This month’s highlights from our Governance Leadership Centre where we showcase research from around the world.
Apple’s supply chain
Apple has received multiple awards for its supply chain strategy. Recently, Gartner, a US-based research and advisory company, awarded Apple its inaugural “Masters” award after previously ranking Apple number one on its “Top 25 Supply Chains” list for the past five years.
Apple has an extensive network of third-party suppliers in its supply chain. According to recent research, it has 785 suppliers in 31 countries worldwide, 349 of which are based in China.
Apple has a number of exclusive long-term agreements with its key suppliers and uses pre-payments to negotiate favourable pricing terms, secure strategic raw materials and guarantee high volumes of production.
It has also diversified its supply chain to include new manufacturing partners in China and Taiwan, and secured multiple suppliers for key components relating to new products.
Boards should encourage management to consider the use of alternative suppliers.
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 use 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.
- Prevent competitors from using the same production capacity through exclusive relationships with suppliers.
Apple CEO Tim Cook has been described as a “supply chain specialist”. He is credited with streamlining inefficient areas of Apple’s supply chain and using inventory tracking mechanisms to reduce its number of suppliers and warehouses.
What can boards learn?
According to a recent report from Deloitte, organisations with effectively governed third-party relationships can outperform their peers with an additional 4 to 5 per cent 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:
- 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 per cent) stated that their organisations’ supply chains sourced from a single supplier and only half (53 per cent) considered their organisations had a “back-up” plan for natural disasters or major equipment failure.
- Measure and evaluate performance: Boards should monitor supply chain performance by analysing financial metrics such as inventory turnover and the cash conversion cycle. These metrics can be used by boards to evaluate whether management is using the company’s financial resources efficiently.
- Encourage a compliance culture: 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.