Supply chain

Managing Risk in the Global Supply Chain
Supply Chain Management Review, August 2015

2015 Supply Chain Top 25
Gartner, May 2015

Apple has received multiple awards for its supply chain strategy. Recently, for example, Gartner, a US-based research and advisory company, awarded Apple its inaugural “Masters” award after previously ranking Apple No. 1 on its “Top 25 Supply Chains” list for the past 5 years.

One key aspect of Apple’s supply chain is its use of multiple suppliers for the same component. The Governance Leadership Centre reviews this aspect of Apple’s supply chain strategy to examine the role that boards and directors can play in enhancing supply chain management and organisational performance.

Apple’s use of multiple suppliers for the same component in its supply chain strategy

Apple has an extensive network of third party suppliers in its supply chain. According to recent research, Apple has 785 suppliers in 31 countries worldwide, 349 of which are based in China.

According to Apple’s “2015 Supplier List”, 97% of its supply chain (including procurement, manufacture and assembly) is accounted for by its top 200 suppliers. This would imply that 585 of Apple’s suppliers account for the remaining 3% of its supply chain, providing it with a significant degree of latent capacity.

Apple has a number of exclusive long-term agreements with its key suppliers and uses prepayments to negotiate favourable pricing terms, secure strategic raw materials and guarantee high volumes of production.

Apple has also diversified its supply chain to include new manufacturing partners in China and Taiwan. It has also secured multiple suppliers for key components relating to new products (such as the Apple Watch).

In addition to diversification, Apple invests in customised manufacturing equipment and automated assembly and milling technology. It has also recently announced environmental programs with its Chinese manufacturing partners to offset carbon emissions and utilise more clean energy.

Apple’s strategy of using multiple suppliers for the same component provides it with key advantages over its competitors. Commentators note that this strategy allows it to:

  • mitigate supply chain disruptions and delays, allowing it to maintain gross-margins;

  • adjust ordering ratios with existing suppliers, therefore minimising the risk of third party issues associated with volume dependency;

  • quickly increase production capacity to respond to changes in consumer demand;

  • encourage lower supply costs as multiple suppliers compete for its business;

  • process large volumes of pre-orders, which it then analyses to create demand forecasts; and

  • prevent competitors from utilising the same production capacity through exclusive relationships with suppliers.

Apple’s Chief Executive Officer, Tim Cook, has been described as a “supply chain specialist”. He is credited for streamlining inefficient areas of Apple’s supply chain and using inventory tracking mechanisms to reduce its number of suppliers and warehouses.

What can Australian boards and directors learn from Apple’s supply chain strategy?

According to a recent report from Deloitte, organisations with effectively governed third party relationships can outperform their peers with an additional 4-5% Return on Equity (ROE).

There are a number of ways in which boards can learn from Apple’s supply chain model to enhance their supply chain management and organisational performance:

  1. Consider the benefits of multiple suppliers for the same component: Boards should encourage management to consider the use of alternative suppliers and whether this may reduce single supplier risks or provide an avenue for improving performance. For example, a recent survey of 150 supply chain executives by Haslam College of Business’ Global Supply Chain Institute found that more than a third of individuals surveyed (38%) stated that their organisations’ supply chains sourced from a single supplier and only half (53%) considered their organisations had a ‘back-up’ plan due to natural disasters or major equipment failure.

  2. Measure and evaluate performance: Boards should closely monitor supply chain performance by analysing financial metrics such as inventory turnover and the cash conversion cycle (CCC). These metrics can be used by boards to evaluate whether management is using the company’s financial resources efficiently.

  3. Encourage a compliance culture and the use of regular audits: Boards should encourage compliance cultures within their organisations and the use of regular audits. For example, Apple has a strict code of conduct and standards that all its subsidiaries, affiliates and subcontractors are required to abide by. It also produces an annual “Supplier Responsibility Progress Report”, which outlines the number of audits it has undertaken and provides details on its labour and human rights initiatives, such as repayments to workers for unpaid overtime or due to excessive recruitment fees charged by brokers.

“More progressive global organisations are now starting to demonstrate bimodal thinking around how to maximise the opportunities out of the third party extended ecosystem while managing the related risks at the same time”, suggests Deloitte.

The GLC has previously interviewed Dr Richard Welford, chair of consulting firm CSR Asia, about the role of directors in managing supply chain risks.