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Apple supply chain - The best supply chain in the world

Apple is famous for its innovation and design. But few people know that the way Apple handles inventory is also a factor that led to success. As a matter of fact, Apple’s Supply Chain has led Gartner's Supply Chain Top 25 list since 2013.

Tim Cook, the current CEO of Apple, a company that reached $260.17 billion in revenues in 2019, was previously the company’s Chief Operations Officer. He joined Apple in 1998, the same time Steve Jobs re-entered the company, and he transformed Apple’s messy operations into a success, becoming COO in 2005 and CEO in 2011.

Tim Cook believes that when it comes to technology such as smartphones, tablets and laptops, inventory deprecates very, very quickly, losing 1-2% of its value each week - “inventory is fundamentally evil” he says.

Back in 2011, a comparison of how tech companies manage their inventory showed Apple was performing much better than Dell, HP, Blackberry (RIM) and Motorola. Using the Inventory Turnover formula that shows how many times a company’s inventory can be sold and replaced over a specific time period (so the higher the number the better), in 2011 Apple performed 2 times better than Dell, 5 times better than HP, 4.5 times better than Blackberry, and 5.5 times better than Motorola.

Apple's annual inventory peaked in 2017, with a value of $4.8 billion. In 2018, the company saw an 18.52% decline year-over-year but they bounced back quickly and they had $3.8 billion in inventory in 2019, a 3.79% increase over 2018.

How does Apple run its supply chain operations?

In a nutshell, Apple purchases components and materials from various suppliers, then gets them shipped to the assembling plant in China. From there, products are shipped directly to consumers (via UPS/FedEx) who buy from Apple's Online Store.

For other distribution channels such as retail stores and other distributors, Apple keeps products at Elk Grove, California (where the central warehouse and call centre are located) and ships products from there. At the end of a product's life, the customer can send it back to the nearest Apple Stores or dedicated recycling facility.

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How did Apple manage to have such great inventory management?

Tim Cook’s mantra from the very beginning was to slash inventory, cut down on warehouses and make suppliers compete between themselves.

"When Cook initially took over Apple's supply chain, he cut down the number of component suppliers from 100 to 24, forcing companies to compete for Apple's business," writes San Oliver from Apple Insider, "He [Cook] also shut down 10 of the 19 Apple warehouses to limit overstocking, and by September of 1998 inventory [stock on hand] was down from a month to only six days."

Looking back at the last five years, Apple's inventory turnover hit its lowest point in September 2018: 37.2x. That means Apple turned over its inventory every 10 days. 

Keeping as little inventory on hand as possible is very important. Why? Because of costs with warehouses and competitors possible hits. Technology manufacturers can’t afford to keep too many products in stock because a sudden announcement from a competitor or a new innovation could change everything and suddenly bring down the value of products in inventory.

By 2013, Apple was dealing with 154 key suppliers (way lower than Amazon for example), which facilitated better supplier relationships and kept only one central warehouse in perfect data sync with the approximately 250 owned stores.

Foreseeing sales levels accurately and not having excess inventory is absolutely crucial in the computer industry, especially when new products quickly cannibalise the old.

Not having too many SKUs helps correct forecasting (in 2013, Apple had 26.000 SKUs, way less than other technology manufacturers). Another facilitating factor is having a longer product life cycle, and Apple has more than 12 months for its key products.

And forecasting demand doesn’t only depend on what products your customers will buy, but also in what kind of technologies will be in demand for the next coming years, allowing the company to reduce costs with suppliers by placing orders for longer terms. This also leads to creating enough demand for suppliers, so that other competitors cannot order the components, hence limiting imitations.

Although Apple was always pushing to have fast inventory turnover, it made a change in 2011 of not rushing selling. The change was implemented with the launch of the iPad 2 and consisted of selling the much-awaited products the second day after they were delivered to shops, despite the customer queues in front. This measure was taken to make sure inventory tracking runs smoothly and there are no errors which lead to inventory inaccuracies.

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