SCM Assignment 2 - Apple Inc.

Supplier Hub Case Study Submission

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. Apples 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 Apples Factory.
b. Role Apples 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 Apples 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 2080 to 40-60. The FLEX system tracked the status of hub material through seven categories FLEX had an additional category for defective material Apples 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 Apples 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 suppliers 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 Assumed

Effects due to change Liability till in ward into Apple Clarity on Schedule and regular PO In case of rejection rework at Fritz possible Liability and insurance of the product Full Pallet to ensure delivery Economic advantage in terms of Business model

Cost and Benefits Cost of cutting down schedule based on schedules and maintain optimum stock at Warehouse

Supplier

Liability till inward

Fritz

Benefit of negotiating with Apple and taking the best possible margin Low inventory carrying cost Better cash flow Investment at R&D low liability till in ward

Cost of handling and fluctuations in schedules

Apple

No Liability Till in ward Cost of handling and system update To negotiate the pricing terms

High Inventory pile and obsolescence 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 Apples 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 Stocked components of PC assembly Logistic provider Irish Express company Fountain Hub Facilities Mfg. Powerbook line of laptop computer Apple chosen Fritz Company inc. San Francisco Copied Hub concept from Cork facility Fritz own and operate in the US and other Countries also FLEX system tracked the status of hub materials through seven categories including defective materials

Supplier Hub concept originally practiced by Cork Irish Express did not own and operate in the US No separate software to track the materials

Shipment through the hub was an arrangement between the supplier and Irish express; contract was between the two parties and Apple not involved No report generation

Contract was between the three parties . Supplier, Fritz and Apple involved

Daily and weekly report generated by FLEX system 60 % non-hub supplied by local supplier

Apple Suppliers did not have sales or manufacturing in Ireland, so did not pay income tax Apple asked permission to access IS (Specific screen) of Irish Express and supplier Apple computer JIT supply program - Defer Payment

Apple allowed to access FLEX system fully

Component parts flowing through the supplier hub under the new JIT supply program were known as Hub Material Customs clearance was done electronically using information available in FLEX Fountain the components were bulky Fountain could store trailer materials Cost incurred was more at Fountain Full pallet shipment worked well

Customs clearance was not done electronically

Cork the size of the components were small Cork could not store trailer materials Cost incurred was less at Cork No pallet system

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
Location Continent Inventory for product Income tax for suppliers Bonded Warehouse Product completion Plastic enclosures (US) Frieght mode Lead time Unit Value Duty rate Freight mode Lead time Unit Value Duty rate Freight mode Lead time Unit Value Duty rate Freight mode Lead time Unit Value US duty rate Freight mode Lead time Unit Value US duty rate Freight mode Lead time Unit Value US duty rate Ireland Europe Desktop PC NOT applicable for all suppliers Necessry for DDU 100% finished product Air/Ocean 8 wks < X < 16 wks > $75 Upto 6% Ocean LT > 16 wks > $250 Upto 6% Truck 2 wks = $175 0% Air 12 wks < LT < 16 wks > $75 Upto 6% Ocean LT > 16 wks > $30 Upto 6% Ocean LT > 16 wks > $250 Upto 6%

Fountain HUB
US North America Desktop PC Applicable for US suppliers Not Necessary for DDU Customization in local manufacturing sites Truck 8 wks = $75 0% Ocean LT = 16 wks = $250 6% Truck 2 wks = $175 0% Air 12 wks from US ; 16 wks from ASIA = $75 8% Ocean LT = 16 wks = $30 4% Ocean LT = 16 wks = $250 = 0%

Monitors (ASIA)

Packaging

PC Assemblies (US / ASIA)

Power supplies (ASIA)

Mass storage