Another year, another iPhone…

It’s widely understood that Apple will launch the iPhone 6 in September, following a long-established pattern. Despite efforts to keep us in the dark as to its specifications, rumour sites are awash with photos of components and so on: just like every other year.

There’s something extraordinary this year, though: if the people at Business Weekly in Taiwan are right, Apple just placed an order for 68 million phones.

Assembly of Apple’s mobile devices is largely performed by two Taiwanese companies, Foxconn and Pegatron, each operating a string of immense factories in China, and dependent upon suppliers from all over the globe.

Not only is this a large operation, it encompasses a tremendous amount of engineering and supply chain uncertainty.

Apple’s phones are brought out of China by air. This is unsurprising; typically the new models are made available for retail around ten days after they debut at a media event. To go from keeping every telephone under lock and key, in strict secrecy, to widespread availability in thousands of stores in ten or so countries, just ten days later is no mean logistic feat… but that’s only part of the story.

FedEx Boeing 777 freighter

FedEx Boeing 777 freighter

Space on freighter aircraft has to be booked months in advance. If there’s a problem and the phones aren’t ready, the prepaid transport is wasted. Last year’s price was about $242,000 to charter a FedEx Boeing 777 for the 15-hour direct flight from China to the US freight hub at Memphis, Tennessee. Minimalistic packaging means that a 777 can transport some 450,000 iPhones, so the cost of this isn’t prohibitive… but it’s a lot of money to waste (and a world of trouble trying to find alternatives) if your products miss the flight.

Those freighter aircraft will already be booked, but obviously the iPhones aren’t ready yet. With a unit cost of at least $200 (based on previous models) nobody is going to sit on warehouses full of the things for any longer than is necessary. We can be sure that there is still a great deal of manufacturing and assembly to do.

This is an enterprise in which a problem in the supply of any one component places a constraint upon the output of the whole network. In the same way that the speed of a wartime convoy is dictated by the speed of the slowest ship, manufacturing and assembly operations proceed only as well as supplies permit. In 2012, Sharp struggled to manufacture iPhone display screens, causing a bottleneck. (Two other sources existed; LG Display and Japan Display, Inc. but for a time there was a significant shortage.) When the problems at Sharp were resolved, Foxconn itself became the bottleneck. There will always be a constraint, somewhere in a supply network. What labour unrest, a natural disaster or political upheaval might do to some part of this global network doesn’t bear thinking about.

Even if manufacturing goes perfectly this time, the software isn’t ready yet either: it’s still undergoing development, and must be loaded onto each phone before it can be shipped – and even when the software is ready, you still can’t seal up the packages for each item yet because decisions must be made as to the product mix: how many phones of each colour, in each storage capacity, will be supplied with each style of plug? Which carrier network will the phone be locked to?

Decisions, decisions. This is a once-a-year chance to shine for Apple and their partners, where any problem means increased costs and lost sales. Lost sales cause a loss of revenue for years to come, if potential Apple customers choose an Android phone instead, and cease to spend money on Apple downloads.

Apple did an astonishing job last year, shifting some nine million units during the launch weekend, while adding two new countries to the list of places where the iPhone would be available on day one… but mistakes were made. Apple underestimated how many of the new ‘gold’ colour iPhones would be demanded. They significantly overestimated demand for the plastic-bodied iPhone 5c. This was a design blunder rather than a problem of the supply chain: a supposedly mid-range telephone that cost something like 85% of the price of the premium product. Retailers were disgusted to find that they couldn’t get enough of the 5s to meet demand, while the 5c languished in their inventories, and they were soon calling for a price cut.

Being simultaneously understocked and overstocked is no mean feat, and it’s something that Apple will have looked at very closely during the year. Selling nine million products priced at something like six hundred dollars each was quite an achievement… but if they’d had more iPhones of the right configurations in the right places, the volume achieved in the opening months could have been far higher.

There’s no mention of a ‘low cost’ iPhone this time around; only rumours of a choice of two screen sizes, with the larger model following a trend already established by rival manufacturers. The product range appears to offer less uncertainty, then… but how about the supply network?

anticipated iPhone 6

Anticipated format of the iPhone 6 – image from MacRumours.com

Something like two months from now, there will be TV news stories showing Apple fans queuing overnight to get their hands on the first new iPhones. In a sense, this scarcity – this difficulty to obtain the highly fashionable piece of ‘technojewelry’ – is free advertising for Apple… although it can be frustrating for the enthusiasts. Experiences last year may prompt more people to order online, in advance, and perhaps that will ease Apple’s difficulties somewhat, compared with relying purely on forecasts.

Without doubt, Apple will be looking to set new records on the launch weekend and in the months to follow. If it’s true that Apple have just committed to buy 68,000,000 iPhones, that’s at least $13.6bn spent: let’s raise a glass to the supply chain managers at Apple, and wish them success.

At this time of year, they’re probably drinking Gaviscon.

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3 thoughts on “Another year, another iPhone…

  1. Really like this case study Richard. Have you shared it with Erica? I wonder if it’d be helpful in her new module next term?

  2. Pingback: iPhone 6: trouble ahead? | Capacify

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