Ask the Chairman: Does Apple Need a Lower Cost Supply Chain Strategy?

Ask the Chairman: Does Apple Need a Lower Cost Supply Chain Strategy? image colorful AppleLogo 300x300This issue was recently raised by Sculley in an interview and others who have encouraged Apple to change its model to a lower cost supply chain so as to be better positioned to compete on price against Samsung and in emerging markets. Many analysts do not agree with this assessment and mention that the carrier subsidy model changes the cost dynamics in some markets (e.g. China and US) while in others that do not yet have this model (e.g. Brazil, Russia and India) Apple has enough of a profit margin already to allow it to come out with a cheaper option.

I would say that this question is not addressing the true challenge to Apple of competing in different markets. In the last few years, Apple’s customer value proposition has focused on product innovation and as a result the company outsources most of its manufacturing and logistics activities and its supply chain has been tuned to that customer value proposition by being fast and efficient. This entails shipping by air and other choices where speed and timeliness trump cost.

Now that the market is more mature, with solid competition and the innovation edge reduced, it may need to change its strategy and value proposition to create lower cost options. Even if the manufacturing cost structure supports this objective, it is not clear that the current logistics model would make this a profitable approach so there should be some adjustments made to the overall supply chain strategy to match the new value proposition.

Apple therefore needs to run multiple supply chains for these different offerings–one supply chain that supports innovations and therefore focused on speed and another supply chain for lower priced products and therefore focused on cost. The challenge is to design a strategy that takes advantage of synergies between the supply chains so that Apple can reduce complexity and benefit from economies of scale.

A similar challenge was faced by Dell in 2008 when it first started selling in the retail channel and grew this business to 15 percent of all units sold in 2010. Initially, Dell utilized the same supply chain in this new channel that had served it so well in its traditional direct-to-consumer business. But some challenges emerged very quickly. For example, in its direct-to-consumer model Dell’s customer value proposition is consumer experience and as a result, the supply chain is focused on responsiveness through an assemble-to-order strategy. However, when Dell sells through retailers, it competes on price with other computer vendors that have more nimble supply chains. Thus, here Dell had to design a supply chain that is focused on cost and efficiency rather than responsiveness.

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Working with Dell, we came up with a supply chain segmentation strategy that not only matched the operations and supply chain with the customer value proposition of each segment, but also built synergies across the different supply chains. This had a big impact on Dell’s supply chain and business performance as is summarized in the table below, see also One Size Does Not Fit All.

Ask the Chairman: Does Apple Need a Lower Cost Supply Chain Strategy? image Screen Shot 2013 01 22 at 11.05.13 AM1

Ask the Chairman: Does Apple Need a Lower Cost Supply Chain Strategy? image dc20fffd 21e3 4e6c a3f5 cb6f768ef40f1

Ask the Chairman: Does Apple Need a Lower Cost Supply Chain Strategy? image b2e7d733 2448 4f0d b22f 0958cdee02a518

 

Written by David Simchi-Levi, Chairman at OPS Rules Management Consultants

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