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On how not to be evil

Tim Cook is quoted as having said the inventory is not only evil but that it’s fundamentally evil.

With just-in-time production inventory can be reduced, at least work-in-progress inventory. Unfortunately inventory cannot be completely eliminated. The fact remains that you sometimes need to stockpile product for launch and need to have some on hand depending which way it’s sold. There is also substantial channel inventory (which is off Apple’s books but still evil) that needs to be in the hands of distributors.

Tight inventory management has become a characteristic of Apple and that contributes to getting ranked number one in Supply Chain Management. So we can expect that Apple runs a tight ship. In fact we have evidence of this through the ability to track our purchases from when they ship out of a factory in China all the way to our homes.

This tracking in itself shows that when product is in high demand production is initiated on direct consumer orders not just in response to maintaining a level of inventory. So with that in mind, we can revisit the question of how many iPhones 5 the company has produced.

First, we need to step back and recall the method for analyzing production. I built a model which attempts to show what a typical production run for an iPhone model would look like. I first published the process in early 2011.  It used the historic data from iPhone 1, 3G and 3GS to try to predict iPhone 4 production. I’ve updated the model to show what that would look like today.

The assumptions driving the model are:

  1. There has to be some inventory on hand during any given month (i.e. inventory cannot be negative.)
  2. Inventory has to be kept as low as possible. Preferably below one full month of shipments in the month. This rule needs to be broken on launch as there has to be an attempt to meet first month sales, which are usually substantial.
  3. There is an assumed mix of older variants equal to about 10% of current model sales.

The results are shown below.

The solid lines are estimated production  and the points are actual shipments (the resolution is monthly so quarterly shipment data is averaged over the months covered by the quarter and normalized for the number of days in a given month). Note that each product ramp differs slightly in shape but that overall there is a doubling of peak production. This is shown more clearly in this view where each production ramp is indexed to the same starting point.

The ramps roughly match the shipment data which assumes the JIT production method is being used. Note also that the start of production was roughly double that of the previous product run–consistent also with the spending on capital equipment (Machinery and Equipment as part of PP&E). Note also that the iPhone 4S was more “peaky” with a shorter maximum run than the 4 but that the 3GS also was peakier than the 3.

The iPhone 5 production, shown in grey, assumes 10 million units sold in September and a quicker ramp to maximum run rate. The need to have units on hand led me to assume 6 million units were produced in August and none prior to that. We don’t yet know peak production or duration of peak production but my guess would be that peak will be well above 4S level, perhaps 15 million per month and that the run will be longer than the 4S.

The maximum inventory on a monthly basis runs to about 6 to 7 million for the iPhone 5 but as a percent of total shipments, I’m assuming the performance is improving over time. The following chart shows this ratio:

For the sake of argument, I would create an equivalency between this ratio and the amount of evil present. My model is based on many assumptions and a mostly a work of (informed) fiction but it would not surprise me that the amount of evil is decreasing.

  • Sharon_Sharalike

    A couple of days ago on CNBC, analyst Brian Marshall (of ISI Group) said he estimates Apple can currently produce about 275K per day. He did not explain how he calculated it. That seemed absurdly low to me. (I actually loudly questioned it at the time, which earned me a couple of eye-rolls.)

    Here’s a reference to it: http://www.csmonitor.com/Business/Latest-News-Wires/2012/0924/Apple-iPhone-sales-fall-short-but-sales-potential-intact

    • Tatil_S

      8 million a month is obviously low for long term production rate, but maybe he thinks there is a supplier bottleneck somewhere. If even one of the 100 suppliers have issues, it could slow down the production.

      • JohnDoey

        It doesn’t sound low for month 1. And it is roughly half of what Horace says they probably should make per month, which also sounds right for month 1.

      • Sharon_Sharalike

        IF they’re going to sell much more than 200M of ‘em they’d better be able soon to make more than 600K per day, because to pass 200M the early demand will have to be much higher than that.

  • Jim Zellmer

    Can one evaluate inventory management via publicly known, publicly held suppliers financial statements & reports?

  • jdsweet

    iPhones 5 – nice. William Safire would indeed be proud.

    • A Tribble

      So would William Shatner.

  • Suddy

    Horace,

    You say the peak production levels roughly double every version. If that peak was 10M for 4S, why do you think it would be 15M (but not 20M) for iP5?

    Also, how do you say “and that the run will be longer than the 4S.”, if your chart is any indication, it will be shorter and more “peakier” than 4s. What makes you state otherwise?

    I did not see you use the formula that AAPL stated in their Samsung trial – total sales = sum of all prev sales. Why not? I get this does not address inventory levels issues, but can still give clues on iP5 demand. Would love to hear your rationale for not using this bit of nugget that AAPL disclosed in the Samsung trials?

    Also, when I read your article headline, I assumed it must have to do with Google “don’t be evil” and the iOS6 Maps issue. Will you plan to post on this topic as well?

    Suddy

    • http://www.asymco.com Horace Dediu

      Peak production might be double. I used 15 as a conservative estimate. It’s also possible that 4S, being a follow-up product does not have the same ramp as the 4 and hence the 5. I stated that the 3GS may have been peakier relative to the 3 and therefore we could be looking at a pair having relative differences in production. Regarding “Schiller’s Rule” I discussed it here: http://www.asymco.com/2012/08/06/how-many-of-the-next-generation-of-iphone-will-be-sold/

  • http://twitter.com/bamurphymac Ben Murphy

    Horace, how familiar are you with Dieter Rams & Vitsoe?

    https://www.vitsoe.com/files/assets/1000/17/VITSOE_Dieter_Rams_speech.pdf

    What if Tim is speaking as a designer of supply chains? What if he understands good design as well as Jony?

    There’s nothing good about the frenzy surrounding these launches. It’s bad in the stores, it’s confusing, and it cheapens the product.

    The iPhone is very very good, but what is good enough? What if they release the 5.1 in 6 months. A functionally identical phone, but with an improved anodization process. And 6 months later 5.2 tweaks the chamfer. And so on.

    Why can’t the retail store be a design showroom only? When you want a new phone, you place an order, and it’s delivered later that week.

    • Sharon_Sharalike

      If they improve the process their history is to not even mention it and just quietly slip it into the channel. They did that not so long ago with the iPad 2, for instance. Maybe they want to avoid any clamor for trade-ins, but that’s just a guess.

      • Tatil_S

        Unannounced cost down versions are common in tech. Sometimes they are done for nefarious purposes, too. LCD monitors that start out with expensive high quality IPS screens, but replaced with lower quality cheap TN screens despite the exact same model number (It is not like they were running out of good names) after good reviews and word of mouth circulates or routers with high end WiFi chips replaced with barebones versions.

    • DWI

      Design showroom stores have been failures. Gateway and Sony are examples. Do not give customers time to shop around.

    • Javbw

      There have been plenty of apple products who go through such revision, but it is invisible to the consumer – Launch issues or discovered issues are “fixed” through the use of a better part or process during assembly. If it is a fundamental deesign issue, then there are ways to deal with it – through a “replacement program” or “warranty extension” – the Original MacBook has a discoloration issue with the plastic, which was solved by switching the materials. THe casee still had a long term durability issue, which was “solved” when they went to the unibody plastic enclosure. Power Adapters, connectors, Casing, Buttons, Paint, keyboards, CD drives, inverters, cabling, all get better when they “spec bump” an existing Mac – I’m sure there is a similar method for dealing with the production of a small device that has the basic complexity and major part count of a MacBook, but is made in the millions each month. the 4/4S is an amazingly complex little guy. a 3GS feels like an iPod. the 4/4S feels like a Mac.

      Tim Cook praised the flexibility of the Chinese assembly lines. I doubt he was referring to just their ability to ramp production – but also to solve errors and issues as they come up. I’m sure there are production quality and yield rate increases month by month for every single product apple makes.

  • Greg Lomow

    I think the clause “iPhone 4 was more “peaky” with” should be “iPhone 4S was more “peaky” with”

  • Westech

    Apple plans well. At the moment sales began, they needed to have a starting inventory to cover pre-orders, delivery to Apple stores, delivery to carriers, and delivery to electronics retailers. They also had to have inventory to cover re-stocking for some period of time. They also knew that they were going to add 22 countries in a few weeks, and had to build inventory for that. My suspicion is that they put a cap on how many initial sales were to be permitted, and would not go much over that because they had to fill the channels. They apparently reached this cap in 40 minutes. BTW, I ordered mine at 11 AM, and it is scheduled to be delivered Monday. As near as I could tell the local Apple store ran out of stock early Tuesday, and has not yet (as of this AM) been re-stocked (as of early this AM). Apple’s current main effort is to fill the channel. This is a huge undertaking.

    As I have noted before, I am guessing that they were aiming to have a 25 million unit inventory, and were building it for at least a month before their first shipment. Under these conditions I don’t see how anybody could make a good estimate of whether the first three days sales are good or disappointing. The fact that they cut off first delivery afire 40 minutes bodes very well, however. I do suspect that they underestimated the initial demand.

    Filling the channels would give a huge boost to revenues in the September quarter. Ultimately, at equilibrium, their goal has been to have a 6 to 8 week channel fill.

    I would be interest in how many units they would have to provide to their outlets for an initial launch. How many outlets? How many units per outlet? How soon they would have to re-stock? How many units pre outlet when they restock? How often they have to re-sotck?

    BTW, it would be helpful if you provided a scale for the X-axis of the second graph.

    • http://www.asymco.com Horace Dediu

      Each vertical line represents one month starting at zero.

  • westech

    I hope I am not double posting this.

    Apple plans well. At the moment sales began, they needed to have a starting inventory to cover pre-orders, delivery to Apple stores, delivery to carriers, and delivery to electronics retailers. They also had to have inventory to cover re-stocking for some period of time. They also knew that they were going to add 22 countries in a few weeks, and had to build inventory for that. My suspicion is that they put a cap on how many initial sales were to be permitted, and would not go much over that because they had to fill the channels. They apparently reached this cap in 40 minutes. BTW, I ordered mine at 11 AM, and it is scheduled to be delivered Monday. As near as I could tell the local Apple store ran out of stock early Tuesday, and has not yet (as of this AM) been re-stocked (as of early this AM). Apple’s current main effort is to fill the channel. This is a huge undertaking.
    As I have noted before, I am guessing that they were aiming to have a 25 million unit inventory, and were building it for at least a month before their first shipment. Under these conditions I don’t see how anybody could make a good estimate of whether the first three days sales are good or disappointing. The fact that they cut off first delivery afire 40 minutes bodes very well. I do suspect that they underestimated the initial demand.
    Filling the channels would give a huge boost to revenues in the September quarter. Ultimately, at equilibrium, their goal has been to have a 6 to 8 week channel fill.
    I would be interest in how many units they would have to provide to their outlets for an initial launch. How many outlets? How many units per outlet? How soon they would have to re-stock? How many units pre outlet when they restock? How often they have to re-sotck?