OM in the News: Apple’s Move to Multiple Suppliers for the New iPad

The scene at Apple stores around the world last Friday resembled a rock concert, with large crowds, barricades, food, and cheering  as the company introduced its 3rd generation iPad. But when covering Supply Chain Management in Chapter 11, you and your students may be more interested in what’s going on under the hood of the new iPad tablets. The Wall Street Journal (March 17-18, 2012) writes that Apple “heavily hedged its bets on suppliers of key components, a strategy aimed at holding down costs and risks. The strategy allows a customer to play one supplier off another for lower prices, and minimize disruption if a single factory runs into production problems.”

How do we know the contents and supplier names?  The research firm UBM TechInsights, it turns out, bought and took apart several iPads on Friday, and found components with the same functions made by at least 3 manufacturers in different tablets. Some teardowns revealed memory devices from Micron Technology, some from Hynix Semiconductor, as well as others with chips  from Toshiba. The distinctive high-resolution displays came from  Samsung, LG Display, and Sharp.

The desire to diversify supply sources has taken on added importance with recent natural disasters, including the 2011 earthquake in Japan and  flooding in Thailand. “The multiple suppliers in the iPad suggest Apple is more actively trying to mitigate such risks,” says a UBM executive,  adding that  the strategy is credited to Apple CEO Tim Cook who “made his name at the beginning as the master of the supply chain.”

After opening the new device, UBM estimated that Apple paid $309 for the components in the iPad (that sells for $629). This compares to a current cost of $248 for the iPad 2, which was released last year. Here is the link to a 3 min. video on the iPad teardown.

Discussion questions:

1. Why do many electronics industry companies seek multiple suppliers?

2. Why did component costs increase in this new iPad?