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Globalization AND Risk IN Supply Chain

(APPLE INC. CASE STUDY)

Supply Chain Management (ENG4089M)

Mu’taz Tayseer Ayed

14020192

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Table of Contents Table of Content .................................................................................................................................................. 1

CHAPTER 1. INTRODUCTION ................................................................................................................................ 2

Introduction ...................................................................................................................................................... 2

Project Aim........................................................................................................................................................ 2

Structure of the Project .................................................................................................................................... 2

CHAPTER 2. LITRATURE REVIEW .......................................................................................................................... 3

Supply Chain and Logistics ................................................................................................................................ 3

Supply Chain Management ............................................................................................................................... 3

Globalisation ..................................................................................................................................................... 3

Global Organizations & Products ..................................................................................................................... 3

Strategies in Global SC ...................................................................................................................................... 5

Global Supply Chain Risk ................................................................................................................................... 7

CHAPTER 3. CASE STUDY OF APPLE INC. ............................................................................................................. 9

Company Background ....................................................................................................................................... 9

Apple Strategy in Global Supply Chain .............................................................................................................. 9

Apple Offshoring-Outsourcing ........................................................................................................................ 12

Apple Dedicated Factories & Centralized Inventories ................................................................................... 14

Risks Factors Apple Facing .............................................................................................................................. 15

CHAPTER 4. CONCUSION ................................................................................................................................... 16

Lessons Learned ............................................................................................................................................. 16

Conclusion ....................................................................................................................................................... 16

REFERENCES ....................................................................................................................................................... 17

Appendix A. Risk Drivers Scenario .................................................................................................................. 19

Appendix B. Apple Main Facilities ................................................................................................................... 21

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CHAPTER 1. INTRODUCTION

Introduction

John Kasarda, Forbes, October 18, 1999, quoted about change the managerial way of thinking because

of industrial changes “Manufacturing now compete less on product and quality- which are often

comparable- and more on inventory turns and speed to market”. This reflect the belief that supply

chain management is the approach to illustrate the ability to compete and achieve competitive

advantage in the market (Ayers, 2001).

Logistics and supply chain management (SCM), has been recognized as an important part of

organizational strategy and the ability of the firms to remain competitive in the marketplace, as the

best practice of logistics and SCM reduce cost and add value to supply chain. (Mellat-Parast & Spillan,

2013)

This project intend to analyse strategic aspects of globalisation and risk in supply chain by reflecting

the aspects related on the global company Apple Inc. as its one of the best companies in developing

and improving in supply chain (SC).

Project Aim

This project aims to understand aspects related to globalisation in supply chain by analysing Apple

Inc. supply chain in regard to the literature review, which discuss the global supply chain issues such

as Glocalisation, centralised inventories, focused factories and risk facing global firms.

Structure of the Project

Starting with chapter 1 as an introduction, in chapter 2 the literature review of the global supply chain

aspects and risks, then chapter 3 which analyses Apple Inc. as a case study. Finally in chapter 4,

summarise the project in conclusion and lessons learned.

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CHAPTER 2. LITRATURE REVIEW

Supply Chain and Logistics

(Ayers, 2001) Defines SC as all what happens to the product from the “dirt” the beginning of

extracting raw material from the Mother Earth, through the different processes of manufacturing,

transporting and distributing, and then in the hand of the final customer who will use it and end it up

to the “dust” or for recycling; (Chopra & Meindl, 2013) to satisfy the customer needs the product;

therefore SC involves transporters, warehouses…etc.

Logistics defined as a total range of logical activities that guide the process of planning and control

the movement of materials flow, including finance and human resources committed to physical

distribution and storing from the moment they leave the original supplier flowing through to the final

customer (Christopher, 1992) (Bowersox, et al., 1986).

Supply Chain Management (SCM)

(Ayers, 2001) SCM is to manage supply chain segments by design, maintenance and operations of

supply chain processes through the upstream and downstream linkages; to achieve customer

satisfaction, extending to SC formulation and operational and maintenance subsequent. SCM is a

valuable and important discipline in organizations which is taken in the level of marketing, finance

and operation. (Chopra & Meindl, 2013) Agrees about the influence of SCM on the firm as quoted

“Supply chain design, planning, and operation decisions play a significant role in the success or failure

of firms”.

Globalisation

Regarding to Oxford dictionary, global in language perspective means “covering or affecting the whole

world”. Moreover, globalization in terms of language points for “the fact that different cultures and

economic systems around the world are becoming connected and similar to each other because of the

influence of large multinational companies and of improved communication”. In general, globalisation

has been defined in the last decades as “an umbrella term for a complex series of economic, social,

technological, cultural and political changes, which continues to take place in the world” (Mangan, et

al., 2012).

Global Organisations & Products

The impact of globalisation on SC can increase the revenue and reduce cost of companies, as Nokia,

which achieved largest global market percentage of 19% in 2007, and P&G which represented 28% of

global sales. However, many companies are not ready to turn to global level because of risk and

complexity of this level in developing supply chain and logistics (Chopra & Meindl, 2013).

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Global Organisations

Regarding to (Waters, 2009), organisations can be classified regarding to the market they are targeting

and working in, starting with the national companies which work in their home market only,

international companies work in many countries as they have facilities in different countries but

centred in one country. Moreover, Multinational companies are linked more broadly with large

independent companies working in different regions around the world. Finally, global companies see

the world as one single market. Global companies make standard product and ship it for all the world

using different facilities which effectively located in many regions.

Barbie, The All-American Girls Toy

In 1959 was the start of the American toy doll the typical example on global citizens` product. It is

originally made in japan, not the USA. As though, her hair is made in Japan, the plastic in her body

made in Taiwan and her clothing made from China.

Boeing 787 Dreamliner

The most successful product lunch for Boeing is a high-value global product which required Boeing

to apply Lean Manufacturing (LM) for the first time in the company. It formulated another SC model

in which suppliers were capable to invest their own cash to plan, make, and coordinate real areas of

the plane, in light of general determinations gave by Boeing (SONG, et al., 2014), the figure below

illustrate Boeing 787 work share around the globe.

Figure 1: Boing 787 Global Work Share (SONG, et al., 2014)

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Strategies in Global Supply Chain

Think global act local “GLOCALISATION”

Many global companies refer to this policy which taking in consider the local and cultural differences

in many regions despite looking for the world as a single market, which allow them to have a world-

market scale, act and cope conveniently to local needs (Mangan, et al., 2012). It involve customising

marketing strategy to suit different countries by categorise countries in common with cultural, social

and technological (Vignali, 2001)

Offshore-Outsourcing

Outsourcing is procuring parts or services, which might be previously processed at the firm, from third

party or outside foreign suppliers instead of perform it in-house, offshoring is to transfer a particular

process to a less cost region or location (Liu & Nagurney, 2011). Consequently, the term offshore-

outsourcing is widely used to refer for both as they are in common. Moreover, reasons of resorting to

offshore-outsourcing are decrease cost, rise the flexibility as the third party partner is able to provide

more services and finally and most importantly to focus only on the core competences of the

organization which should not be outsourced but can be offshored (Mangan, et al., 2012).

However, there still a trade-off about what to outsource and what to keep in-house as Chopra discussed

“managers must decide whether to outsource all of it, outsource only the responsive component, or

outsource only the efficient components” which effect significantly on the SC value (Chopra &

Meindl, 2013). Although offshore-outsourcing has many advantages, it also reveal various risks to SC

global organisations such as production disruption risk, quality risk, supplier default risk and foreign

exchange risk. Among these risks, foreign exchange risk is considered to be on the top of the list (Liu

& Nagurney, 2011). On the other hand, Outsourcing is a recent trend, usually adopted to gain lower

production costs, but also can be used to reduce core organizational risk (Wu, et al., 2013).

Focused Factories

(Brumme, et al., 2015) The basic idea of focused manufacturing facilities is old, “The Focused

Factory” Skinner 1974 and other related articles in the Harvard Business Review, gave birth of it.

(Harrison & Hoek, 2005)Many global companies have prepared their production globally by setting

factories in the countries or regions, focused factory strategy includes integrate products production

to a specific manufacturing plant to supply the international market by focusing on a limited segment

of product variety. As many strategies, focused factory is a trade-off between delivery lead time and

cos, and has advantage and disadvantages as shown in table 1 next page.

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Table 1: Advantages and Disadvantages of Focused Factory strategy (Harrison & Hoek, 2005)

Advantages

Disadvantages

Cost

Lower production costs

through economies of scale

Higher transport cost

Lead time

Specialised equipment may

be able to manufacture

quicker

Longer distance from

market will increase lead

time

(Skinner, 1974) agrees that focused factory is not the ultimate solution because “A factory cannot

perform well on every yardstick” which reflect the trade-off between measuring manufacturing need

to be compromised such as short delivery cycles, quality and reliability...etc. for example, it is

catastrophe to take low-cost over quality, reliability and delivery.

Centralised Inventories

(Harrison & Hoek, 2005) Instead of having a huge number of small distribution centres, gathering

these to smaller number of distribution centres will decline cost and management complexity, which

allow remove duplication and reduce safety stocks. However, it will extend the transportation outline

because the distribution legs will be longer from the warehouse to the customer. Also, it makes a trade-

off when it comes to the product environment where the cost of inventory is more important than the

distribution cost. The table below illustrate the advantages and disadvantages of Centralised

Inventories strategy.

Table 2: Centralised inventories advantages and disadvantages

Advantages

Disadvantages

Eliminate duplication and

minimise safety stock

Lowering logistics costs(factory-

to-warehouse cost) and

distribution cycle times

Extend the transportation

pipeline and distribution legs

Concern in where inventory

cost is more important than

logistics cost

Concerns about the lead time

and delivery efficiency as the

customer demand can be

volatile and unpredictable

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In consequence, many disadvantages appears in centralisation strategy but many different levels of

centralisations approaches can be implemented to compromise the best country or location in order to

add value to the SC.

Many approaches to select an adopt location regarding to (Rushton & Oxley, 1991), firstly is the centre

of gravity method 1930, which is based the identification between the centre with minimum cost for

adequate location and the centre of gravity as defined in physics and The Tonne Mile Centre Method,

both methods are crude and clear, and emphasize major point in the location; The importance of the

demand for goods, the distance involved and decrease the product of those factor “weight (tonnes)

times distance (miles)”. Secondly, Heuristics which is derived from the ‘rule of thumb’ principle by

using knowledge and common sense to refuse any unlikely positions which minify problems. Thirdly,

Mathematical programming using known mathematical techniques like linear programming, and

finally simulation method.

Global Supply Chain Risk

(Waters, 2011) Risks in supply chain appear when a sudden event happen and might threaten the flow

of materials, information and finance through the SC from the first supplier to the customer, which

causes delays in deliveries or maybe prevention, effect or damage goods and many consequences that

might cause lost in cost, quality in services and honesty. (Manuj & Mentzer, 2008)“Risks are all those

things that keep you away from the perfect path and perfect outcomes and (you) got to be able to

translate (risks) into dollars somehow”.

Reasons to be aware in global SC might be direct such as tariffs, SC information or documents and

import/export restrictions, or indirect impediment like security concerns and local factors. Which result

in delays, cost rise, financial loss and stressed business relationships (Benson, 2013).

Writers introduced risks in GSC with different perspectives. Therefore, in order to understand the risk,

those perspectives are collected and sorted in table 3 in the next page.

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Table 3: SC risks regarding to different perspectives

Writer Perspective Description and influence

Donal Waters

(Waters, 2011)

In General

External risks: Moving products and materials

through many countries, regions cultures and different

governments with different policies make a dramatic

risk, in addition to the natural disasters that might

disturb the SC.

Internal risks: less dramatic, but more widespread in

their effect. Those are related with the shop floor such

as breakdowns and delays.

Many traditional ways can work with it such as

having many suppliers in order to reduce risk of

material suppling or having a safety stock just in case.

Omera Khan, George

Zsidisin.

(Khan & Zsidisin, 2011)

According to the main

effect on the SC

performance goals

Total costs too high.

Delivery reliability.

Insufficient quality.

Damage to company reputation.

See Appendix (A) for scenario for each point

Ila Manuj, John T.

Mentzer

(Manuj & Mentzer,

2008)

Definitions provided

by supply chain

managers

Potential losses (if the risk is realized, what losses will

result and what is the significance of the

consequences of the losses.

Likelihood of those losses (the probability of the

occurrence of an event that leads to realization of the

risk).

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CHAPTER 3. CASE STUDY OF APPLE INC.

Company Background

The Company is a California corporation established in 1977 which “designs, manufactures and

markets mobile communication and media devices, personal computers and portable digital music

players, and sells a variety of related software, services, accessories, networking solutions and third-

party digital content and applications.” The Company sells its products and services globally by its

retail stores, online stores and direct sales force, in addition to third-party cellular network carriers.

The Company sells to consumers, small and mid-sized businesses and education, enterprise and

government customers. The Company’s products and services include iPhone®, iPad®, Mac®, iPod®,

Apple Watch®, Apple TV®. (Apple, 2015)

Apple is one of the big global companies which achieved a tremendous improvement in SC ranking

between 2004 and 2008 regarding to (Hill & Hill, 2009) as it ranked in 1st position as shown in the

exhibit below. Gartner website, as the world leading IT research, ranked the SC of Apple the 1st in the

world and 3 years in row (Gartner, 2015).

Figure 2: Apple SC management ranking 2004-2008 (Hill & Hill, 2009)

Apple Strategy in Global Supply Chain

Apple business strategy from 1997 after Steve jobs return was focused on improving cutting-edge easy

use products and new innovations in products every 12-18months, which changed the company

foundations immensely (Hill & Hill, 2009). That requires a classic SC model of new product

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development process (NPD) starting with R&D through SC functions to marketing (Supplychainopz,

2013).

As shown in Figure 3, starting with R&D and testing to produce new, easy and valuable product. Then,

the pre-lunch stage which is more related with SC by noticing main processes should be done

accurately: Manage material purchase commitments, provide proper storing levels, raise orders and

make pre-payments to suppliers to guarantee suppliers will stick with the strategy. These four planning

points reflects how ready is the company and the high commitment with the plan. In addition to a

quarterly review as a feedback to measure the current statues of the market and if there is any action

needed.

(supplychain247, 2015) The SC model of Apple Inc. is almost similar to other industries’ models,

Apple order raw materials from many suppliers around the world to the assemble plants mainly in

China and other assembling facilities that we will mention later on. After that, the products are shipped

by the assembler to customers who buy from online store and to Apple warehouse at Elk Grove,

California to supply products from there to other distribution channels as illustrated in Figure 4 next

page.

Figure 3: Apple Supply Chain Planning Model (Supplychainopz, 2013)

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Figure 4: Apple Inc. SC Model (supplychain247, 2015)

Regarding to the entire suppliers list (Apple.com, 2015) provided by the company website, the number

of suppliers for all products is more than 200 suppliers all around the world, Figure 3.

In

comparison with 2014 suppliers’ distribution around the world, the number of suppliers in China and

Japan saw a decline from 349 to 334 suppliers. On the other hand, an increase in suppliers in America

Figure 5: Apple Inc. worldwide suppliers in 2015 (Apple.com, 2015)

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and Europe. This can be referred to many reasons to protect the SC such as natural disasters, cost and

quality aspects or a strategic approach the company is looking for.

Figure 6: Apple global suppliers in 2014 (Comparecamp, 2014)

Apple Offshoring-Outsourcing

Apple strategy in offshore outsourcing is to achieve huge labour cost reduction, less equipment

investment and high operations efficiency. By manufacture and assemble products mainly in China, in

addition to other Asian countries such as Taiwan, japan and Thailand (Wenji, 2005).

(Wright, 2012) Apple’s strategy is to keep the high value added task like designing, marketing and

product management within the company, and outsourcing most of low value or low cost effective

processes, like parts manufacturing and assembling to external suppliers and partners. This is

compatible with what mentioned in the literature review to not outsource your core-competence.

Outsourcing varies from touch screen controllers, storage electronics manufacturing and Bluetooth and

Wi-Fi all around the world, (supplychain247, 2015) shows specifically components outsourced for

Apple product iPhone.

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Figure 7: IPhone outsourced components (Comparecamp, 2014)

The famous story “Biscuits and Tea”

(Duhigg & Bradsher, 2012) Reported, In 2007 Steven Jobs had decided to redesign the iPhone's screen

weeks before the lunch, which force an assembly line overhaul. Chines factory where able to finish

the task in 15 days by giving around 8,000 workers biscuits and tea and work all day and night in order

to fit screen glass to 10,000 iPhone a day. Regarding to (Comparecamp, 2014) if it had been done by

an American partner It would have taken 9 months as shown in figure 6. As one of the company

executives mentioned “The speed and flexibility is breath-taking, there is no American plant that can

match that.”

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Figure 8: USA manufacturing flexibility vs. China (Comparecamp, 2014)

Apple Dedicated Factories and Centralised inventories

Apple has different focused factories as each one is focusing on processing a specific segment of

products. Most of Apple products are assembled and processed in Foxconn factories. Foxconn has a

tremendous manufacturing plants which divided to be dedicated to different Apple products regarding

to (Apple.com, 2015), the facilities are 18 as a main assembly factories in Ireland, Brazil and China

which most of the facilities are based in. See Appendix B to see the 18 facilities.

About Apple inventory (Oliver, 2012) mentioned “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. He also shut down 10 of the 19 Apple warehouses to limit overstocking, and by

September of 1998 inventory was down from a month to only six days.”

(Supplychain247, 2015) (Supplychainopz, 2013)Apple centralisation of inventories can be

summarised in two ways, the first is the main warehouse which is the only centralised inventory based

in California, this inventory receive finished products and then ship it all around the world, basically

in big quantities to retail stores, telecommunication companies, Apple stores and other distributers.

The second is by online shopping, which will be sent from the manufacturer to the customer.

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Risk Factors Apple Facing

Risks factors that Apple facing and planning to avoid in case of threatening the company assets, supply

chain or competitive advantage are listed in their annual report as follow:

Table 4: Risk factors Apple Inc. facing (Apple.Inc., 2012)

Risks Factors

Global economic conditions could materially adversely affect the

Company.

Ability to obtain components in sufficient quantities is important

To remain competitive, the Company must successfully manage

frequent product introductions to stimulate the customer demand.

The Company faces substantial inventory and other asset risk in

addition to purchase commitment cancellation risk.

The Company depends on component and product manufacturing

and logistical services provided by outsourcing partners, many of

whom are located outside of the U.S.

The Company’s future performance depends in part on support

from third-party software developers.

The Company’s products and services experience quality problems

from time to time that can result in decreased sales and operating

margin.

Some components are currently obtained from the single or limited

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CHAPTER 4. CONCLUSION

Lessons Learned

SC planning in Apple is simple and rigid and focuses because of the successful management of

suppliers and SC, while other companies has similar model but still find it complex.

Focusing on their core-competence and outsource other aspects they are not good at.

Apple are the kings of offshoring-outsourcing, as they rely on China which adding efficiency and

responsiveness in regard to biscuits and tea story.

Apple has one centralised warehouse which has advantage in reducing management complexity if

they have many warehouses all around the world. On the other hand, shipping from manufacturer

to warehouses around the world is adding responsiveness to SC. It still a trade-off judgment.

Many parts are supplier from limited suppliers which is a case that Apple should look for in the

near future.

Procurement importance, Cook reduced the number of suppliers to make your suppliers work for

the contract.

Conclusion

In conclusion, Apple Inc. are leading now in SCM and that increasing the company revenue because

they are adding value on their SC using many techniques and strategy such as offshore-outsourcing

and centralised inventories which is in California. In addition to dedicated factories as there

manufacturing is almost in China with many facilities, each one is focusing on segment of parts or

tasks. Moreover, Apple Inc. are facing many risks like many companies, and most of those risk related

with demand and efficiency in controlling changes in customers and suppliers as many components

are supplied from limited numbers of suppliers which sometime reach only one. Eventually, types of

risk related to global issues and disasters which is out of Apple control.

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APPENDIX A. RISK DRIVERS SCENARIO

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APPENDIX B. APPLE MAIN FACILITIES

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