Executive Briefings

Apple's Supply-Chain Challenge: Keep It Secret. Then Tell the World.

In Stanley Kubrick's Cold War black comedy "Dr. Strangelove," the Soviets have developed a devastating "Doomsday Device," to be triggered by a nuclear attack on the U.S.S.R. It's supposed to act as a deterrent, but has been kept a secret. Asks an exasperated American president of the Russian ambassador: "Why didn't you tell the world?" To which the ambassador replies: "The Premier loves surprises."

Apple's Supply-Chain Challenge: Keep It Secret. Then Tell the World.

Secrecy and publicity: successful ventures need both. And while it lacks the apocalyptic qualities of a world-killing nuclear device, the Apple iPhone finds itself caught in this conundrum.

In a sense, Apple is a victim of its own success. “It has created a very optimized supply chain, based in large part on a heightened amount of secrecy,” says Paul Noel, senior vice president of supply chain management solutions with spend-management software vendor Ivalua. “But marketing wants a big splash.”

Basic supply-chain theory dictates that Apple diversify its manufacturing base to some extent, to minimize the risk of disruption and ensure enough product to satisfy stampeding consumers. But the broader its team of suppliers, the greater the likelihood of product details leaking prior to official unveiling. And Apple, as you know, loves secrecy.

It’s a culture that was fostered by the late Steve Jobs, and continued under the leadership of Tim Cook (himself a chief architect of Apple’s global supply chain). The company carefully times product launches to maximize media frenzy, and only occasionally stumbles with a premature revelation. Much of its success can be credited to a tightly controlled supply chain and reliance on a small number of manufacturers – in the case of the iPhone, Taiwan’s Foxconn Technology Group.

The production and recent launch of the iPhone 6 was no different. Once again, Apple found itself scrambling to fulfill a level of demand that was entirely anticipated. Foxconn’s plant in China reportedly was running more than 100 production lines around the clock, with 200,000 workers tasked to turn out 540,000 units a day. And still it wasn’t enough.

A longtime observer of the Apple Way might suggest that the shortfall was deliberate. Doesn’t a company create even more buzz when consumers can’t get their hands on its product? (Remember the Tickle Me Elmo mania?) “I wouldn’t put it past the marketing guys,” says Noel. “It’s part of the calculation. You’re going to have some bad press, but it’s still press, and that’s a positive.”

In the long run, though, a manufacturer that can’t satisfy demand is leaving huge amounts of money on the factory floor – especially during the narrow window defined by the Christmas shopping season. Better to sell as many units as possible, within the limits of workers’ sanity.

For Apple, which is making more money than ever, the underlying supply problem has grown worse. Output levels for the iPhone 6 Plus are said to be around 50 to 60 percent, compared with 85 percent for the iPhone 5. Yet Foxconn remains the sole producer – the basket that holds all of Apple’s eggs.

“This is not a box you can work your way out of,” says Noel, offering a somewhat different metaphor. “It’s something that you have to work your way through.” He suggests that Apple might have mitigated the problem by having other manufacturers poised to bolster supply as soon as details of the product are officially revealed. Following up with additional production capacity wouldn’t solve the immediate demand crunch, but it would lessen the lag time for satisfying the entire market.

In fact, says Noel, Apple has diversified production before, most notably with the iPhone 5. The company isn’t necessarily a slave to its own culture of secrecy and exclusivity. Even the most exquisitely designed supply chains need a measure of flexibility to stay sharp.

The other risk of a more extensive producer pool is an erosion of product quality. But Apple faces that problem already – recall the reception problems of the iPhone 4, and the supposed bendability of the iPhone 6. (The latter turned out to be less of an issue than originally reported.) In any case, Noel doesn’t see that as a major disrupter.

“It’s much more mitigatable than the secrecy risk,” he says. “With quality control, you can actually throw more people at it. They have bigger problems with [other] competing priorities.”

The place where Cook and his team really excel is in the upstream supply chain. At various points in the development of its products, Apple has moved aggressively to secure adequate supplies of key components such as flash memory and Sapphire glass – in some cases snapping up the world’s supply. At such times, availability trumps exclusivity. “That’s probably where more of their focus is, going further upstream and ensuring supply all the way through,” says Noel. The alternative is “a line-down situation.”

When it comes to relying exclusively on Foxconn for assembly, however, margin-obsessed Apple has to be thinking about the steep rise in factory wages that China has experienced in recent years. Coupled with the obvious image boost that comes with manufacturing domestically, the trend could motivate Apple to shift more production back to the U.S., or at least Mexico. In the process, it would have to find partners that can turn out product at the massive scale of the Foxconn operation, while ensuring strict levels of quality and, of course, secrecy.

Because Apple loves surprises.

Comment on This Article

Secrecy and publicity: successful ventures need both. And while it lacks the apocalyptic qualities of a world-killing nuclear device, the Apple iPhone finds itself caught in this conundrum.

In a sense, Apple is a victim of its own success. “It has created a very optimized supply chain, based in large part on a heightened amount of secrecy,” says Paul Noel, senior vice president of supply chain management solutions with spend-management software vendor Ivalua. “But marketing wants a big splash.”

Basic supply-chain theory dictates that Apple diversify its manufacturing base to some extent, to minimize the risk of disruption and ensure enough product to satisfy stampeding consumers. But the broader its team of suppliers, the greater the likelihood of product details leaking prior to official unveiling. And Apple, as you know, loves secrecy.

It’s a culture that was fostered by the late Steve Jobs, and continued under the leadership of Tim Cook (himself a chief architect of Apple’s global supply chain). The company carefully times product launches to maximize media frenzy, and only occasionally stumbles with a premature revelation. Much of its success can be credited to a tightly controlled supply chain and reliance on a small number of manufacturers – in the case of the iPhone, Taiwan’s Foxconn Technology Group.

The production and recent launch of the iPhone 6 was no different. Once again, Apple found itself scrambling to fulfill a level of demand that was entirely anticipated. Foxconn’s plant in China reportedly was running more than 100 production lines around the clock, with 200,000 workers tasked to turn out 540,000 units a day. And still it wasn’t enough.

A longtime observer of the Apple Way might suggest that the shortfall was deliberate. Doesn’t a company create even more buzz when consumers can’t get their hands on its product? (Remember the Tickle Me Elmo mania?) “I wouldn’t put it past the marketing guys,” says Noel. “It’s part of the calculation. You’re going to have some bad press, but it’s still press, and that’s a positive.”

In the long run, though, a manufacturer that can’t satisfy demand is leaving huge amounts of money on the factory floor – especially during the narrow window defined by the Christmas shopping season. Better to sell as many units as possible, within the limits of workers’ sanity.

For Apple, which is making more money than ever, the underlying supply problem has grown worse. Output levels for the iPhone 6 Plus are said to be around 50 to 60 percent, compared with 85 percent for the iPhone 5. Yet Foxconn remains the sole producer – the basket that holds all of Apple’s eggs.

“This is not a box you can work your way out of,” says Noel, offering a somewhat different metaphor. “It’s something that you have to work your way through.” He suggests that Apple might have mitigated the problem by having other manufacturers poised to bolster supply as soon as details of the product are officially revealed. Following up with additional production capacity wouldn’t solve the immediate demand crunch, but it would lessen the lag time for satisfying the entire market.

In fact, says Noel, Apple has diversified production before, most notably with the iPhone 5. The company isn’t necessarily a slave to its own culture of secrecy and exclusivity. Even the most exquisitely designed supply chains need a measure of flexibility to stay sharp.

The other risk of a more extensive producer pool is an erosion of product quality. But Apple faces that problem already – recall the reception problems of the iPhone 4, and the supposed bendability of the iPhone 6. (The latter turned out to be less of an issue than originally reported.) In any case, Noel doesn’t see that as a major disrupter.

“It’s much more mitigatable than the secrecy risk,” he says. “With quality control, you can actually throw more people at it. They have bigger problems with [other] competing priorities.”

The place where Cook and his team really excel is in the upstream supply chain. At various points in the development of its products, Apple has moved aggressively to secure adequate supplies of key components such as flash memory and Sapphire glass – in some cases snapping up the world’s supply. At such times, availability trumps exclusivity. “That’s probably where more of their focus is, going further upstream and ensuring supply all the way through,” says Noel. The alternative is “a line-down situation.”

When it comes to relying exclusively on Foxconn for assembly, however, margin-obsessed Apple has to be thinking about the steep rise in factory wages that China has experienced in recent years. Coupled with the obvious image boost that comes with manufacturing domestically, the trend could motivate Apple to shift more production back to the U.S., or at least Mexico. In the process, it would have to find partners that can turn out product at the massive scale of the Foxconn operation, while ensuring strict levels of quality and, of course, secrecy.

Because Apple loves surprises.

Comment on This Article

Apple's Supply-Chain Challenge: Keep It Secret. Then Tell the World.