A Lesson From Apple: Simplify

If your supply chain is more complex than the leading competitor's processes, you've got a major problem. The simpler a manufacturing and order fulfillment process is, the nimbler it will be and the more competitively it will help your company achieve its goals.

Many people may not realize this, but Apple Inc. (Nasdaq: AAPL), the world's leading consumer electronics company, operates one of the leanest and simplest supply chain operations in the world. At Apple, the same clean look-and-feel customers experience when they use the company's most successful products is mirrored in the design and supply chain processes that support the devices. In its manufacturing, procurement, and repair and warranty fulfillment operations, Apple may be as above the competition as it is in winning products it sells.

Nowhere is this more obvious than in its retail operation, which, in my opinion, is one of the more public manifestations of Apple's lean supply chain operations. While other retailers are complaining about the weak economy, Apple's outlet stores remain buoyant and are considered among the most successful retail operations on earth. The retail division had 357 stores in 2011 and for the year posted sales of $14.1 billion, up 44 percent from $9.8 billion in 2010. That growth puts it in a distinct class compared with other retailers globally.

At any of these Apple stores, the look-and-feel is that of ease of access and neat display, combined with free and unhindered flow of products and people. Clutter is literally non-existent; even at the stores' busiest, the sense of order and ease of use remain obvious. You don't believe me? Perhaps it will sound better coming from Apple itself. Here's a comment from Apple's last annual Securities and Exchange Commission filing: "The stores are designed to simplify and enhance the presentation and marketing of the Company’s products and related solutions." Apple's retail outlets, in my opinion, take their cue from the company's supply chain.

Here are the key features of Apple's supply chain and why they reinforce the idea of a simple yet highly effective winning system:

1. Highly defined, limited, and contiguous products: Apple sells only a handful of products, and although it has expanded these over the years, most of what the company markets can be easily packed into a small box container. It sells PCs, smartphones, digital music players, TV box, and a handful of peripherals and digital products. The products are highly contiguous in terms of the supply chain needed to support them. In fact, many of these products are manufactured by the same company: Foxconn.
2. Single manufacturing strategy: This could be considered a problem in the event of a major natural disaster, but so far operating mainly in a single manufacturing region hasn't hurt Apple. In fact, manufacturing "substantially all of the company's hardware products" in Asia, as Apple said in its 10K filing, allows it to whittle down costs and coordinate logistics and shipping services in only a handful of locations. As for the dangers involved, remember this: no system is without risks. The decentralized (plus outsourced) electronics manufacturing services business has evolved to the point where even the absence of key components in one single location can ground the whole system to a halt globally.

   Additionally, Apple understands the risks in its strategy and is believed to be continuously taking steps to hedge and reduce the potential problems. The company noted that in addition to the production of its products by "a few outsourcing partners located in Asia," it "has also outsourced much of its transportation and logistics management." While such arrangements "may lower operating costs," Apple said, "they also reduce the company's direct control over production and distribution." Having identified the challenges, Apple has been proactive in monitoring and ensuring supply partners live up to the ends of their agreements. Simplicity doesn't translate into stupidity.

3. Strategic and forward-oriented procurement strategy: Apple dominates in its markets partly because it has also figured out a way to secure components at competitive pricing. Apple has spent billions to assure guarantee of components such as LCDs. Its strategic proposition to critical component suppliers is refreshingly simple: it shares the financial risks with them. "The company has entered into various agreements for the supply of components," Apple said.

Apple isn't perfect, and some of its decisions with regard to sole-sourcing and partnership with only a handful of manufacturers in a single region could come back to haunt the company. Nevertheless, its supply chain is anchored on the principle of simple efficiency. Your company may not be able to copy or use Apple's system as effectively, but a complex system is inherently more difficult to manage.

With a complex supply chain system, you'll score many goals depending on the range of products being manufactured, but some of these may turn out to be a strike against your company's interests.