SCM Assignment 2 - Apple Inc.

Supplier
Hub Case Study Submission
By JayaprakashB.N (WPM13JAY)

1. What strategy is Apple pursuing to remain competitive? What role does Apple's
materials management organization play in making Apple successful? What
performance measures should Apple use with respect to materials management?

a. Apple’s competitive strategy

Apple competitive strategy is to differentiate by offering products of high-quality,
exceptional design, and personalized service. The Target segment covers
Customers ranging from unsophisticated beginner to special needs power
users.

For this, they focused on Investing heavily on R & D, which means Apple is
always looking at future and ensures continued excellence is releasing Products
which the market demands. The investment on R & D is generating a steady
stream of new product introductions.

Cost reduction to improve the profit margin while reducing prices. Apple focus is
to have in house Team working on design and leave the Manufacture of Parts to
OEMs. This has helped achieving cost savings thru vast economies of scale.

To decrease distribution and service costs Apple moved its North American
distribution center and service operations from San Francisco Bay area to
Sacramento.

Co-location of manufacturing and distribution improved response time to

customers

The focus of design is to develop the user interfaces which are highly stylish and
ergonomically natural.

The highly personalized one-on-one customer service has created the value
proposition and has also enabled Apple to charge higher than average price to
Customers for its products.

Supplier hub concept

 Deferred payment to the supplier. This strategy will ensure that the Payments to
Supplier will be made once the Supplies reach the factory based on demand
Reduced inventory. The aim is to reduce/eliminate inventory pile up at Apple’s
Factory.

b. Role Apple’s materials management organization play in making Apple

successful
 Conformance to fluctuating demands
 Low inventory carrying cost
 Flexibility in manufacturing in case of bottleneck components
 Reducing the sourcing liability cost by pass it on suppliers.
 Increasing cash flow by making the payments Post Goods received
activity
c. Performance measures Apple should use with respect to materials management

Apple used the following performance measures to track effectiveness with

respect to inventory:

 Inventory turns
 Dollars of inventory as a percentage of cost of goods sold
 Number of days of inventory on Apple’s books and
 Obsolescence costs.

2. Analyze the hub process at Fountain, Colorado.

a. What changes were made as part of the hub implementation?
 Reducing the number of logical grouping of entities involved from nine to
three - one at the port of origin, one at the port of entry, and one at the
Fountain hub
 Investment on Technology which enabled efficient tracking of materials
movement for Fritz, Supplier and Apple
 Tracking of Defective Material thru the Flex System
 Enabled complete end to end tracking of Material Movement from start to
finish
 There has been a change in the percentage of Hub vs. Non Hub from 20-
80 to 40-60.
 The FLEX system tracked the status of hub material through seven
categories FLEX had an additional category for defective material
 Apple’s buyers had access to FLEX via terminals on their desks, they had
full visibility of all material in the pipeline. This “womb-to-tomb” tracking
was a breakthrough for Apple Fountain

b. What role does Fritz play in the hub?

Fritz is an international freight forwarder based in San Francisco.

 The role of Fritz in the supplier hub are:

 Coordination of material flows as well as information flows (act as

customs broker)
 Coordinating the movement of material from the port of origin to the final
destination with proper tracking
 The process from PO Placement by Apple and different categories were
created to track the progress of this PO(shipment were made in full
pallets)
 Controlling the inventory, which is defective being pulled for Production
and also physically segregating the defective inventory
 Full visibility for Apple’s buyers on the material movement
 Enabling Customs Clearance thru the information available in Flex with
appropriate lead times defined for Air as well as Ocean Cargo.

c. Could Apple have made any of these changes without implementing a supplier
hub? What alternative solutions could have been implemented?
Yes, Apple could have made the reduction in inventory without using
supplier’s hub Since the Hub vs. Non Hub Supplier ratio is 4:6 it is not
possible to conclude that supplier hub is the only option.

Alternative solutions:
 Enabling Critical Supplier Teams to be part of the Forecast Process, and
positioning Supplier representative to be stationed within Apple facility.
This will ensure that Supplier representative will co-own the delivery of
materials to Apple Manufacturing facility on a JIT Process.
 Facility within Facility model. In this model, based on a cost sharing
arrangement, Apple can look at enabling some of the critical parts
supplier to set up facility on close proximity to Apple Manufacturing
facility. This will enable Material to be available as Just In Time and
inventory pile up can be completely eliminated
d. What effect did each change have on suppliers, Fritz, and Apple? Quantify the
costs and benefits. What risks are being assumed by each entity?

Risk
Effects due to change Cost and Benefits Assumed

Liability till in ward into Apple Cost of cutting down

Clarity on Schedule and schedule based on
Supplier regular PO schedules and
In case of rejection rework at maintain optimum Liability till
Fritz possible stock at Warehouse inward

Liability and insurance of the

product Benefit of Cost of
Fritz Full Pallet to ensure delivery negotiating with handling and
Economic advantage in terms Apple and taking the fluctuations in
of Business model best possible margin schedules

Low inventory
carrying cost High
No Liability Till in ward Better cash flow Inventory pile
Apple
Cost of handling and system Investment at R&D and
update low liability till in obsolescence
To negotiate the pricing terms ward cost

e. Why was the supplier hub option chosen by Apple Fountain? Was it
successful?

The Supplier hub option was chosen by Apple to tackle the space constraints arising
due to the increase in the demand for the desktop PC s .In order to cope up with the
demand Apple had to outsource the product and go for the stocking the child parts at
the hub.

 The Hub concept at Fountain was successful from Apple’s point of view
due to the following reasons
  Liability was with Supplier until inward of parts happen at Apple
manufacturing facility
 Deferring the payment for components and customs tax until the component
being used
 Suppliers were paid post inward and hence no payment for inventory not
used for production
 Enabled better cash flow and facilitated to invest more on R & D
 Assured returns on futuristic products which suit market demand

3. Should Apple implement a supplier hub for its Sacramento site? Why or why not?
If yes, what components should flow through the hub? Should the process differ
from that implemented at Fountain? How much material should flow through the
hub?

Sacramento Site-differences compared to Fountain and Cork

 Desktops are being manufactured in Sacramento and hence there was

need for higher component storage
 Better weather conditions enabled more reliable local transportation
 Supplier lead times are lower due to the location being closer to
California Ports and airports
 Suppliers could easily arrange for KANBAN/JIT deliveries from their
manufacturing centers in Bay Area
 Since there are multiple PC manufacturers in and around Sacramento, a
logistics service provider could arrange hubs in the area
The points mentioned above were not available for Fountain area and hence there was
a need to have Hub in Fountain and also the need for Apple to rethink on the need for
an Apple exclusive Hub in Sacramento. A cost benefit analysis of the need for Hub in
Sacramento points to a favorable aspect.

Hence the recommendation is to have a Hub for specific materials and parts

 When the lead time is more and storage requirement is more it is better
to have the hub(Mass storages, PC assemblies, Monitors)
 When the lead time is less and storage requirement is also less the items
can be on Non-Hub(plastic enclosures, packaging)
The FLEX Technology based solution implemented by Fountain by Fritz surely
called for investment. Hence only by repeat orders from Apple helped Fritz to Break
even.

At Sacramento, the key Product is desktop PC, and majority of components are bulky.
The Bulky components occupied 60 % of the space and hence these components can
be stored at the Hub and the remaining 40 % can be localized/in house leading to
economic advantage for both Apple and Fritz.
Should the process differ from that implemented at Fountain?

Yes , the process should differ from that of the fountain as Flex system in Fritz called for
huge investment by Fritz in order to make break even . Which inturn causes Apple to
place more order to Fritz to get achieve the break even for Fritz.

Since the Sacramento site was for a dedicated Desktop manufacturing ,all the
components were bulkier and called for high storage space and this can be avoided by
Apple by storing the components 60 % of the components at the supplier hub and the
remaining 40 % of the components at the localized source or in house which gave an
economic advantage for both Apple as well as Fritz

4. What are the differences between the Cork and Fountain hubs?

Cork Hub Facility Fountain Hub Facilities

Stocked components of Mfg. Powerbook line of

PC assembly laptop computer

Logistic provider – Irish Apple chosen Fritz

Express company Company inc. – San
Francisco

Supplier Hub concept Copied Hub concept from

originally practiced by Cork facility
Cork
Irish Express did not Fritz own and operate in
own and operate in the the US and other
US Countries also

No separate software FLEX system tracked the

to track the materials status of hub materials
through seven categories
including defective
materials
Shipment through the Contract was between
hub was an the three parties ….
arrangement between Supplier, Fritz and
the supplier and Irish Apple involved
express; contract was
between the two
parties and Apple not
involved

No report generation Daily and weekly report

generated by FLEX
system

Apple Suppliers did not 60 % non-hub supplied

have sales or by local supplier
manufacturing in
Ireland, so did not pay
income tax

Apple asked Apple allowed to access

permission to access FLEX system fully
IS (Specific screen) of
Irish Express and
supplier

Apple computer JIT Component parts flowing

supply program - Defer through the supplier hub
Payment under the new JIT supply
program were known as
Hub Material

Customs clearance Customs clearance was

was not done done electronically using
electronically information available in
FLEX

Cork the size of the Fountain the components

components were were bulky
small
Cork could not store Fountain could store
trailer materials trailer materials
Cost incurred was less Cost incurred was more
at Cork at Fountain
No pallet system Full pallet shipment
worked well
The Cork Hub facilities : Highlights

Shifted ownership from Apple to supplier

Duties on parts coming into European community were also deferred until the day of material
was used

DDU – Delivery Duty Unpaid – 6% of material cost

Deferred payment of duties

10% per quarter prices decrease due to deferred payment and duties

Cost of Goods Sold reduced by 2-3%

Fountain Hub : Highlights

Three major goals

Free up space at the fountain site by developing a local supply base with deliveries to the
fountain site every shift

Reduced inventory

Defer payment to supplier until material was pulled for use by production

Term called Request – For – Proposal (RFP)- Asked from 13 logistics providers.

Fritz leased 30000 Sq.ft area for warehouse at a site 25mins from Apple site – which will reduce
the transportation cost and time.

Mostly Hub material purchased from Asia

Shipment through ocean is four weeks and by air 1 week respectively

Fritz coordinate both material flows and information flows and acted as customer broker

Apple buyers had access to FLEX – Womb-to- tomb tracking was a breakthrough for Apple
fountain

Fritz was liable for any damage or loss in warehouse (insurance paid by Fritz.

Supplier owned custom clearance – Apple acted as the importer of record

 Cork HUB Fountain HUB
Location Ireland US
Continent Europe North America
Inventory for product Desktop PC Desktop PC
NOT applicable for all
Applicable for US suppliers
Income tax for suppliers suppliers
Bonded Warehouse Necessry for DDU Not Necessary for DDU
Customization in local
100% finished product
Product completion manufacturing sites
Frieght
Air/Ocean Truck
Plastic enclosures (US) mode
Lead time 8 wks < X < 16 wks 8 wks
Unit Value > $75 = $75
Duty rate Upto 6% 0%
Freight
Ocean Ocean
Monitors (ASIA) mode
Lead time LT > 16 wks LT = 16 wks
Unit Value > $250 = $250
Duty rate Upto 6% 6%
Freight
Truck Truck
Packaging mode
Lead time 2 wks 2 wks
Unit Value = $175 = $175
Duty rate 0% 0%
Freight
Air Air
PC Assemblies (US / ASIA) mode
Lead time 12 wks < LT < 16 wks 12 wks from US ; 16 wks from ASIA
Unit Value > $75 = $75
US duty rate Upto 6% 8%
Freight
Ocean Ocean
Power supplies (ASIA) mode
Lead time LT > 16 wks LT = 16 wks
Unit Value > $30 = $30
US duty rate Upto 6% 4%
Freight
Ocean Ocean
Mass storage mode
Lead time LT > 16 wks LT = 16 wks
Unit Value > $250 = $250
US duty rate Upto 6% = 0%