Spend Matters welcomes another guest post from Ashwin Kumar of GEP.
In 2012 alone, Apple sold more than 120 million iPhones, 60 million iPads, 35 million iPods, 15 million Macs – staggering numbers, to say the least. The success of the world’s biggest technology company has come on the back of a robust supply chain network. Foxconn, a Taiwanese company, is one of its strategic supply partners that churn out tens of thousands of its flagship products each day. Manufacturing for Apple isn’t easy. Sales estimates are difficult to forecast, and for such complex products, the time to market is extremely short. As Apple needed Foxconn and Foxconn needed Apple, the relationship was mutually beneficial. It was a fine example of procurement playing an instrumental role in managing growth.
Recently, news surfaced that Apple is planning to award more business to a relatively unknown company called Pegatron. This company already manufactures iPad Minis and some versions of the iPhone. It is perceived as a step towards achieving better stability in Apple’s supply chain. Though the jury is still out on the success of such a move, it nevertheless provides some pointers on the procurement’s alignment with overall organizational goals.
- Risk Diversification: Many analysts feel that the motivation behind the addition of a new supplier is to diversify supply chain risks. A bulging product portfolio, burgeoning growth from the much anticipated “cheaper” iPhone, increasing design complexities and ever decreasing time to market necessitate frequent revisits to supply chain strategy and supply partners. Addition of a new supplier will provide a greater flexibility and Apple can react faster to supply chain disruptions, should they arise. As a result of its strong commitment towards safe and ethical manufacturing practices, Apple needs to be in a position to sever ties with any supplier that doesn’t comply with its Code of Conduct. It doesn’t mean non-compliance from Foxconn but a mere option to exercise—if needed.
- Capacity Management: Apple has a history of competing with multiple companies across the value chain. Unlike Google, Apple cannot afford the luxury of working with multiple handset partners such as Motorola, Samsung, LG, etc. Since Apple’s proprietary OS is closely linked to its hardware design, it needs to manage handset capacity issues as well. To succeed in emerging markets such as China and India (one the world’s largest user base), Apple needs to ramp up its production capacity rather quickly. Having a second supplier will ease some of the capacity constraints and help Apple focus on its core business – developing groundbreaking technologies.
- Margins sustenance: With the advent of Android and successful market penetration of Samsung and other competitors, Apple is planning to introduce stripped down versions of its flagship products at reduced prices to increase market share. Increasing freight costs, both due to market pressures and Apple’s product choices, do not help either. To maintain the high levels of profitability as the company embarks on the next phase of growth, it needs its suppliers to help reduce costs. Positioning Pegatron as a reliable supplier will help Apple gain strong bargaining leverage. Given the steep manufacturing learning curve that Apple has gained in the last five years, it will be relatively easier to replicate these manufacturing practices for its simpler and cheaper products – at a relatively lower cost.
- Supplier Innovation: A new supplier will also be more willing to invest in capital to fund growth as opposed to a long serving incumbent who may have reservations on the returns on such an investment. In order to increase its share of Apple’s business, Pegatron may strive to improve operational efficiencies in an effort to differentiate itself from its competitor. As a customer, Apple will stand to gain from such an arrangement.
While it is too early to understand the exact motivation of Apple’s alleged partnership with Pegatron, it does indicate Apple’s willingness to tweak procurement strategy and align with the larger organizational strategy. It strongly underlines the company’s commitment to innovation. What we have here is a classic example of procurement playing an instrumental role in managing growth.
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