Still the #1 Supply Chain Firm? Apple Plays Catch-Up with Its “Buy-Sell” Program

In the supply chain, Apple has always been known for its product innovation prowess and its ability to work closely with massive OEM partners (i.e., the large contract manufacturers like FoxConn, Flextronics, etc.). And they’re known for locking down key upstream component technology (and related capacity).

But, as Apple moves down market with its products (take the iPhone 5C), target costs also need to come down, and Apple is starting to have to live up to its reputation as the “#1 supply chain firm,” as voted by Gartner. I won’t wade into that debate, neither in regards to ranking (i.e., are they really better than, say, Amazon?), nor to process. However, I will say that maybe there should be a similar process for just the procurement aspect… oh, wait, I used to do that in my benchmarking days at The Hackett Group. Nah. Supply chains, procurement organizations, and third-party procurement providers share a common trait in attempting to "mass customize" their offerings to their unique stakeholder segments. As such, a one-dimensional list or a two-dimensional quadrant to plot them in a one-size-fits-all approach is not wise (as we've written about here and here). But I digress.

If Apple is going to start “turning over every stone” for profitability improvements, it has to look more creatively at its broader multi-tier supply chain – especially on the inbound side. We could not agree more, and have recently published an extensive, 23-page research report (Re-inventing Direct Procurement, which is available for free download here) on this very topic of integrating direct procurement deeply with the multi-tier inbound supply network.

I’m not going to talk about Apple’s well-known third-party management issues, as highlighted in the recent Business Week investigative report on one Nepalese factory worker’s plight through a shadowy multi-tier labor supply chain. Rather, I’ll talk about the multi-tier materials supply chain that is often managed much more carefully than the human aspects of the supply chain.

Digitimes has published an article on the large OEMs beginning to cede procurement control (i.e., sourcing and supplier management – starting at the time of design) to Apple, who is taking a more prominent role in tier-2 and tier-3 supply management. OEMs will no longer be making money on the mark-up – and Apple is helping them re-coup the margin by doing a likely temporary “price-up” – but should make that back and then some. That is, if it can manage this process well, which includes upstream design and sourcing (and supplier management), as well as downstream multi-tier supply chain orchestration from supply planning all the way down to the true transactional execution level.

In essence, Apple is taking an old play out of the playbook that HP drew up over a decade ago with its “Buy-Sell” program. In our direct procurement report, we summarize some of the program highlights:

Buy-Sell has allowed HP to design a supply chain that is heavily outsourced to ODMs and CMs, but they still retain supplier control and collaboration with the tier 2 and tier 3 suppliers.  HP has been deliberate and adamant about retaining key engineering and manufacturing staff (augmented by third parties) in core processes/technologies, having them work alongside procurement and other supply chain staff to continually and cross-functionally optimize the extended inbound supply chain.  Most people know the Buy-Sell program for how HP uses buying power to negotiate with tier 2 suppliers, and then uses ‘price masking’ to keep favorable pricing proprietary (so CMs/ODMs/competitors can’t lean on suppliers to demand comparable pricing—and reduce HP’s advantage).

We then dive into some of the implementation mechanics, tying it to the other 10 key direct procurement competencies to master. As Apple gets deeper into the wild and wonderful world of price masking, multi-tier supplier management (from both a labor and component standpoint), and multi-tier orchestration, there are a lot of capabilities to build. Think of it as a mash-up of multi-tier collaborative planning (capacity, inventory, and transportation tied dynamically into contracts) and multi-tier “collaborative execution” that is not just glorified drop-shipping and VMI, but also involving the suppliers fine-tuning the supply segments even within a particular upstream SKU (and feeds back into the planning processes).

This is an area where a supply chain provider like E2open plays well. I doubt though that secretive Apple would use a “COTS” (commercially available technology solution) to perform such a mission-critical activity – especially since some of Apple’s competitors and suppliers are also on the E2open network. I only say this because I’ve seen time and time again where an advanced pacesetter firm will evaluate a packaged solution and then build it itself (and/or contract out the custom work). The bottom line here is that there is NO single benchmark company in supply chain or procurement that excels at everything– including Apple. That said, it’s the relentless pursuit of improvement that keeps such firms in the lead, and if there is money staring at them, they might as well pass it on to the shareholders.

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