Finance Business Studies Case Study
1.1. Strategic Role
a) Cost Leadership
In 2016, the production of most Apple products happened in multiple factories across mainland China, Brazil and India. By using economies of scale Apple are able to achieve cost leadership. Long assembly lines with little automation being the key to very short work times with a move towards automation in the future. (3)
b) Good/Service Differentiation
Varying product features - the production of different applications for the iPhone allows customers to vary features to suit their needs. Varying product quality - Apple produce high-end desktops which differentiate them from other brands such as Dell. (1)
Varying lead times with the deliver of services - by creating Genius Bars in all retail outlets Apple decreases the lead times of after sales services. This makes the value of the service a tangible measurement. Varying expertise and quality of customer service - the use of an online booking system via Apple.com allows Apple retail stores to manage the expectations of the customs. (2)
1.2. Good and services in different industries
Apple’s core business is to provide customers with consumer electronics and software. Most product lines are standardised goods as they are mass-produced. (1)
Apple provides a unique opportunity for potential customers to customise standardised goods such as iPads and iPhones. By developing applications such as iTunes, customers can purchase music/eBooks/movies to suit their needs. (1)
Apple supplies both goods and services. Services like Apple Genius bars in retail outlets provide customers with after sale service. In turn services like these are customised to satisfy individual needs. (2)
The online booking system for the Genius bars provides customers with an element of self service. The ability to log in anytime to book a time slot improves speed of service. (3)
1.3. Interdependence with other key functions
Operations - Marketing - The use of customer feedback, primary and secondary market research from previous sales of the iPad provided Apple with benchmarks for Apple iPad Pro sales. (3)
Operations - Finance - The flexibility of each suppliers layout allows Apple to shift resources to other products if volume or demand changes. This is done without too much disruption to the pricing strategies Apple employ. (3)
Operations - HR - Due to the consumer electronics industry being very competitive, technical and innovative, Apple tend to hire technically savvy staff. From the product development team to retail staff. (55)
Global supply chain - Jabil Circuit Inc. manufacturing facilities are based in China, and is listed on the NYSE. It supplies phone casings for Apple. Jabil also makes a wide variety of electronic and manufacturing devices. It also provides services such as product ideation, design, development and creation. Despite this diversified set of products and service-lines, Jail reportedly relies on Apple for approximately 20% of the business. (79)
Imitation and reverse engineering is an issue for Apple. Eg. With three different subsidiaries – Samsung Electro-Mechanics Co. Ltd., Samsung Electronics Co. Ltd., and Samsung SDI. Co. Ltd. – which are located in four different countries (South Korea, China, the U.S. and the Philippines), Samsung is one of Apple's major suppliers. It supplies multiple components, including flash memory, which is used for storing data content; the mobile DRAM, used for multi-tasking various applications in devices; and the application processors which are responsible for controlling and keeping the whole device running. Despite being a competitor to Apple in the mobile phones market, Samsung uses its supplier status to reduce its own component manufacturing costs via bulk production. Security of information and new technologies is of high importance. (79)
With the competitive nature of the consumer electronics market Apple are forced to continually patent/trademark their innovations to compete with the likes of Samsung and Microsoft. In late 2015, the US Court of Appeals for the Federal Circuit reaffirmed that Samsung had copied specific design patents in Apple's iPhone. But the court decided that Samsung wasn't infringing on Apple's overall trade dress — the look and feel of its phones. This means that while the damages Apple was granted for patent infringement will stand, the company's overall $930 million award will be downsized. (71)
2.3. Quality expectations
Degree of competence - much of Apple’s success has been attributed to its reliable, durable, functionally simple and clean designs. (7) Apple must maintain a reputation for good quality and not necessarily the best quality. In terms of the iPhone, Apple will not gain more customers with the highest quality but will lose customers if the quality falls below market expectations. (3)
2.3. Cost Based Competition
Economies of scale - Apple suppliers can adjust for changing volumes of a product by simply adjusting staff, reconfiguring tasks (shifting labor, space and equipment) and rebalancing the line. Eg. The manufacturing layout of Jabil and the standardised nature of production allows Apple to shift resources, adjust fixed and variable costs to other products if volume or demand changes. (79)
2.4. Government Policies
Regulations and policies - In 2016, Apple were still in court to explain their pricing policies and why Australians were forced to pay more for some of their products compared with other countries. (70)
2.5. Legal Regulations
Consumer protection - Apple has been repairing phones outside the warranty period for free since the Australian Consumer Laws (ACL) changed in 2011. Consumers are given a guarantee for products, including electronic goods. Consumers, under their statutory rights, can have electronic products repaired even "after any manufacturer's voluntary or extended warranty has expired". The catch is that it only applies "for the amount of time that is reasonable to expect, given the cost and quality of the item". The Australian Competition and Consumer Commission (ACCC) has previously said that businesses should comply and it is reasonable for consumers to expect a mobile handset locked into a 24-month contract to work for the duration of the contract. (9)
2.6. Environmental Sustainability
Concern for future generations - On the Apple.com website it states, “The way products are manufactured, used and recycled represents the largest percentage of Apple’s total greenhouse emissions. That’s why we design them for better environmental performance to try and reduce our carbon footprint. We measure the performance in every Product Environmental Report. Areas addressed include: climate change, energy and material efficiency, restricted substances and recycling.” (10)
In 2016, Apple have focused on generating clean energy for 100% of its Operations in China. Apple announced two new programs aimed at reducing the carbon footprint of its manufacturing partners in China. The programs will avoid over 20 million metric tons of greenhouse gas pollution in the country between now and 2020, equivalent to taking nearly 4 million passenger vehicles off the road for one year. (11)Apple is looking to expand its clean-energy investments in China. Apple plans to build more than 200 megawatts of solar projects in the northern, eastern and southern grid regions of China, which will produce the equivalent of the energy used by more by than 265,000 Chinese homes in a year and will begin to offset the energy used in Apple’s supply chain. (11)
2.7. Corporate Social Responsibility
On the Apple.com website there is a section on Apple’s Supplier Responsibility - “workers everywhere should have the right to safe and ethical working conditions. 6 areas of focus: accountability, empowering workers, labour and human rights, health and safety, environment and audited results.” (11)
a) Difference btw legal compliance and ethical responsibility
On the Apple.com website it states, “If companies want to work with Apple, they must act fairly and ethical at all times”. Areas of focus include: compliance with labour laws, ending excessive work hours, human rights, addressing underage labor, outsourcing, setting standards for hiring students and stopping bonded labor. (11)
b) Environmental sustainability and social responsibility
On the Apple.com website it states, “We take care to design environmentally sound products. And we work with suppliers to make sure they’re using environmentally responsible manufacturing processes wherever those products are made.” The aim is to not only comply with local laws and international labour standards but also use environmentally responsible manufacturing processes wherever Apple products are made. (11)
Labour, energy, raw materials, machinery and technology used to produce an iPhone:
a) Transformed resources
Materials – of the 748 suppliers listed in Apple’s Supplier list in 2016, more than 600 were in Asia which manufactured intermediate goods. (11)
Information – technical and innovative information is an integral part of the success of Apple. The information Apple knows about new products allows them to be a leader in technology, design, electronics and industry KPI’s. Apple use this information to gain a competitive advantage.
Customers – feedback is key to gaining information about customers and their thoughts about products and services (customer relationship management). Customers can provide Apple with feedback via their website, retail stores and product research groups. (60)
b) Transforming resources (human resources, facilities)
Human Resources – As of December 2015, Apple is responsible for creating and supporting 1.9 million jobs. Nearly three-quarters of those jobsare attributable to the iOS ecosystem.(10)
Facilities – In 2016, Apple had 18 final assembly plants around the World. In 2016, Apple had 200 suppliers which represented at least 97% of procurement expenditures for materials, manufacturing and assembly of products World wide. (10)
a) The influence of volume, variety, variation in demand and visibility (customer contact)
Influence of volume - suppliers like Hanson Metal Factory have the ability to adjust for changing volumes by simply adjusting staff numbers and reconfiguring tasks (shifting labor, space and equipment). This in turn, speeds up lead times. (10)
Influence of variety - Apple have suppliers in Asia and South America who specialise in the production of particular parts and products. The supply chain of over 330 suppliers in mainland China allows Apple to produce high volumes of electronics but still provide customers with variety of choice (value adding). (10)
Influence of variation in demand – in 2016, the demand for the iPad Pro exceeded the initial supply during the launch. The ability of Apple to produce more iPhone 5’s in a short period of time (to meet the excess demand) depended on the suppliers and their ability to adjust their operations. (74)
Influence of visibility - customer contact and feedback is important to the improvement of Apple products. The iPhone 6 has two versions with many of the glitches which appeared in the 6 were not evident in the 6S. Customer feedback and research is important in the innovation process. (72)
b) Sequencing and scheduling, gantt charts, critical path analysis
The order-delivery sequence or the critical path analysis of purchasing an Apple iPad Pro is (13):
- Processing – Apple website sale, verification and notification, manufacturing/ customisation.
- Delivery (lead time) - consolidation (Fedex scheduled), transfer (Transpacific Cargo flights), de-consolidation (final hub and local trucks).
Apple have tracked an order-delivery sequence (length of time) of delivering an Apple iPad at 12 days, 18 hours and 8 minutes. This lead time is used as a scheduling and planning tool for management. (13)
c) Technology, task design and process layout
Technology - Apple suppliers use automation to compensate for unskilled and or inexperienced workers. Automation is not used to eliminate work that can be done manually. Automation is used for placement of small components that are difficult to perform and error prone. With the introduction of new products such as the Apple Watch automation is gradually being added. They are then able to refine and stabilise the process without committing to expensive computer aided manufacturing, capital and expenditures. (3)
Task Design – a skills audit helps to complete the production of the iPad Pro in the most efficient and effective timeframe. Recruitment of staff is based on specific duties selected for employees. Eg. unskilled workers have specific functions with no shared tasks. They are highly supervised and the speed of work is quick.
Process Layout – due to cheaper labour costs Apple suppliers use a product layout for their manufacturing. Mass production with high volumes involve unskilled labour to form long assembly lines with little automation and very short work times. (3)
d) Monitoring, control and improvement
With Apple suppliers, there is a high level of supervision as many workers are unskilled and line configurations of tasks need continual monitoring and control checks to improve time management, minimise poor process flows, assess and meet KPI’s, improve quality, cost and efficiency. Technicians are of high importance for quality control. (16)
Quality Improvement - the iPhone 6 has a precision metal band, which is prone to scratching. Continuous customer feedback and frustrations about receiving new products with scratches have led to tighter production standards and tougher quality tests and controls. Subsequently, longer lead times were a result. (14)
a) Customer service
Holistic approach - Apple aims to exceed customer expectations before, during and after the purchase of their products (10):
- The buying experience: plenty of retail staff on hand to help with technical advice and listen to feedback.
- Packaging: all products come with technical and product support.
- The users experience: product and technical support via the web or in retail stores.
- Consistent support: Genius bars and online operators.
Apple aim to minimise claims by creating quality products. The promise - all Apple products have a 1-year warranty/guarantee. There are options for consumers to purchase longer warranty periods. If Apple products are genuinely faulty customers concerns can be voiced at Genius bars, assessed by technical staff and replacements are made (3).
To be an Apple “Authorised Service Provider” the following performance metrics have to be met (3):
- Quality and flexibility – (first time fix) providers must successfully repair products the first time. Apple not only expect their products to be reliable but reliable with service as well.
- Speed – (repair turnaround time) how quickly repairs are returned after service.
- Dependability – refers to the number of days it takes to ship in a replacement part. Plan for a lead time on the repair to manage customer expectations. It needs to be consistent for all customers.
- Customisation – the ability to provide a service to suit customer’s needs and time frames.
- Cost - (parts per repair) measure the average number of parts used per repair so fixed and variable costings can be monitored.
4.2. New product or service design and development
For the Apple Watch launched in 2015/2016 (61):
1. Market research, product concept and development – based on customer feedback and innovation of the products Apple developed and launched the Apple Watch concept based on customers wanting more convenience.
2. Product and quality design – the goal was to have a watch with all the trimmings. Apple engineers spent months living out of hotel rooms in order to be close to suppliers and manufacturers, helping to tweak the industrial processes that translate prototypes into mass-produced devices. (16)
3. Testing and assessment – assessing customer feedback, glitches in software and the design of the Apple Watch lends its self to the improvement of future models.
4. Product refinement – testing the Apple Watch in 2014 led to developments of a second model of Apple Watches. Tangible advantages such as more features and larger storage capacity. (74)
5. Product launch and distribution – late 2015, the launch of the Apple Watch was delayed to allow the launch of the iPad Pro to stand-alone. The aim was to avoid any other products detracting from the launch of the iPad Pro. (73)
4.3. Supply chain management – logistics, e-commerce, global sourcing
Apple has built an ecosystem where it exerts control over nearly every piece of the supply chain, from design to retail store. Because of its volume Apple gets discounts on parts, manufacturing capacity, and air freight. (16)
Apple have an operational edge over other brands as they are able to handle massive product launches without having to warehouse and maintain large, profit-sapping inventories. Apple products are in high (consumer) demand. Inputs then need to be of good quality, production levels need to flexible, lead times need to be quicker than others, costs need to be competitive with other leading brands. (16)
b) Global Sourcing
Supplier rationalisation – Apple have a variety of suppliers, which cope with the large volumes of production. Samsung is one of Apple's major suppliers. It supplies multiple components, including flash memory, which is used for storing data content; the mobile DRAM, used for multi-tasking various applications in devices; and the application processors which are responsible for controlling and keeping the whole device running. (79) Despite being a competitor to Apple in the mobile phones market, Samsung uses its supplier status to reduce its own component manufacturing costs via bulk production. The tactic ensures availability, cost minimisation, flexibility and low prices for Apple and Samsung —and sometimes limits the options for everyone else. (16)
Backward vertical integration – Apple has its own stores to ensure that its products are displayed, sold, and supported on the shop floor in a manner that is consistent with its brand values. It doesn’t trust other retailers to do it.
Cost minimisation – Apple used the internet to procure over 330 Apple suppliers based in mainland China. Apple receive discounts based on the large volume that they produce in mainland China. (3) Life as an Apple supplier is lucrative because of the high volumes but there are strings attached. When Apple asks for a price quote for parts such as touch screens, it demands detailed accounting of how the manufacturer arrived at the quote. Including its estimates for material and labor costs, and its own projected profit. Apple requires many key suppliers to keep two weeks of inventory within a mile of Apple’s assembly plants in Asia (storage and warehousing), and sometimes delays payments.(16)
c) Logistics: Transportation
In Dec 2015, to ensure that the Apple iWatch would be widely available at Christmas, Apple buy up all the available holiday air freight space. This move handicaps rivals such as Nixon that later wanted to book air transport. (71)
d) E-commerce and e-procurement
With the help of Apple.com sales increase from year to year. Apple realised it could pack so many of the diminutive music players on planes that it became economical to ship them directly from Chinese factories to consumers’ doors (material handling and packaging). (16)
4.4. Outsourcing – advantages and disadvantages
a) Apple use a variety of outsourcing options for non core business functions:
- Creation of shared service centres (in house marketing)
- Use of fee for service arrangements (freight suppliers like Fedex)
- ‘Build and operate – transfer’ approach (Apple retail outlets)
b) The advantages of outsourcing for Apple are:
- Simplification – specific suppliers for certain products.
- Efficiency and cost savings – large volumes of product. More standardisation than customisation.
- Increase process capability – purchasing innovative machinery for production using global suppliers.
- Increase accountability – supplier responsibility guidelines.
- Access to resources – unskilled workers in overseas countries.
- Capacity to focus on core business.
Strategic benefits – by having suppliers not only in Asia but in South America, partnerships are built and there is the ability to produce in different time zones. (16)
4.5.Technology – leading edge, established
Leading edge – In 2016, Reports suggest that Apple is developing an electric iCar to rival Tesla. With reports that Apple is negotiating with BMW, and poaching Samsung employees (especially battery specialists) and reassigning large numbers of staff for its Project Titan. (80)
Established - iOS is the operating system that runs on iPhone, Mac and iPad devices. The operating system manages the device hardware and provides the technologies required to implement apps. The operating system also syncs with various system apps, such as Phone, Mail, and Safari. Apple provide a standard system to service the user. (18)
4.6. Inventory management
High inventory turnover (COGS/Average inventory 69.4 vs. Dell 35.7) and the number of days in which inventory is warehoused is very low (No. of days/Inventory turnover 5.3 vs. Dell 10.2) for Apple suppliers. Just in time inventory management is employed as once products are ordered online the product is shipped directly from China, and Apple doesn’t even look at the product. This reduces lead times, demands are met quickly, Apple avoids damage or warehousing costs and it minimises the chance of stock becoming obsolete. (19)
4.7. Quality management
Apple requires a commitment to rigorous quality assurance. This ensures the highest standards of total quality management. The ideal suppliers are those who understand Apple’s culture, standards and expectations. Suppliers who take the time to learn about and understand Apple’s business and look for ways to add value. These suppliers know the importance of making and meeting commitments and delivering the highest quality goods/services. Apple’s suppliers must understand this dynamic, apply ongoing improvement and be flexible in responding to changing business conditions. Above all, Apple values innovation. (22)
Control checks - Apple employs a secure online database that has regularly updated information on current and potential suppliers. The Supplier Information Database (SID) enables Apple procurement professionals to access key information about potential and current suppliers, including capabilities, Supplier Diversity certifications, product/service descriptions, Universal Standard Products and Services Classification (UNSPSC) codes and contact information. (22) In 2015 Apple performed 633 audits covering over 1.6 million workers. (11)
4.8. Overcoming resistance to change
Ever since the 1980’s when Steve Jobs returned to Apple the ethos has always been to invest in innovation and change. Since Jobs return in the 1980’s executive staff have been made redundant, new equipment have been procured, change agents have been introduced and all current and new staff are continually retrained in new technology. Supply chains have been continually reorganised and any sign of inertia from suppliers/staff have never been tolerated. Supplier development and building supportive environments has been the key strengths both for product innovation and cost reduction. Any resistance would mean that suppliers will not fair at all in Apple’s plans.
4.9. Global factors
a) Global sourcing
Apple’s supply chain management sources suitable suppliers (e-procurement), which give the business cost advantages without being constrained by location. (23)
b) Economies of scale
Having over 300 suppliers in China, Apple outsources large overseas production to gain lower unit costs, economies of scale and quick lead times. Giving Apple a competitive advantage. (11)
c) Scanning and learning
Apple focus on continual innovation and research. By updating their “Supplier Information Database (SID)” the company is always looking for new ideas. (22)
d) Research and development
Apple’s industrial design team are used to moving to supplier sites to support suppliers in their effort to meet Apple design requirements which are key to the product’s success. (23)
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Who we are – PFC Finance and Practice Finance Company are a trading style of The Practice Loan Company PLC. The Practice Loan Company
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