Apple Inc. will soon get another “Best Practice” award for its “excellent supply chain”. It has received numerous such awards in the past and, in fact, perennially appears at the top of some research and consulting companies’ “Supply Chain Top 25” list. On the face of it, the awards would seem to be justified but there are sufficient troubling signs about mismatches in the company’s operations that the management, suppliers and the ever-applauding crowd of financial analysts should take heed.
Of course, Apple is a phenomenal company that deserves many of the accolades it has received since Steve Jobs returned to the company and revamped operations to focus on the consumer electronics market. It is on track to post record annual revenue of approximately $233.1 billion for the fiscal year ending Sept., up from $182.8 billion in the 2014 fiscal year, according to the average estimate of analysts polled by Yahoo. The June-quarter revenue of $49.6 billion announced yesterday was higher than the entire fiscal 2009 sales of $42.9 billion. That was just five years ago.
“We had another stellar quarter for iPhone, establishing a new June quarter record,” said Timothy Cook, Apple’s CEO, during a conference call with analysts. “iPhone unit sales grew 35 percent, which is almost three times the rate of growth of the smartphone market overall and we gained share in all of our geographic segments. iPhone revenue grew even more strongly, up 59 percent. The strong iPhone results were broad-based in both developed and emerging markets and we experienced the highest switcher rate from Android that we've ever measured.”
And yet investors weren’t quite as pleased with the company’s performance. Apple’s stock price slid sharply after it announced this latest “record revenue”. In overnight trading the stock fell more than 8 percent and tumbled more during regular trading hours. Why did investors punish Apple for what would normally be considered a stellar performance and especially this company that in the last decade revamped operations to produce award-winning products, skyrocketing revenues and hefty profits while becoming the world’s most valuable company?
Perhaps Apple’s performance wasn’t stellar in all aspects of its operations. One such area was its supply chain. Apple hardly ever gets its forecasts right and the company has consistently beaten its own sales estimates widely, creating the image of two different expectations for the company in the minds of investors and analysts. The first is the regular forecast provided by Apple, which analysts treat at best as guidance numbers. Instead, analysts develop – and investors look for – “Street Numbers” or “Whisper Numbers”, which they believe more accurately reflect the company’s performance. Those numbers are always ahead of and are often much bigger than the company’s own estimates.
Few other companies could get away with this erratic performance. But few companies are like Apple. Suppliers and contractors would be perplexed and investors would wonder if the management had a firm grasp of the business. In the world of supply chain optimization, wide forecast gulfs lie somewhere between ludicrous and irresponsible. The electronics supply chain likes guidance that are fairly accurate and when this is difficult to determine -- it often is -- they like swift updates to eliminate disparities between actual demand and expectations.
This is why manufacturers spend a ton of money annually on forecasting tools and that’s why they have over years developed terminologies like just-in-time (JIT) inventory management to match stocks with production needs. Outsized variance between number of goods to be produced and the number sold is treated normally with shock.
It’s certainly not celebrated. That’s what Apple, too, needs to learn. Component suppliers don’t like it, distributors find it disruptive and contract manufacturers can’t optimize their operations in their margin-sensitive business when forecasts diverge so sharply from actual customer demand.
Investors pounded Apple’s shares after it announced the latest results because analysts were expecting it to produce and sell more iPhones than it shipped. 1.3 million more iPhones, to be precise. Kathryn Huberty, an analyst with Morgan Stanley grilled the company, stressing that while the “year-on-year iPhone growth was very attractive, the sequential unit decline in the June quarter was worse than the past two years.”
Investors were also miffed that Apple’s revenue outlook for the September quarter of $49 billion to $51 billion lagged the “Street” expectation of $51.1 billion. Apple, it seemed, had given investors a great deal but still less than what they had grown to expect.
Cook and CFO Luca Maestri didn’t help with the explanation that the company could have shipped more products in the June quarter but didn’t want to stuff the “channel.” The channel inventory could have been 600,000 units larger, Cook said, adding the “revenues could have been much higher if we would have expanded the channel.”
Why would you aim “to drain the channel inventory when iPhone 6 is selling so well,” queried Morgan Stanley’s Huberty during the quarterly conference call with Apple executives. Why indeed.
Cook’s explanation didn’t fly with investors. The strategy might have worked well for Apple for year-over-year sales growth comparisons but it also created doubt about the company’s execution strategy and its ability to maintain the giddy growth rate investors have come to expect.
The supply chain is still the best way to get a panoramic view of industry dynamics. Cook whose background is in supply chain management should have known that.
Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at email@example.com.