Supply Chain and Lean Management: An Analysis of Apple's Strategies

Current and Future Supply Chain

Apple is an American multinational corporation founded by Steve Jobs that produces a wide variety of consumer-electronics such as smartphones, laptops, and tablets. They develop their own software and sells subscription services for movies and music. In August 2020, Apple was valued to over 2 trillion dollars (Gramstad et al., 2020). During the same fiscal year of 2020, Apple released approximately 22.6 million tons of carbon dioxide into the atmosphere. The main part of these emissions is due to the production process and then followed by the usage of apple products (Tiseo, 2021). This number can be expected to follow the sales income and give Apple an immense challenge on how to organize their supply chain and use the right suppliers for dealing with this issue.

The motivation for international outsourcing, in fact establishing a tightly connected supply chain, comes from the theory of comparative advantage. This theory focuses on the economic concept of relative advantage. According to the theory, if an external provider, regardless of its geographic location, can perform activities more productively than the company itself, then the external provider should do the work. This allows the purchasing firm to focus on what it does best, its core competencies. Consistent with the theory of comparative advantage, outsourcing continues to grow. But outsourcing the wrong activities can be a disaster. And even outsourcing non-core activities has risks. Outsourcing implies an agreement, typically a legally binding contract, with an external organization.

The classic make-or-buy decision, concerning which products to make and which to buy, is the basis of outsourcing. When firms such as Apple find that their core competency is in creativity, innovation, and product design, they may want to outsource manufacturing (Heizer et al., 2017).

This section introduces outsourcing risks, Apple’s supply chain, and how it currently and possible in the future incorporates risk mitigation, resilience, and sustainability considerations. Further will be outlined, which consequences the risk, resilience, and sustainability objectives have on the facility level across the supply chain.

Risk management starts with a realistic analysis of uncertainty and results in a strategy that minimizes the impact of these uncertainties. Indeed, outsourcing is risky, with roughly half of all outsourcing agreements failing because of inadequate planning and analysis. Timely delivery and quality standards can be major problems, as can underestimating increases in inventory and logistics costs. Additionally, companies that outsource customer service tend to see a drop in customer satisfaction (Heizer et al., 2017).

When outsourcing is overseas, additional issues must be considered. These issues include financing, people skills and availability, and the general business environment. Another risk of outsourcing overseas is the perceived loss of jobs that has fuelled anti-outsourcing rhetoric. This rhetoric is contributing to a process known as reshoring, the return of business activity to the originating country (Heizer et al., 2017).

Risk of outsourcing

By nature, companies tend to keep a low profile when it comes to internal data about their core business and associated structures. Apple Inc., hereby, is no exception. Precise and reliable first-hand information about Apple´s supply chain is rarely available. After conducting a research with available resources, Apple´s current supply chain for iPhones can be described and modeled with some key figures. As observed in Figure 1 below, Apple acquires its components from various international sources shipping them to mainly China to be assembled by contract manufacturers such as Foxconn as the most notable example shifting its core business towards design and  marketing (Apple Inc., 2020; Benjabutr, 2021).

For the fiscal year 2020, apple accounts for combined 197 internationally spread suppliers for their whole product portfolio (Apple Inc., 2021a). The assembled products are then either send directly to the end customer, in case ordered in the online store, or are shipped to the central and notably only warehouse located in Elk Grove, California, USA. Either way, third-party logistics companies such as FedEx or UPS are employed. From there, iPhones are distributed further to retail stores and wholesalers. At the end of the product´s life cycle, which equals approximately 2 years for an iPhone (Ewa et al., 2017), customers can trade-in the old iPhone in exchange for a new model or it can be send to dedicated recycling facilities (Benjabutr, 2021).

In fact, Apple has built an effective global system where it controls nearly every piece of the supply chain, from product design to retail store. With rapid communication and accurate data shared up and down the supply chain, innovation is enhanced, inventory costs are reduced, and speed to market is improved. Once a product goes on sale, Apple tracks demand by the hour for each store and adjusts production forecasts daily. At Apple, forecasts for its supply chain are a strategic weapon.

Sustainability aspects, such as achieving carbon neutrality by 2030, are extended throughout the entire supply chain, from initial design up to disposal. All members of the supply chain must hold on to Apple´s Supplier Code of Conduct, a practical implication of the triple bottom line, outlining supplier requirements within labor, health, safety, environment, management system, and ethics. To ensure compliance, Apple regularly conducts assessments of every supplier (Apple Inc., 2021b).

According to relevant literature on Operations Management, increasingly reciprocal reliance on members of the supply chain by outsourcing induces risk (Heizer et al., 2017). Risk can arise in numerous ways and hence, Apple´s most threatening risks according to 2020´s SEC filing are addressed in the following (Apple Inc., 2020). As described earlier, the majority of the company´s sales, supply chain, manufacturing, and assembly are located outside the U.S., mainly in China. Therefore, Apple highly depends on global and regional economic and political/regulatory conditions.

Apple’s supply chain

Fluctuations in demand as well as uncertainties about global economic conditions could impact members of the entire supply chain. Further, Apple depends on industrial and logistics partners outside the U.S. as, for example, a notable part of manufacturing is conducted by a small number of contract partners. As a result, Apple may lose control over production and distribution, which in turn may result in issues in quality and flexibility in terms of changing market conditions. Therefore, Apple, as mentioned above, regularly conducts assessments on all suppliers by themselves and independent third-party auditors. In order to identify related potential risks as well as determine the effectiveness of the supplier engagement, supplier performance and improvements are rated on a three-point classification scheme. It is observed that supplier performance increase over time (Ferrari, 2019). In the future, Apple could aim to even more monitoring of current and potential suppliers to completely prevent violations to their code. As the business environment is quickly evolving and changing, continuously improved collaboration will become increasingly important to protecting people and planet throughout the supply chain.

Political issues such as recent trade tensions between the U.S. and China involving enormous import tariffs require managerial strategic attention. Apple, in fact, seeks risk mitigation by cross-country diversification by asking suppliers to evaluate potential moves of production out of China. Even if the conflict seems to be resolved, Apple´s strategic decision to mitigate arbitrary risk related to China´s government has been upheld. In fact, 15-30% of the production is evaluated to be shifted to Southeast Asia and Mexico in order to diversify risk. Du to close interconnectivity along the supply chain, relocation of major suppliers will cause movements of their respective suppliers. In the long run that will cause a shift of entire industrial plants from China to other parts of the world (Ferrari, 2019; Li and Ting-Fang, 2019). Such decisions may also have an influence on human factors related to the availability of qualified workforce.

Corporate resilience is the ability to adapt to and respond to business disruptions, protect people and assets, and maintain continuous business operations. Corporate resilience is a wide term that encompasses all crisis management and business continuity and the organization’s ability to adapt to all types of risk, everything from natural disasters, new demands from customers and supply chain disruptions (Gligor et al., 2019). The competition between companies is now towards their supply chains, supply chains against supply chains (Gligor et al., 2019). Highlighting the importance of coordination with suppliers and their respective suppliers, and the competitive advantage this provides. The supply chain resilience helps companies mitigate the problem related to supply, identifying and securing possible new suppliers to reach their normal levels (Wong et al., 2020). As the customers were demanding more and more carbon-neutral products, Apple had to adapt to their needs. As most of the emissions is due to production and shipping, Apple have started investing and providing their suppliers with the necessary funds to reach their renewable energy goals. Building wind turbines in Denmark to support their data centre in Viborg is an example (Holbrook, 2021).

Risk Mitigation

As mentioned before, Apple has built an effective global system, rapid communication between every part of the supply chain. But even with the network Apple have built delays occurs. Due to COVID-19 Apple couldn’t launch iPhone as scheduled as the first time since 2012. The iPhone 13 had been rumoured to get delayed due to lack of microchips and suppliers struggling with hiring new employees. Apple have taken precaution and pre-ordered microchips to ensure suppliers can deliver the necessary volume and quality, and suppliers have increased wages for production workers (Smith, 2021). Apple have shown their strengths and the ability to change and adapt to challenges that occurs. Nevertheless, it has to been mentioned that it is also claimed that Apple was rather lucky that the shortage, in fact, mainly affected iPads and Macs, not the iPhone as the most important product (Leswing, 2021). It could therefore be argued that the overcoming of that particular challenge was less attributed to thorough supply chain design.

It is obvious that Apple puts great effort in sustainability. By annually releasing the People and Environment in Our Supply Chain report, Apple emphasizes the focus on sustainability throughout the entire supply chain. During the year of 2020, Apple became carbon neutral for all their operations, and targets to be completely carbon neutral for the whole supply chain before 2030. This includes the production, shipment, and the use of the iPhone. The company uses several tools to accomplish this. Using recycled materials and building several renewable power plants globally to mention a few. Apple has in a partnership with Goldman-Sachs and Conservation International made a fund to invest into forests for collecting carbon, and revitalizing ecosystems. Their strategy for reaching their future carbon neutrality goal consists of 3 main pillars: resources, climate change and smarter chemistry. Focusing on low-carbon energy-efficient design and transitioning the entire supply chain into renewable energy (Apple Inc., 2021c).

One of the main issues that critics has put forward against apple is their lack of reparability and a way of designing products that could be a form of planned obsolescence. Apple controls where and how their user can fix the iPhone, and thereby could encourage the consumers to purchase new iPhone every year (McGrath, 2017). Figure 2 visualizes how Apple has presented their view on the amount of emissions that they are going to release the next years and how much they are capturing.