Lessons from Apple’s Supplier Strategy

Apple Supply Chain Management in China

Lessons from Apple’s Supplier Strategy

The way in which Apple selects and manages its suppliers is an important factor in the company’s success. There are 156 names on Apple’s latest supplier list, including major companies such as Samsung, Toshiba, and Foxconn, which gained recognition as an assembler of iPhones. However, there are hundreds of second- and third-tier companies that supply to the big names on behalf of Apple. Apple controls nearly every part of this complex network, leveraging its scale and clout to get the best product at the best price in time to the consumer. Apple rates quality, technological ability, and scale as priorities when it seeks out new suppliers. Cost is lower down the list. Becoming an Apple supplier is not easy. Yet the competition is intense because Apple’s approval is seen as an endorsement of manufacturing prowess.

Apple puts the factory to the test by insisting on watching the supplier make the hard-to-make samples. Investments in technology needed at this stage are the responsibility of the supplier.
Apple has other requirements that increase its control over inputs, yield, and costs. For instance, the company requires suppliers to buy materials from firms it recommends.
Over time, Apple has forged strong relationships. It has invested in special technology and has its own (600+) engineers on the ground to help fix production problems and improve the factory’s efficiency.

At the same time, Apple has sought alternatives to diversify its supplier base and improve its negotiating power. For example, Foxconn, which for years has assembled iPhones and iPads, now has a rival in Pegatron. The smaller Taiwanese firm makes the low-cost iPhone.
Few buyers have the reach or even the same needs as Apple. However, the company’s strategy has lessons in selection, negotiation and management that can be adapted by any firm sourcing from China. Here are the top five:

Visit the Factories

You need to be sure the supplier has the capacity to fill orders in time and the ability to make high-quality products. A factory visit will also provide an idea of the number of employees and their skill levels. Assess intangibles such as the mind-set of the company’s leadership and the firm’s potential for growth. When asking for samples, be very specific with requirements and have an engineer monitor the process so you know the samples are being made in-house and not outsourced.

Negotiate and Monitor

Have more than one supplier for the same product to improve your negotiating power and lower your risks. When negotiating a contract, focus not just on cost but also on quality. Build in a buffer for defective goods and negotiate a discount for delayed delivery.
Once an order is placed, have local representatives visit the factories and inspect the goods at various stages so as to allow intervention and correction of defects. Inspection just before shipment is important, as returning defective goods to China is prohibitively expensive due to taxes. Continue to monitor the performance closely especially in the initial stages of the relationship.
Know your supplier’s suppliers:
Visibility over the supply chain is necessary to minimize risks such as poor quality and intellectual property theft as well as to keep a grip on costs. You may not have the same power as Apple but you should know the source of the various materials used in your product. This is particularly important as suppliers often change their suppliers to save costs.

Be Prepared to Help

Once you’ve identified the high performers on your supplier list, be open to sharing product enhancement ideas that can improve the margins of other products that the supplier is selling. Show the supplier that lowering costs (e.g., through the use of cheaper materials) is not the only strategy for sustainable margin improvement. You could also consider other ways to help such as with training to upgrade the skill level of employees.

Communicate Often

Third-party reports and an annual visit are not enough to build a relationship. An established line of communication that includes feedback is necessary to avoid misunderstandings and address issues before they become crises. Ideally, you should also have an on-site team with business skills and technical expertise visiting the factories periodically and not just when there’s a breakdown. If that’s not possible, increase the frequency of visits by headquarters.

 

Dr. Neale O'Connor
Cofounder of the China Sourcing Academy, founder and director of the China Supplier 1000 Project. Senior consultant of the China Lab at Silk Road Associates (Hong Kong). Currently teaching at the Hong Kong Baptist University.