Apple’s Biggest Cost Take Out and Supplier Development Opportunity is Not What You Think

We've been analyzing Apple's supply chain quite a bit lately on Spend Matters and will be featuring a long series on it starting tomorrow. From secondary research and a few discussions with insiders in the high-tech market, it seems that Apple's supply chain does not appear collaborative in the least. This is also true if you believe the portrait that the NYT paints in a recent expose, where it quotes dozens of anonymous sources about Apple's supply chain practices. One that stood out was the detailed product costing Apple requires of suppliers and potential suppliers and the "slim" profit margin that Apple allows. From a procurement and supply chain perspective, we actually applaud this product costing and cost breakdown behavior as best practice. However, where Apple comes up short is in collaborating with suppliers in year-over-year -- or quarter-over-quarter, in the case of the high-tech industry -- cost take out activity. Rather than encourage suppliers to come up with ideas and share in the benefits, Apple just expects, the article suggest, 10% price decreases on an ongoing basis.

This "toss it over the wall" type of decree is not a good sign. Rather, it reminds us of the types of procurement practices that GM employed in its procurement-with-a-stick hey day. If Apple really focused more on supplier development rather than simply auditing and demanding price decrease, they'd probably uncover significant opportunities working with suppliers rather than against them. For example, just consider the aluminum dust that has been to blame for accidents (and deaths) at Apple's supplier facilities. If Apple worked with its suppliers to create best-practice scrap and recycling program that cut down on waste from the start -- not to mention dealing with dust at the source -- the benefits that could accrue for savings, worker conditions and the environment could be significant.

Clearly, what's not evident in Apple's Sustainability Report is even more telling than the metrics Apple reports. Unless Apple is holding something back -- and based on everything we've read as well as sources in the high tech industry, we do not believe they are -- Apple's reported behavior suggests that it treats suppliers like students in an overcrowded public school, caring more about setting up management systems to stop bad behavior rather than teaching and working closely with suppliers to come up with innovative ideas to improve production practices, efficiency, collaboration and safety. Unless Apple suppliers seek out development and self-improvement from outside sources, it's clear they're not learning much in the classroom other than how to avoid a slap on the wrist from their teacher -- or at worst, expulsion.

- Jason Busch