Apple – Page 2 – The OM Blog by Heizer, Render, & Munson

OM in the News: Coronavirus Tests Apple’s China Dependency

Coronavirus has given new meaning to something Apple executives have been saying for years: Apple needs another China. The rapid spread of the virus and the disruption it has caused is the latest test of Apple’s dependency on China as its manufacturing base for most of the iPhones, iPads and Macs sold world-wide.

To curtail the virus’s spread, local governments have asked people to stay away from work. Shipments of parts and components to the Apple assembly plants are curtailed, and workers who went home to celebrate the Lunar New Year may not return, out of caution. Foxconn, Apple’s main manufacturer, is contending with a strict quarantine in Zhengzhou city, home to its largest iPhone plant.

Apple has successfully weathered a number of challenges involving China in recent years, writes The Wall Street Journal (Feb. 8, 2020). But it is among the foreign companies most vulnerable to the outbreak because it hasn’t diversified its manufacturing. Though it looked at assembling iPhones outside China, it found the costs of facilities and training too high and opted to keep exporting from China. Apple’s leaders have long considered its reliance on China-based manufacturers as both a strength and a vulnerability. Apple worried more about a disruption in exports from the country than loss of sales inside Greater China, a market that accounts for 1/5 of revenue.

Samsung, the world’s largest smartphone maker, wound down production in China last year as part of a years-old strategy of diversifying its manufacturing base by shifting production to India, Vietnam and elsewhere.

Apple is known for its operational prowess and has a record of navigating supply-chain challenges. After an earthquake triggered the Fukushima nuclear crisis in Japan in 2011, Apple quickly created a new factory to maintain production of optical drives it needed for its devices. When monsoons flooded factories in Thailand later that year, Apple turned to the Thai Navy to load boats with the heavy equipment necessary for production. But those events only affected a sliver of Apple’s supply chain. Coronavirus affects the very heart of it.

Classroom discussion questions:

Referring to Supplement 11 in your Heizer/Render/Munson text, draw a decision tree for Apple’s disaster risk.
What can Apple do at this point if it thinks the virus will have a 6-month impact on supply chains?

OM in the News: Apple Believes in Squeezing Its Supply Chain

To understand Apple’s evolving place in the tech world, consider that one of its most important executives today is a guy whose job is badgering suppliers to get costs down. Tony Blevins, VP-Procurement, will stop at little to get a favorable deal. He has paraded manufacturers past competitors in Apple’s lobby and spurned a UPS contract by sending it back to UPS executives through FedEx. He persuaded subcontractors not to pay a chip maker that Apple was in litigation with, depriving the chip company of $8 billion.

The supply chain was always a critical piece of the Apple formula—alongside, if duller than, its magic designs, writes The Wall Street Journal (Jan. 24, 2020). CEO Tim Cook built the supplier network and instilled rigorous frugality in it as he did so. Today the supply chain looms larger than ever at Apple. Slowing iPhone sales, combined with the increasing cost of new features, make the job of hammering down expenses critical.

The result is a company less identified with visionary leaders and more of an operations juggernaut with rich profit margins it intends to keep. Blevins enforces manufacturing deadlines that help the company fill orders on time around the world. He manages semiconductor suppliers, making him the bearer of bad news if Apple sets out to replace their chips with an in-house product. Under Blevins, Apple pays Intel $10 per modem chip, roughly 50% less than Samsung pays Qualcomm. Blevins even rotates staff members every few years to keep them from developing supplier relationships that might dilute their focus on saving Apple money.

Apple believes that saving 10% on the cost of parts could boost profits more quickly than selling more computers, exactly the point we make in the text on page 7 in Table 1.1, “Options for Increasing Contribution.”

Classroom discussion questions:

Why is Blevins so important to Apple?
Explain the implications of Table 1.1.

OM in the News: Apple to Keep Building Mac Pro in U.S. After All

Apple just said it is keeping production of its new Mac Pro in Texas, reversing earlier plans to shift assembly of the computer to China, reports The Wall Street Journal (Sept. 25, 2019). The decision follows the administration’s move last week to grant tariff exemptions on 10 items Apple imports from China. The exclusions for components includes a power supply and a logic board, and the U.S. will refund tariffs already paid.

The tech giant had earlier tapped Taiwanese contractor Quanta Computer to assemble the $6,000 desktop computer outside Shanghai. The high-end computer, which was introduced in 2013, had been assembled in Austin, Texas, and was touted as Apple’s only Made in USA product. Escalating trade tensions over the summer challenged Apple’s plans to make the product in China, where labor and logistics costs are lower than in the U.S. The proposed tariffs could have cut into Apple’s profits or forced it to increase the cost of the Mac Pro.

The parts for which Apple obtained exemptions are critical to the computer’s function. For example, Apple received a tariff waiver on the Mac Pro’s graphics-processing module, which itself incorporates more than 1,600 components and allows images to be rendered on a computer screen. Apple’s decision to reverse course and instead keep the computer’s assembly in Texas is among the most pronounced examples of how tariffs have roiled corporate decision-making.

Apple also said it is on track to fulfill its commitment to invest $350 billion in the U.S. economy by 2023, last year spending more than $60 billion with more than 9,000 domestic suppliers.

Classroom discussion questions:

Where do you think Apple falls in terms of international operations strategies (see Figure 2.9)?
What factors did Apple consider in making this decision?

OM in the News: Apple Wrestles With Conflicts in its Supply Chain

Apple is asking suppliers to study shifting final assembly of some products out of China, as trade tensions prompt the company to consider diversifying its supply chain, reports The Wall Street Journal (June 19, 2019). While any major changes would be difficult and could take time to implement, Apple is looking into the feasibility of shifting 1/3 of the production for some devices to S.E. Asia.

Manufacturers of apparel, footwear and other low-margin items have been moving out of China for years due to rising costs, and tariffs have accelerated that trend. Many tech companies, however, find it more difficult to move. Among China’s chief attractions are well-developed chains of suppliers and reliable infrastructure, much of it built in the past 20 years. A plentiful labor force skilled in precision manufacturing as well as trained engineers and pro-business government policies also make China appealing. And for those companies looking to sell into the large Chinese market, producing in the country is more competitive than importing.

Apple remains deeply rooted in China. About 1/5 of its total sales are recorded there, while on the manufacturing side its supply chain accounts for three million jobs. Foxconn, which assembles iPhones, iPads and Macs, is, however, ready to shift some Apple production to plants elsewhere. It has also put more than $213 million into India recently and is looking to invest in Vietnam.

Outsourcing to China helped solidify Apple as one of the world’s largest and most profitable companies. CEO Tim Cook helped build the company’s sophisticated and efficient supply chain there, relying on Foxconn and others to crank out hundreds of millions of iPhones annually.

International moves won’t come easy. Production equipment and assembly lines would need to be dismantled and packed,. They then must be reinstalled, tested and calibrated, and their output rate adjusted. Software and environmental-control systems would need to be put in place, and line operators, engineers and quality managers must be available and trained.

Classroom discussion questions:

Why isn’t more of Apple’s manufacturing coming to the U.S?
What are the advantages and disadvantages of moving production?

OM in the News: Apple Suppliers Suffer With Uncertainty

Apple CEO Tim Cook at an Apple store in Italy,

Lower-than-expected demand for Apple’s new iPhones and the company’s decision to offer more models have created turmoil along its supply chain and made it harder for Apple to predict the number of components and phones it needs, writes The Wall Street Journal (Nov. 20, 2018).

Recently, Apple slashed production orders for all 3 of the iPhone models it unveiled in September, frustrating Apple suppliers and workers who assemble the phones and their components. The slowdown has ripped throughout Apple’s supply chain.

Big suppliers of iPhone components, including Qorvo, Lumentum, and Japan Display, cut their quarterly profit estimates, implying a reduction in previously placed orders from Apple, which accounts for 1/3-1/2 of their revenue. At Foxconn , Apple’s largest iPhone assembler, thousands of workers have voluntarily left its Chinese plants earlier than they intended after Foxconn cut overtime hours that typically are available. (Many workers rely on overtime as a major source of income).

Hundreds of suppliers built their businesses on the back of smartphones, and none benefited more than those providing components for Apple. But the iPhone production cuts have reignited frustration among suppliers and raised worries about Apple’s ability to forecast demand since it started releasing 3 flagship models instead of 2 last year. Apple also continues to sell some older models in its stores, further complicating forecasting.

The company’s suppliers have been rattled before. The iPhone 6, introduced in 2014, sold better than Apple’s expectations, and suppliers scrambled to meet increased orders. The following year, demand for the iPhone 6s fell short of forecasts, leaving suppliers to grapple with excess inventories and underused production capacity. Last year, many suppliers were hurt by Apple’s excessively optimistic production forecast for the iPhone X, which it later slashed by some 20 million units for the 2018 first quarter.

While making components for 200 million-plus iPhones remains a tremendous business for suppliers, most relied on the growth in iPhones sold to boost their profits and pay for huge capital expenditures. “The freeway of Apple suppliers is littered with roadkill,” said one industry analyst.

Classroom discussion questions:

What forecasting techniques can be used by Apple to predict demand for a new phone?
What are the advantages and disadvantages of being an iPhone supplier?

OM in the News: Apple’s Sustainability Move

Apple’s new HQ features rooftop solar panels.

“Apple has just announced,” writes The Wall Street Journal (April 10, 2018), “that it has achieved a decade-old goal of having its facilities world-wide powered exclusively by renewable energy, an achievement that will shift the company’s sustainability efforts to its supply chain, where about 10% of suppliers have made a similar commitment”.

The tech giant said it has improved to be 100% reliant on clean energy from 96% last year in part by contracting renewable energy for the first time in India, Turkey, Brazil and Mexico. The figure covers all of its retail stores, offices, data centers, as well as its new California headquarters, Apple Park, the spaceshiplike structure that is one of the largest on-site solar installations in the world.

Apple is just one of many global corporations trying to cut energy consumption and shift to renewable power including wind and solar, both to cut costs and slow climate change. More than 100 companies world-wide, including Apple, IKEA, Anheuser-Busch and Starbucks, pledged in 2014 to shift to 100% renewable energy. Many of these companies are now trying to accelerate efforts to convince their suppliers to join them.

Environmental experts said the bigger challenge will be making the manufacturers of the more than 200 million iPhones and 43 million iPads it sells annually wholly dependent on renewable energy. “We’re not going to stop until our supply chain is 100% renewable,” said Apple’s VP. Apple, which set that goal two years ago, said 9 more of its suppliers have committed to powering all production with 100% clean energy, bringing the total to 23 out of more than 200 suppliers. Apple also will be challenged to keep its own facilities at the 100% level in the years ahead, especially as it looks to add a new campus in the U.S. and $10 billion in data centers.

Classroom discussion questions:

Why is Apple’s drive an OM issue?
Why is the firm’s movement so important to industry?

OM in the News: Samsung and Apple’s Love-Hate Supply Chain Relationship

“When the iPhone X goes on sale next month, Apple rival, Samsung, has good reason to hope it is a roaring success,” writes The Wall Street Journal (Oct. 3, 2017). The South Korean company stands to make $110 from each $1,000 iPhone X that Apple sells. The fact reflects a love-hate dynamic between the phone makers that is one of the more unusual supply chain relationships in business. While each company vies to get consumers to buy its gadgets, Samsung stands to make billions of dollars supplying screens and memory chips for the new iPhone—parts that Apple relies on for its most important product. “These are two of the largest companies on the planet deeply tied at the hip and directly competitive,” says one Harvard prof.

Apple and Samsung are expected to be the world’s two most-profitable companies in 2017. And they will depend on each other to get there. Apple needs Samsung’s parts to make the iPhones that accounted for 2/3 of the company’s $216 billion 2016 revenue. Samsung needs Apple’s orders to fuel a component business that delivered 35% of the South Korean firm’s total revenue of $195 billion in 2016.

The relationship grew after Apple moved into selling smartphones. Apple’s immense demand for parts—it sells more than 200 million iPhones a year—limits the field of possible suppliers. Samsung is one of a handful of semiconductor makers that can make a small chip crammed with extra memory capacity. And it is the only significant manufacturer of the organic light-emitting diode displays Apple has adopted to create the iPhone X screen.The relationship took an acrimonious turn in 2011, when Apple sued Samsung over patent infringement, accusing the Galaxy S of ripping off the iPhone’s design. Samsung countersued Apple with its own patent-infringement. Six years on, the U.S. lawsuit is unresolved.

Classroom discussion questions:

Describe similar relationships between competitors in other industries?
Why does Apple depend on Samsung so heavily?

OM in the News: The City That iPhone Built

Foxconn iPhone workers walk between Zhengzhou Foxconn factories

It was 2010 and the iPhone was coming to a new industrial town on the edge of Zhengzhou, China that would be known as iPhone City. One year later, Foxconn, the manufacturer, said the iPhone factory complex had 100,000 workers. Today, it employs 250,000 at the plant. The company makes 150 million iPhones each year, along with 20 million iPads.

“With Apple embracing outsourced manufacturing in Chinese cities, the iPhone’s success in the decade since it launched has fueled China’s rise at the center of the global electronics supply chain,” writes The Wall Street Journal (July 5, 2017). The explosion of higher-tech manufacturing was encouraged by Beijing as leaders sought to move factories up the value chain from making plastic toys and clothes. That shift transformed the lives of millions of Chinese, bringing jobs but also leading to complaints from workers of repetitive labor, restrictive work rules and poor living conditions.

The move to Zhengzhou followed a spate of suicides in 2010 at Foxconn’s other iPhone factory in Shenzhen, along the coast where wages were higher. “We hold our suppliers to the standard we hold ourselves: They must treat everyone with dignity and respect,” said Apple. Apple said wages and working conditions at its suppliers have improved significantly in the past 5 years.

Like American company towns a century ago—Pullman, Ill., Hershey, Pa., and Henry Ford’s Detroit—iPhone City revolves mainly around a single product, and it depends on that product for its wealth. During last fall’s rush to make the iPhone 7, when Foxconn was short-handed, state-owned coal companies lent workers to Foxconn. In past years, the province issued quotas to local authorities stating how many workers they needed to produce for Foxconn.

Classroom discussion questions:

Why doesn’t Apple manufacture iPhones in the U.S.?
What has China’s government done to assist manufacturers such as Foxconn?

OM in the News: China’s Secret Incentives to Land iPhone Manufacturing

The Chinese government is also spending over $10 billion to build an airport just a few miles from the iPhone factory. — The Chinese government is also spending $10 billion to build an airport near the iPhone factory

OM in the News: How the iPhone Got Outsourced to China

A crushing work force begins arriving for the Apple early shift at 6:30 a.m., crossing paths with those leaving the late shift — A crushing Foxconn work force begins arriving for the Apple early shift at 6:30 a.m., crossing paths with those leaving the late shift in Zhengzhou.

“Apple was late to China”, writes The New York Times (Dec. 29, 2016). In a bid to lower costs, some of the biggest American technology companies, including Compaq, Dell and H-P, began dismantling their domestic manufacturing in the 1980s and moving work overseas, largely to Asia. Not Apple. Steven Jobs believed that software and hardware development had to be closely integrated.

Rather than close plants, Apple decided to build them — in Colorado, Texas and California. The plants were highly automated, with the walls painted white, just as Jobs liked them, and they were promoted as a symbol of American ingenuity. “This is a machine that is made in America,” Mr. Jobs trumpeted in 1984, after Apple opened a manufacturing facility in California to produce the Macintosh PC.

But by the mid-1990s, Apple began to embrace outsourcing under its new operations chief, Tim Cook (now CEO). Under Cook’s direction, Apple shifted business to Foxconn, then an up-and-coming Taiwanese contract manufacturer that had started to gain a following among big American PC brands. The partnership freed up Apple to focus on its strengths — design and marketing. Apple would come up with a new idea, and Foxconn would find ways to produce millions of units at a low cost.

“They have brilliant tooling engineers, and they were willing to invest a lot to keep pace with Apple’s growth,” said a former Apple executive. When Apple’s sales took off after the introduction of the iPod in 2001, Foxconn had the heft and expertise to meet the demand that accompanied each hit product. Foxconn’s factories could quickly produce prototypes, increase production and, during peak periods hire hundreds of thousands of workers. Now, some 350,000 workers assemble, test and package iPhones in the 2.2 square mile site— 350 a minute, 500,000 a day.

Classroom discussion questions:

Everyone is talking about regaining manufacturing jobs. Can Apple reshore its manufacturing?

2. What is Apple’s core competency? Foxconn’s?

OM in the News: Designed for Demise

Apple's Liam robot can take apart 1.2 million iPhones a year — Apple’s Liam robot can take apart 1.2 million iPhones a year

Apple just introduced a piece of technology that will likely never be used by any consumer. Instead, it kind of cleans up after them: a robot that breaks down iPhones for recycling. The arrival of Liam—a 29-armed robot –speaks to a big challenge facing tech manufacturers today. Even as they strive to entice consumers to ditch their existing devices for the next new thing, companies must figure out what to do with the growing numbers of devices that are destined for the scrapheap as a result. “We think as much now about the recycling and end of life of products as the design of products itself,” says Apple’s VP of environment, policy and social initiatives.

Other electronics makers take a different recycling approach, designing products that simplify disassembly by replacing glue and screws with parts that snap together, for instance. Some also have reduced the variety of plastics used and avoid mercury and other hazardous materials that can complicate disposal. Samsung designed a 2016 model of its 55-inch curved television for easier disassembly, eliminating 30 of 38 screws, replacing them with snap closures. Now the TVs can be dismantled in less than 10 minutes.

The constant churn of new devices has contributed to an increase in electronic waste, some of which ends up in developing nations where local residents must deal with the health and environmental risks, writes The Wall Street Journal (June 8, 2016). “Many of the environmental problems are made during the design process,” says a U. of Illinois professor. He says a product’s design choices for the types of materials and varieties of components are critical.

Classroom discussion questions:

Describe the “design for disassembly” model in Supplement 5.
Why is this issue important to operations managers?

OM in the News: Foxconn Replaces 60,000 Humans with Robots in China

Apple supplier Foxconn Technology has replaced 60,000 human workers with robots in a single factory, reports the South China Morning Post (May 22, 2016). This is part of a massive reduction in headcount across China’s entire Kunshan region. Foxconn has been automating its manufacturing facilities throughout China, including Kunshan, for “many years,” which it says has freed up its employees to focus on higher value-added elements of the manufacturing process, such as R&D, process control and quality control. The job cuts do not augur well for Kunshan, which has a population of 2.5 million.

”Across all of our facilities today, we are applying robotics engineering to replace repetitive tasks previously done by employees,” Foxconn said. “As our manufacturing processes and the products we produce become more technologically advanced, automation is playing an increasingly important role in our operations and we have plans to automate more of our manufacturing operations over the coming years.”

Roughly 600 companies in the Kunshan region are looking to reduce headcount with robots, as part of an effort to accelerate growth and reduce costs. While developing robotics does present higher upfront costs, machines are more predictable, stable, and cheaper over the long term versus humans. With such high pressures placed on these manufacturers, which assemble much of the world’s consumer technology products and are often under strict deadlines, it also alleviates some of the ethical issues that arise when working people too hard for too long to meet demand. Foxconn has been criticized for years for inadequate working conditions, which led to a string of suicides at its manufacturing facilities a few years ago. Foxconn employees have complained of being overworked, sleeping in less-than-ideal dormitory conditions, and not being paid fairly.

There are, by the way, currently more than 260,000 robots working in U.S. factories.

Classroom discussion questions:

How will Foxconn’s strategy impact U.S. manufacturers?
How will this decision impact China?

OM in the News: Apple’s Transparent Supply Chain

Apple stopped short of declaring itself conflict-free because some suppliers might still use smuggling or fraud for small amounts of minerals that might get back to armed groups. — Apple stopped short of declaring itself 100% conflict-free because some suppliers still use smuggling or fraud for small amounts of minerals that might get back to armed groups.

Apple has reached what it’s calling a milestone in supply-chain transparency, saying it’s now auditing 100% of its suppliers for the use of conflict minerals linked to violent militia groups in the Democratic Republic of the Congo, reports Businessweek (March 28-April 3, 2016). The iPhone maker has been working since 2010 to remove minerals connected to these groups from its supply chain, and while it isn’t yet declaring its products totally conflict-free, the company said all of its 242 smelters and refiners of tin, tantalum, tungsten and gold are now subject to third-party audits. That figure is up from about 88% at the end of 2014 and 44% in 2013.

“We could have very easily chosen a path of re-routing our supply and declared ourselves conflict-free long ago, but that would have done nothing to help the people on the ground,” Apple’s COO stated.

Apple, which uses the minerals in its mobile-phone processors, motherboards and screen displays, is required to investigate its supply chain for the presence of the minerals under the 2010 Dodd-Frank Act. The law is meant to choke off revenue to violent militia groups in African nations. More than 1,300 companies file annual conflict minerals reports, but few have been able to fully audit their supply chains and determine if their products are free of the minerals. Only a handful, such as Intel, have been able to say they sell conflict-free products.

To reach a fully audited supply chain, Apple spent 5 years “cajoling, persuading, and even embarrassing suppliers by publishing their names.” Apple has spent hundreds of hours in the region and also kicked out 35 smelters from its supply chain because they wouldn’t participate in the audits. The company started saying in 2014 that it would end supply contracts with companies that didn’t take part in the audits.

Classroom discussion questions:

Why is it so hard to validate Apple’s supply chain in Africa?
Why is supply chain transparency a major OM issue?

OM in the News: What Makes the Apple Watch Tick?

A Wall Street Journal (May 1, 2015) analysis just released suggests the cost of the new Apple Sport Watch is a smaller share of the retail price than other Apple products. The costs of parts and manufacturing for the cheapest version available total about $83.70. The watch sells for $349. That 24% ratio for parts and manufacturing is lower than the 29% to 45% ratio than for other Apple devices. The total bill of materials for the Watch Sport is $81.20 and manufacturing costs add about $2.50 per watch. These figures don’t take into account capital, logistics, R&D, intellectual property, or other supply chain costs.

Inside the Watch, a touch screen is supplied by TPK and a display module by Analog Devices. Apple manufacturers the S1 processor, while Toshiba and MicronTechnology supply the memory chip. The Bluetooth controller comes from Broadcom.

A key component of the watch made by one of two suppliers was found to be defective, prompting Apple to temporarily limit availability. That part is the so-called taptic engine, designed to produce the sensation of being tapped on the wrist. After mass production began in February, reliability testing revealed that some taptic engines supplied by AAC Technologies of Shenzhen, China, started to break down over time, forcing Apple to scrap completed watches as a result.

Classroom discussion questions:
1. What are the most critical components, cost-wise, of the watch?

2. What is a bill-of-materials (see Chapter 5)?

OM in the News: Apple and its Supplier Problems (Again)

Rainto, 12, said he was worried about landslides in the mine he works in Indonesia

BBC’s secret filming of a Chinese iPhone production line showed Apple’s longstanding promises to protect workers were routinely broken (BBC News, Dec. 18, 2014). It found standards on workers’ hours, ID cards, dormitories, work meetings and juvenile workers were being breached at the factories. Exhausted workers were filmed falling asleep on their 12-hour shifts at the Pegatron supplier. One undercover reporter had to work 18 days in a row despite repeated requests for a day off.

Apple responded, saying: “We are aware of no other company doing as much as Apple to ensure fair and safe working conditions. We work with suppliers to address shortfalls, and we see continuous and significant improvement, but we know our work is never done.”

The poor conditions in Chinese factories were highlighted in 2010 when 14 workers killed themselves at Apple’s biggest supplier, Foxconn. Following the suicides, Apple published a set of standards spelling out how factory workers should be treated. It also moved some of its production work to Pegatron’s factories on the outskirts of Shanghai. But BBC’s undercover reporters found that these standards were routinely breached on the factory floor. Overtime is supposed to be voluntary, but none of the reporters were offered any choice. One reporter was housed in a dormitory where 12 workers shared a cramped room.

BBC also travelled further down Apple’s supply chain to Indonesia. Apple says it is dedicated to the ethical sourcing of minerals, but BBC found evidence that tin from illegal mines could be entering its supply chain. It found children digging tin ore out by hand in extremely dangerous conditions. Apple says its Indonesia situation is complex, with tens of thousands of miners selling tin through many middle men. It wrote: “The simplest course of action would be for Apple to unilaterally refuse any tin from Indonesian mines. But that would also be the lazy and cowardly path, since it would do nothing to improve the situation. We have chosen to stay engaged and attempt to drive changes on the ground.”

Classroom discussion questions:

1. Evaluate Apple’s choices.

2. Why is supply chain integrity so important–and so difficult?