Analyzing Apple’s #1 Position on the Gartner Top 25 Supply Chain

I have the privilege of hosting a webinar tomorrow on the Gartner Top 25 Supply Chains with Kevin O’Marah.  Webinar is probably not an accurate description for the event as it will function more like a live Question and Answer session with Kevin.  We have pre-selected a handful of questions that we thought would have the broadest relevance for the audience.  One of the interesting questions related to how Apple could be ranked #1 in the Top 25 Supply Chains after the negative publicity it received in 2010 from the series of Foxconn suicides. 

In fact, the Foxconn labor issue was not the only public criticism that Apple faced in the past twelve months.  Remember Antennagate?  How about the AT&T pre-order failures and security incidents?  And I still have yet to see a white iPhone in real life.  Yet despite all of these public relations challenges Apple received the highest number of peer opinion votes in the Top 25 rankings.  And it received the third highest number of Gartner opinion votes, closely following P&G and Cisco.  So how is this possible?

Top 25 Supply Chains for 2011

I suspect some of the strong peer review weighting is the result of Apple’s phenomenal brand and reputation as well as its innovation and product design.  One could write an entire book about Apple’s market leadership.  However, there are three facets of Apple’s supply chain management that I find to be particularly compelling.

Social Responsibility Reporting

Although Apple was heavily criticized for its use of Foxconn, it is important to note that many other high tech manufacturers also source assembly to the same contract manufacturing facilities.  However, I would argue that none of the companies have responded as proactively as Apple.  As I wrote in a post earlier this year, what happens in your supply chain is your responsibility even if it occurs outside of the four walls of your enterpriseApple has published some of the most detailed supplier audit reports that I have seen.  What I admire about the reports is the levels of transparency to code of conduct violations.  It makes no attempt to suggest that Apple has a perfect supply chain.  For example only 32 percent of factories audited complied with Apple’s rules on working hours.  However, I think the exposure of incidents in such a public forum will drive faster remediation of the issues.  Some highlights of the report include:

  • Apple provided $3.4 million in recruitment fee reimbursements for foreign workers that were charged exorbitant fees to move from their home country to work in another.
  • Apple identified 142 suppliers that use potential “conflict minerals” such as tantalum, tin, tungsten and gold.  It is working closely with independent sustainability organizations to ensure metals used in its products are “conflict free”
  • Audits revealed that 10 factories had hired workers that had not yet reached the legal age of 16 years old.  One factory had 42 underage workers Apple employed more rigorous age verification and ID checks to prevent falsification of credentials.
  • At one facilitate over 130 workers suffered adverse health effects from exposure to n-hexane, a chemical used in cleaning agents.  Apple requested the supplier suspend the use of the chemical and a reconfiguration of the ventilation system. 

Vertical Integration

Apple is more vertically integrated than people may realize.  Apple does outsource parts of its supply chain such as assembly to contract manufacturers.  And it acquires parts for its phones and tablets from a variety of suppliers such as Qualcomm and Samsung.  However, Apple did acquire a small startup company called P.A. Semi in an effort to begin to design its own chips

Perhaps, most importantly Apple owns over 300 retail stores worldwide.  You do not see other mobile phone manufacturers such as RIM and Google with physical stores nor do you see other PC manufacturers such as HP or Dell in shopping malls.  The design and the on-site availability of service in Apple’s Genius Bars draw customers to the store.  Excellent customer service keeps the consumers coming back.  Apple Store employees undergo rigorous interviewing process.  Those selected must complete a rigorous training program.  Apple’s retail model is much simpler than big box consumer electronics stores.  It only sells a single brand of products and relatively few SKUs.  Apple’s stores generate $4,406 in annual sales per square foot, which is more than Tiffany & Co ($3,070), Coach ($1,776) and Best Buy ($880).

Overcoming Countefeits and Copycats

The velocity at which Apple products have been copied and counterfeited has been nothing short of amazing.  An “iPed” launched simultaneously with the international versions of Apple’s iPad.  Sold on the streets of Shenzhen for $100, the iPed ran the Google Android operating system and held more memory than the original iPad.  Perhaps, even more impressive was that a replica of the iPhone 4 reached the market before Apple even announced a launch date for the authentic version.  The design was based upon a prototype of the genuine Apple 4 iPhone that was mistakenly left in a bar in Redwood City, CA. 

The counterfeit products have primarily been launched by the “Shanzhai” bandit manufacturers, which control 10 percent of the worldwide cell phone market.  There have been numerous attempts by legitimate competitors to replicate Apple’s designs and innovation.  Over 10 different tablets appeared on the market in the first 12 months following the iPad launch.  Within hours of the iPad2 launch various web sites began to publish detailed “teardowns” for tech enthusiasts and Apple’s competitors to review.  High resolution photographs of the Printed Circuit Board (PCB), battery and other components were published for all to see.  A complete Bill of Materials (BOM) listing each supplier and the cost of individual components were included as well. 

Apple has been one of the few vendors to successfully overcome the counterfeit and copycat threats that permeate today’s high tech supply chains.  I believe a key to their success has been to focus on the overall customer experience, not just the device.  Apple’s phones and iPods are tightly integrated into iTunes.  Apple negotiated with major movie studios and record labels to ensure that it offered an expansive selection of music, movies and TV shows for its device owners to choose from.  When the tablet was released it successfully created a community of developers to build applications for the device.  The Genius Bar at the stores provides an unparalleled customer service experience for consumers with in-person consultation that is almost impossible to find anywhere else.  It worked closely with only a handful of telecommunications carriers to ensure the best possible 3G experience for phone and table owners.  Apple’s ability to design an end-to-end experience is one of the key factors which enable it to differentiate its products in a highly commoditized, cutthroat mobile phone market.  And likely a key reason why it remains #1 on this year’s Top 25 supply chain list.