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Apple's supply problem

Jun 29, ’10 6:58 PM
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With the iPad still unavailable three months after its launch and with only 1.7 million iPhones available for purchase in the first three days, Apple’s inability to meet demand is surfacing as its most immediate and glaring problem. This problem merits the deployment of some of the cash Apple is hoarding.

As I wrote in May, Apple’s next billion users are in waiting. However, to serve them in a timely manner requires a new approach to product launch and ramps.

Apple has imposed upon itself a yearly product cycle for the iPhone and the iPod [and, probably for the iPad].  This is a brilliant move because it keeps the product fresh without having it seem disposable.  It also keeps competitors within its turning radius. However, the challenge is that the distribution network has to be filled rapidly and drained rapidly to maximize availability. This gets harder and harder as the volume grows. Imagine having to manufacture and ship into the channel a billion devices in less than a quarter.

This year’s iPhone 4 launch was heavily over-subscribed.  If Apple had enough supply, launch sales could have gone as high as 2.5 million, one analyst believes. Apple admitted mis-diagnosing demand and problems arose during the reservation process. There were insufficient units for pre-order, never mind for users walking into stores.  The shocking thing is that three months on, the iPad is still unavailable to impulse buyers who might want to pick one up with their iPhone.  This despite the fact that most of the world does not have any purchase option.

Now I ask what will happen next year?  Supply may balance with demand by October and strains will show again around Christmas.  Then what?  The iPhone 5 will be getting prepared with another 50% to 100% growth in demand.  How will June 2011 and June 2012 look?  Will Apple have 4x the supply of iPhones and iPads needed to maintain growth?

There are various solutions possible, but if Apple wants to maintain the product cycle, the event marketing and the “reveal” that builds brand value, it needs to change the way it manufactures.  By investing in automation, locating plants near to buyers and by integrating suppliers into production, it can get the quantum leap in supply it needs.  These are capital-intensive solutions, but Apple’s capital is underemployed.  I see no better use for the rapidly-building cash pile.

  • kevin

    What kind of problems does Apple have? Is it a component supply problem? Is it a market forecast problem? Or both? Or something else?

    For the iPad, I think Apple initially underestimated demand, and went ahead with launch thinking they had a good supply chain for all the iPad components. They soon found out they needed to make much much more, but rumors are that suppliers could not supply that much more at any price.

    For the iPhone, rumors are that it is again a component supply problem (display), coupled with an initial demand problem (too many people holding off for the last 2-3 months to buy in June, plus the early upgrades at AT&T; when did Apple know about the latter?). Could this demand problem have been solved by delaying the unveiling and launch?

    Can Apple solve the component supply problem by investing in component production facilities? It’s too late for today’s problem to bring new facilities into place. And didn’t Apple already pre-buy/invest in LG for displays awhile ago. And how does one invest in factories for cutting edge components (such as the retina display) if you have to wait until you know you will be using such components? It seems a bit different than investing in factories for flash memory.

  • I agree it's a conundrum. I don't have a prescription and I don't even know what the options are. What I do know is that a solution probably exists; the solution is probably capital intensive and Apple has eye-watering quantities of capital.

  • capablanca

    I doubt it is the capital intensity that gives Apple pause. There are other issues that getting into manufacturing involves. Managing the workforce is one example. Component production, after all, is more than facilities.

    And you are suggesting that Apple get into mfg, are you not?

  • > And you are suggesting that Apple get into mfg, are you not?
    If that's what it takes. Apple got into retail because it needed to, it got into chip design because it needed to (and may get into battery design as well).

    Apple needs to do what it takes to deliver great products to as many people as want them. They've shown the willingness to do the right thing before.

    Manufacturing of devices today is not as labor intensive as it first seems. Much of what needs doing is automated, but there is a lot of risk in setting up and feeding a production line. It would not surprise me if Apple could bring some value to the process (if they don't already).

  • Tom Ross

    They never had those problems in ramping up iPod production, except for the iPod Mini launch in 2004. I think the current problems have a lot to do with using very advanced hardware, especially the screens of both the iPad and the iPhone 4, and that Apple is putting too much flash memory into their mobile products. Maybe introducing a 2nd iPhone model that will always be updated in September can divert some of the pressure.

    • That's a good point. I hope the complexity is under control on the next revision of the product.

    • That's a very good point, Tom, but I think the difference is in product line strategy. Initially, with the iPod, Apple artificially constrained its potential market by making it Mac-only. As demand increased, it broadened the product line to include cheaper, lower-margin, but easier to manufacture models.

      So far with iPhone, it hasn't done this except by selling off what I presume are existing stocks of the an older model. Which begs the question: "When, and if, will Apple think the time is right to expand the iPhone range with something that's cheaper and easier to manufacture?"

  • Ted T.

    To what extent are these shortages hurting Apple? How many people end up buying Androids or Blackberry's instead of waiting for the iPhone to become available? How many people end up buying (??? — there is nothing to buy) instead of an iPad?

    On the other hand the shortages enhance the products' desirability.

    It is hard for me to know if it is truly a net negative.

    • Joseph

      In Japan the iPhone 4 hit a fever pitch on launch. People who had never been interested in Apple, the type of consumer who doesn't even know what smartphone means, were suddenly talking about switching to iPhone 4. In Japan that means switching to Softbank, which in the mind of many consumers is a second-rate carrier, so people need a real push to make the switch. The iPhone 4 would have been the push for a lot of people.

      Fast forward 2 months and the media frenzy and fever of interest is gone. I've heard from a handful of people (mainly coworkers) that they decided to go with an alternative because they had to wait 3 weeks. It makes sense. An uninformed consumer goes into an electronics shop to pick up an iPhone and they're told they have to wait 3 weeks to a month. The shop and sales staff have every incentive to push them to pick up another model they can sell now. The consumer hears that phone X has all the same features, they don't have to switch carriers, and they can take the phone home right now. This is going to sell most people who aren't already committed to buying Apple for some reason. Softbank staff have also said that lack of supply is hurting sales. Even they have incentives to push people to buy other phones. Just anecdotal evidence, I know, but the lack of supply has got to be hurting sales, and probably significantly.

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  • Sam Penrose

    Really astute piece. The problem is hard and the risks are significant. Besides obvious difficulty of execution, investment only makes sense if manufacturing capacity is strategic bottleneck: i.e. if it significantly impacts long-term trajectory. If removing it would only shift bottleneck slightly (e.g. to HW designers, software engineers, Jobs himself), then it is unlikely to be worth huge costs. iPad and iPhone 4 were a huge amount of design work. Even "simple" tasks like updating iOS to speak to latest radios, etc., require crucial engineering time.

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  • Steven

    I would love to see Apple get into manufacturing. There are pros and cons involved, however.

    Pro: think of the PR benefits of establishing manufacturing entities here in the U.S. and employing American workers, avoiding sweatshop and suicide issues. This would definitely constitute a prudent utilization of its cash hoard.

    Con: those same American workers would demand much more in wages and benefits than the average Taiwanese worker, placing tremendous downward pressure on margins. Also, Apple's hard-fought secrecy would be much more difficult to maintain stateside.

    • @Steven,
      Although labor is not as big a part of the manufacturing of phones or devices as one might think, it is enough to compel managers to try to reduce it.
      However let's not forget that many companies said the same of the cost of R&D and out-sourced as much as they could (e.g. Motorola). The results are not always good. The decision is not cut and dried. You need to look beyond the numbers. There are intangibles and there are questions of value chain evolution and the long term evaporation and condensation of profits.

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