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Can Apple's Supply Chain Handle the Apple Watch?

Another Apple product. Another stampede to buy it.

Can Apple’s Supply Chain Handle the Apple Watch?

This time it's the Apple Watch, the company’s first attempt at a wearable computer that lets you monitor your heart rate, track your exercise program, pay for goods, chat with friends, make calls, send and receive e-mails, watch the news, open hotel room doors, and manage any number of other miscellaneous daily tasks. (Including, it should be said, checking the time.) The device was thought to be something of a gamble for Apple, raising questions about whether consumers would pay anywhere from $349 to $17,000 for the company’s latest attempt to digitize their lives.

As it turns out, there was no need to worry on Apple's behalf. The watch doesn't go on sale in stores until April 24, but preorders have already guaranteed that it's a hit. While Apple hasn't released any numbers, initial stocks of most models sold out almost immediately. Based on receipts from online activity, Slice Intelligence reported that 957,000 people preordered the Apple Watch on April 10, the day on which Apple began accepting orders. (The number doesn’t include those from Europe or China.) In fact, they purchased an average of 1.3 units per person, suggesting either that they were eager to share the new device with loved ones, or were planning on putting the extra watches on eBay.

BMO Capital Markets had predicted that Apple would sell 19 million Apple Watches in 2015. Other estimates have projected shipments of 4.8 million units in the first quarter of the year, and up to 9 million in the second quarter. Evidently consumers aren’t being stopped by mixed reviews, or the necessity to link an iPhone to the watch in order to get any value from it.

Whatever the final numbers turn out to be, the success of the Apple Watch has deep implications for the company’s supply chain. Start with the high-end Apple Watch Edition, of which there are eight models, ranging in price from $10,000 to $17,000. All incorporate an estimated 2 troy ounces (62.2 grams) of 18-karat gold within the case. If Apple hits its sales targets for those models, it could need up to 746 tons of gold a year, or approximately 30 percent of the world’s annual production, according to spend-management software vendor Ivalua.

It’s hard to say where all that gold will come from, as Apple pursues its goal of servicing the luxury market for consumer electronics. (In a sense, Apple has always sold luxury products, priced higher than those of most competitors, and never available at a discount.) Paul Noel, senior vice president of supply chain management solutions with Ivalua, says the policy creates a tension between the needs of marketing and the ability of the supply chain to satisfy them. For Apple, the watch’s release will further highlight the issue of conflict minerals, of which gold is one, when sourced from certain mines in the Democratic Republic of the Congo. In the wake of the device’s debut, it will be interesting to see the company’s reports to the U.S. Securities and Exchange Commission, which requires all manufacturers to report annually on the presence in their products of gold, tin, tungsten or tantalum from the DRC.

The other, less expensive models of the Apple Watch present their own challenges to the company’s supply chain, starting with who will make them. At first, it appeared that Apple had secured just one manufacturer, Taiwan-based Quanta Computer, to produce the entire supply of watches. Now, Foxconn reportedly has been added to the manufacturing mix. It is a long-time vendor of Apple, turning out the iPad and iPhone, among many other popular electronic devices. Yet Foxconn has courted controversy for its allegedly brutal labor practices, with some factories in China experiencing riots and worker suicides. As production of the Apple Watch ramps up, Apple will have to double down on its stated policy of ensuring fair working conditions at the plants of its contract manufacturers.

Mickey North Rizza, vice president of strategic services with spend-analysis specialist BravoSolution, sees the multiple-vendor strategy as a means for Apple to avoid becoming too dependent on any one manufacturer. “They can’t put all their eggs in one basket,” she says. Of course, it could also be a matter of Apple needing more than one producer to meet its ambitious sales targets.

Rizza says any company launching a new product is going to experience growing pains in its supplier-development program. High-tech devices are constantly being tweaked and improved, even as manufacturers struggle to accommodate the sheer volume of throughput.

With the Apple Watch, the company’s supply chain is further complicated by the large number of models and variations in such elements as metal, color and style of wristband. Apple can’t know precisely in advance how many consumers will opt for aluminum, stainless steel or gold (aluminum, used in the cheapest models, appears to be winning out in preorders). According to Rizza, Apple is likely to be pursuing a postponement strategy, whereby all watches are manufactured identically up to a certain stage, then customized when the company has a better idea of actual demand for each model. Think of automakers that produce one undercarriage and drivetrain, then add different body types and options to differentiate among their various models and price points.

One interesting aspect of the Apple sales strategy is the way in which the company uses a supposedly negative tendency – the persistent inability to fill all orders of a new product – to boost that item’s image and popularity down the line. It’s no coincidence that Apple, known globally as one of the world’s greatest supply-chain experts, runs out of stock every time it introduces a new or updated device. The company only ends up fueling consumer mania for its products.

Nevertheless, Apple faces some very real supply-chain issues in satisfying demand for the Apple Watch, in all of its iterations. Whether the device’s popularity is real or manufactured, and can be sustained over the long term, will become clearer in the months ahead. So will Apple’s ability to maintain its reputation as the possessor of a best-in-class supply chain.

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This time it's the Apple Watch, the company’s first attempt at a wearable computer that lets you monitor your heart rate, track your exercise program, pay for goods, chat with friends, make calls, send and receive e-mails, watch the news, open hotel room doors, and manage any number of other miscellaneous daily tasks. (Including, it should be said, checking the time.) The device was thought to be something of a gamble for Apple, raising questions about whether consumers would pay anywhere from $349 to $17,000 for the company’s latest attempt to digitize their lives.

As it turns out, there was no need to worry on Apple's behalf. The watch doesn't go on sale in stores until April 24, but preorders have already guaranteed that it's a hit. While Apple hasn't released any numbers, initial stocks of most models sold out almost immediately. Based on receipts from online activity, Slice Intelligence reported that 957,000 people preordered the Apple Watch on April 10, the day on which Apple began accepting orders. (The number doesn’t include those from Europe or China.) In fact, they purchased an average of 1.3 units per person, suggesting either that they were eager to share the new device with loved ones, or were planning on putting the extra watches on eBay.

BMO Capital Markets had predicted that Apple would sell 19 million Apple Watches in 2015. Other estimates have projected shipments of 4.8 million units in the first quarter of the year, and up to 9 million in the second quarter. Evidently consumers aren’t being stopped by mixed reviews, or the necessity to link an iPhone to the watch in order to get any value from it.

Whatever the final numbers turn out to be, the success of the Apple Watch has deep implications for the company’s supply chain. Start with the high-end Apple Watch Edition, of which there are eight models, ranging in price from $10,000 to $17,000. All incorporate an estimated 2 troy ounces (62.2 grams) of 18-karat gold within the case. If Apple hits its sales targets for those models, it could need up to 746 tons of gold a year, or approximately 30 percent of the world’s annual production, according to spend-management software vendor Ivalua.

It’s hard to say where all that gold will come from, as Apple pursues its goal of servicing the luxury market for consumer electronics. (In a sense, Apple has always sold luxury products, priced higher than those of most competitors, and never available at a discount.) Paul Noel, senior vice president of supply chain management solutions with Ivalua, says the policy creates a tension between the needs of marketing and the ability of the supply chain to satisfy them. For Apple, the watch’s release will further highlight the issue of conflict minerals, of which gold is one, when sourced from certain mines in the Democratic Republic of the Congo. In the wake of the device’s debut, it will be interesting to see the company’s reports to the U.S. Securities and Exchange Commission, which requires all manufacturers to report annually on the presence in their products of gold, tin, tungsten or tantalum from the DRC.

The other, less expensive models of the Apple Watch present their own challenges to the company’s supply chain, starting with who will make them. At first, it appeared that Apple had secured just one manufacturer, Taiwan-based Quanta Computer, to produce the entire supply of watches. Now, Foxconn reportedly has been added to the manufacturing mix. It is a long-time vendor of Apple, turning out the iPad and iPhone, among many other popular electronic devices. Yet Foxconn has courted controversy for its allegedly brutal labor practices, with some factories in China experiencing riots and worker suicides. As production of the Apple Watch ramps up, Apple will have to double down on its stated policy of ensuring fair working conditions at the plants of its contract manufacturers.

Mickey North Rizza, vice president of strategic services with spend-analysis specialist BravoSolution, sees the multiple-vendor strategy as a means for Apple to avoid becoming too dependent on any one manufacturer. “They can’t put all their eggs in one basket,” she says. Of course, it could also be a matter of Apple needing more than one producer to meet its ambitious sales targets.

Rizza says any company launching a new product is going to experience growing pains in its supplier-development program. High-tech devices are constantly being tweaked and improved, even as manufacturers struggle to accommodate the sheer volume of throughput.

With the Apple Watch, the company’s supply chain is further complicated by the large number of models and variations in such elements as metal, color and style of wristband. Apple can’t know precisely in advance how many consumers will opt for aluminum, stainless steel or gold (aluminum, used in the cheapest models, appears to be winning out in preorders). According to Rizza, Apple is likely to be pursuing a postponement strategy, whereby all watches are manufactured identically up to a certain stage, then customized when the company has a better idea of actual demand for each model. Think of automakers that produce one undercarriage and drivetrain, then add different body types and options to differentiate among their various models and price points.

One interesting aspect of the Apple sales strategy is the way in which the company uses a supposedly negative tendency – the persistent inability to fill all orders of a new product – to boost that item’s image and popularity down the line. It’s no coincidence that Apple, known globally as one of the world’s greatest supply-chain experts, runs out of stock every time it introduces a new or updated device. The company only ends up fueling consumer mania for its products.

Nevertheless, Apple faces some very real supply-chain issues in satisfying demand for the Apple Watch, in all of its iterations. Whether the device’s popularity is real or manufactured, and can be sustained over the long term, will become clearer in the months ahead. So will Apple’s ability to maintain its reputation as the possessor of a best-in-class supply chain.

Comment on This Article

Can Apple’s Supply Chain Handle the Apple Watch?