other manufacturers would probably prefer to make the laptop for $6 (amortization) less. I have a ThinkPad T520 [with Linux] because it's rugged, comfortable (no wrist razor), has a TrackPoint (I know, I know, but I love it) and about $1200-$1500 less than a comparable Macbook Pro. Clearly, the majority of hackers disagree with me, so I'm convinced that 90% of Apple's incredibleness is their marketing (not ads, but understanding how to design and build excellent products which are very well targeted at their audiences).
That last sentence there doesn't make much sense at all. How is "understanding how to design and build excellent products which are very well targeted at their audiences" part of marketing? That's straight up design and engineering.
It looks like Apple's supply logistics chain is similar to WalMart's supply chain. WalMart has deep connections with their suppliers, requiring suppliers to hand over financial records, dictating factory processes, and demanding yearly cost reduction.
The difference (and it is the major difference) is that Apple focuses their relationships with suppliers on quality of process and availability by locking up supply years ahead of time. WalMart just focuses on cost reduction.
The innovation is that Apple willing to pay high upfront costs years in advance to design efficient manufacturing processes so that later it would be able to get both cheaper component rates and a guaranteed supply. Jonathan Ive has said that most of his time is spent designing processes rather than products. Check out this excerpt from the [Objectified](http://en.wikipedia.org/wiki/Objectified) documentary: [Youtube](http://www.youtube.com/watch?feature=player_detailpage&v...)
That's a bit of a floppy ending for an otherwise excellent article.
> Because of its volume—and its occasional ruthlessness—Apple gets big discounts on parts, manufacturing capacity, and air freight. “Operations expertise is as big an asset for Apple as product innovation or marketing,” says Mike Fawkes, the former supply-chain chief at Hewlett-Packard (HPQ) and now a venture capitalist with VantagePoint Capital Partners. “They’ve taken operational excellence to a level never seen before.”
Crediting a company that until very recently employed slave labour with "occasional ruthlessness" and "taking operational excellence to a new level" is just disgusting.
There is still no excuse for that. They should be grovelling on the ground begging for forgiveness, not being commended for it!!
At least thanks to this article we know how that situation came to being... Just a little harmless "occasional ruthlessness".