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Apple's secret sauce for success is inventory management

Posted: , by Victor H.

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Apple's secret sauce for success is inventory management
There are a couple of things making a successful phone maker the world’s largest company in market cap and if we knew them all we’d be starting our own company, but one of the most universal lessons one can draw from Apple’s success is that inventory management is very, very important. 

And despite Apple having this aura of innovation it deserved with the iPhone and the iPad, and despite Steve Jobs being widely perceived as a product guy and design maximalist, he did not appoint a techie or a designer to manage Apple. He appointed Apple’s most disciplined inventory manager, former Chief Operating Officer, Tim Cook. And this alone is telling.

Cook’s career with Apple starts almost at the same time when Steve Jobs re-entered the company after winding up NeXT. At the time, Apple distribution was a mess. What’s not often mentioned is that Tim Cook transformed this model. He did away with Apple’s own manufacturing and opted for contract manufacturers, and led distribution with his “inventory is evil” view.

He has mentioned that inventory deprecates very, very quickly, comparing the way it loses value to the way milk goes bad in a couple of days. Cook has mentioned estimates that inventory loses 1% to 2% of its value each week under standard conditions.

This vision is what has allowed Apple to fully harvest its technological breakthroughs. 37 million iPhones sold in Q4 2011 shows incredible inventory management. And while previously Dell was the front-runner of a build-to-order model, Apple is currently clearly the market leader when it comes to the way it runs inventory.

Apple's secret sauce for success is inventory management
To measure this, analysts usually turn to two indicators. “Inventory Turnover” shows how many times the current inventory balance of a company could be sold and replaced over a specific period. The higher the number here, the better.

Apple's secret sauce for success is inventory management
The second indicator is “Days of Inventory.” This is a similar metric showing how long it would take for a company to sell through all of its inventory. In other words, days of inventory indicates how much inventory a company holds. The lower the number here, the better.

Apple is incredibly efficient in managing inventory.

Apple is incredibly efficient in managing inventory.

And looking back, you’d see that Apple has been historically extremely efficient with its inventory. Actually, often times when you order online, the product is shipped directly from China, so Apple doesn’t even have to look at it at all. When demand goes through the roof, Apple reacts relatively quickly with huge hiring sprees over at Foxconn. And the recent extremely well orchestrated iPad launch only underlines one of the biggest advantages Apple has - delivering a product days after the announcement, while other companies take weeks and often months.

source: Motley Fool

Apple's secret sauce for success is inventory management

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posted on 29 Mar 2012, 08:05 3

1. nnaatthhaannx2 (Posts: 820; Member since: 19 Oct 2011)

i think its just the apple name that goes along with their advertising.

posted on 29 Mar 2012, 12:09 2

6. darkkjedii (Posts: 24444; Member since: 05 Feb 2011)

Name brand only matters, if the products baring said name deliver on performance, and dependability.

posted on 29 Mar 2012, 08:35 1

2. wendygarett (unregistered)

100% true story... thats why I love Dell!!!

posted on 29 Mar 2012, 08:38 6

3. remixfa (Posts: 14604; Member since: 19 Dec 2008)

we also call that false demand by being out of stock.. which is a mental trick that makes people want it longer. Compare that with Nintendo's Wii stock.
The less you have, the more people want to "buy it now". It creates a sense of urgency in the purchase and false pride that you have something that another doesnt.

posted on 29 Mar 2012, 11:36 2

4. downphoenix (Posts: 3165; Member since: 19 Jun 2010)

True. This is one of the things Sony used to kill off the Dreamcast, they created a heavy false demand which made people want the PS2 over the Dreamcast, despite the PS2 initially having a very poor launch lineup and graphics that at the time were only similar to or even worse than the cheaper Dreamcast. Then when Sega had no choice but to call it quits because the average dumb consumer didnt know a good gaming system when it hit them in the face, then they did an inventory shock. Seriously, I got a Dreamcast in March when they announced they were pulling out, the PS2 was scantly found., there was like 2 at the local walmart. I got a PS2 2 months later and they had over 100 in stock. Fortunately the PS2 lineup was much better by that time, got Onimusha with it, and also picked up Twisted Metal Black when it came out the next month.

Apple does this too, but to greater success than even Sony. They had low supply on the initial Ipads, then with the demand being so great, they did an inventory shock on the new ipad and set off sales records.

posted on 29 Mar 2012, 11:45 2

5. remixfa (Posts: 14604; Member since: 19 Dec 2008)

ha. I miss my dreamcast. that thing was awesome. Some ass robbed my house and stole it, along with like 10 games, 4 controllers, those little PMP memory thinggys and all sorts of stuff. like 600 bux worth of merch.

but yea, the point is valid. .lol

posted on 29 Mar 2012, 12:12

7. EclipseGSX (Posts: 1737; Member since: 18 Oct 2011)

oh man i loved my Dreamcast too and those memory cards with the display that went into your controller and you could take it out and play those pixelated games like snake lol

posted on 29 Mar 2012, 19:42

10. E.N. (Posts: 2610; Member since: 25 Jan 2009)

I agree with the theory of false demand in general but I don't think that's what Apple is (intentionally) doing. Every year they make more and more devices so waiting is shorter. Take the new iPad for example. They had pre-orders and had so much inventory that they didn't even sell out and they still broke records. I obviously don't know what's going on behind Apple's doors but it seems like if Apple could give their iDevices to everyone who wants them at launch, they would. Purposely playing with low inventories can be dangerous. I was going to return my iPhone 4 and buy the Evo 4G after Steve Job's "you're holding it wrong," but waiting for the Evo to restock gave me time to reconsider, which ultimately led to me changing my mind.

posted on 29 Mar 2012, 20:46 1

11. remixfa (Posts: 14604; Member since: 19 Dec 2008)

Amazingly, false demand makes people want it more, which makes sales go up. Its actually better to continually be running out of stock and getting "just a few in" than it is to have shelves full of inventory. It has been proven to work over n over again. Rediculous but true.

No, Apple stocks up phones for months in advance for the launch. They have the stock piles, they just dont send them to the stores. They give enough to whip up some sales frenzy, then cut em off. Its completely on purpose.

posted on 29 Mar 2012, 13:24 1

8. ericsorensen (Posts: 53; Member since: 17 Nov 2011)

Nothing secret about inventory management and how it can boost profit if managed tightly. Nice article with clear explanations and formulas.

posted on 29 Mar 2012, 16:56

9. mohdr (Posts: 4; Member since: 29 Mar 2012)

All about Modern Slavery >>> if you know what i mean.

posted on 30 Mar 2012, 10:41

12. WirelessCon (Posts: 311; Member since: 11 May 2010)

3.5 days! Wow. The company I work for had about 90 days worth of inventory, and I've knocked them down to 14 days and I'm about to knock it down to 10.

I need a considerable raise; 10% bonus from saved deprecation... I would be well off.

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