Apple and Their Suppliers

Partnerships, both internal and external, are vital to accelerating profit and growth in middle market companies. Whether they’re with suppliers, customers, internal departments or the wider community, companies need to ask if their relationships are

  • A win/win for both parties
  • A collaboration but without common goals
  • A detriment to both parties’ performance and success

A recent case in point is Apple and one of its suppliers, as told in a series of articles in the Wall Street Journal last month. Apple selected a supplier, GT Advanced Technologies, to create a screen for their new phones made out of artificial sapphire, a material that was supposed to be harder than glass and less susceptible to scratching and breakage.

Apple agreed to invest in a plant that GT planned to build in Texas to the tune of over $700 million dollars, but to GT’s apparent surprise, withheld their final payment of $139 million dollars. GT share prices plummeted and the company eventually filed for bankruptcy. What happened to this relationship?

There were several indications that this was not a partnership:

  • GT said it could produce the sapphire screen that would solve the big problem of scratched and broken smart phone screens. Apparently GT couldn’t produce the product and Apple engineers decided not to use it in the phones. GT struggled with low manufacturing efficiency and some processes didn’t work at all. How could Apple not know this? Why didn’t Apple engineers and GT engineers work hand in hand toward the objective both companies wanted to achieve? GT had never produced sapphire screens before. Apparently GT only produced the furnaces that made sapphire screens, never the sapphire itself.
  • Apple withheld payments toward the plant due to GT’s poor performance. Did they know that this would put GT in a cash bind?
  • When GT declared bankruptcy, it “surprised” Apple. Apple had been working with GT to keep it solvent and hadn’t requested repayment of the loans. How could the bankruptcy be a surprise? Not only was Apple surprised, so were the analysts on Wall Street, which is never good.
  • In the end, GT said its agreements with Apply were “oppressive and burdensome.” It apparently had to file bankruptcy to stop the bleeding.

What a mess. Does this sound like a partnership to you? Partnerships have a foundation of trust and communication. Here it seems that there might have been trust (or perhaps just wishful thinking), but there certainly wasn’t enough communication.

In order to develop a mutually beneficial relationship, the first step is to carefully select your suppliers. The qualification process should be rigorous, with your company sending a team including manufacturing engineers to determine whether the supplier can meet “capability” levels of technical skills. Can they hold tolerances? Can they produce the technologies needed? Do they have the financial resources to do what needs to be done? In this case, have they ever done it before? What do you need to do to help them be successful?

Apple has a bit of a reputation for being aggressive with their suppliers, requiring short lead times, low prices, high quality and significant investment. While Apple will usually provide high volume orders, often the margins are so thin that suppliers have little room to recover from any road bumps on the way to delivery.

Partners should achieve true win-win results. While supplier partners provide world class pricing with short lead-times and JIT delivery, suppliers should also help with achieving high quality, high inventory turns and high margins. The customer, on the other hand, should help the supplier achieve that by

1) Being very open with information in terms of designs, forecasts, customer information and required capabilities

2) Inviting the suppliers into the design process to a) help identify materials that are lower cost, higher performing and available, and b) develop designs that are manufacturable by the supplier given their capabilities

Supplier partnerships

  • Include fewer suppliers, generally two or three per commodity
  • Use auto replenishment systems, often allowing customers to reduce inventory and at times entirely avoid touching the materials
  • Reduce cost volatility allowing for smoother flow and better customer service

Supplier partnerships are working very well for Alaska Communications (ACS). About two years ago, ACS retained me to help them develop a supply chain strategy that identified a few supplier a partners for parts that are used in construction projects, sales in retail stores, B2C sales of home internet networks, and B2B sales for business communications systems.

By developing partnerships with a very few key suppliers, ACS developed processes that included vendor managed inventory (VMI) in their warehouses, direct ship of kitted materials to construction sites, vendor managed delivery directly to consumers, and issuance of materials to maintenance personnel through vending machines and kitted parts for their vans. The results include cutting the number of part SKUs in half, reducing inventory by over $5 million, and cutting materials and warehouse costs by over $6 million.

Partnerships based on trust and communications with both partners seeking a true win-win relationship can be very powerful for mid-market companies. To help accelerate your profit and growth, consider developing supply chain strategies and practices that include your key suppliers as partners in your success.

© 2014 – Rick Pay – All Rights Reserved