How Apple Has the Best Supply Chain in the World


To any Mac owner over the past roughly five years: have you ever put much thought into that tiny green light that blinks on whenever the built-in iSight/FaceTime camera turns on? Didn't think so. I'll give you six guesses as to who has put in downright absurd amounts of time, thought, and dollars into it.

Bloomberg Businessweek provides an in-depth look at how Apple's (NAS: AAPL) control-freak ways extend throughout its entire supply chain, and that its willingness to spare no expense in the name of perfection has given the company unmatched advantages in areas like component pricing and manufacturing capacity.

Physics, schmysics
The report describes how Apple's design head honcho, Jonathan Ive, came up with the green-light idea five years ago, but the pesky laws of physics threatened to hinder him, since light doesn't normally just shine through metal regardless of how nicely you ask it to. The solution was a highly specialized laser that could poke holes through the aluminum casing so fine that the human eye has trouble seeing them, but just big enough to let light get through.

In Apple's characteristic domineering ways, it found a company that made the necessary equipment -- which runs about a quarter million a pop -- and had it sign an exclusivity agreement and is now the proud owner of hundreds of such machines. The little green dots are now found in Apple's wireless keyboards, trackpads, and MacBooks.

While most PC makers like Dell (NAS: DELL) typically try to cut manufacturing costs, Apple has no compunction spending for its designs, and relies on its operational prowess and efficiencies to reduce costs and expand margins. Much of Apple's operational accomplishments are directly attributed to CEO Tim Cook.

Businessweek quotes HP's former supply-chain head Mike Fawkes as saying, "Operations expertise is as big an asset for Apple as product innovation or marketing. They've taken operational excellence to a level never seen before." Fawkes remembers an HP colleague buying an iPod online, tracking it online directly from the manufacturing plant in China, and receiving it mere days later.

The life of an Apple supplier
With its weight, Apple is able to corner pricing and availability in key components like NAND flash memory. For example, the company entered into long-term flash-memory supply agreements in 2005, pre-paying up to $1.25 billion to lock down supply. Even now, Apple represents almost 30% of the NAND flash-memory market alone as the single largest company gobbling up the chips, and its nearly insatiable demand has helped grow the market in recent years.

The hefty prepayments that frequently top a billion dollars don't always sway potential suppliers. The life of an Apple supplier is a doubled-edged sword: The heavy volume is offset by Apple's bargaining power. The weight that Apple wields allows it to negotiate favorable pricing at the expense of the supplier's bottom line and margins. On top of that, Apple wants its component prices broken down in excruciating detail, including how much the supplier stands to profit.

Getting cozy with Apple isn't always a smooth ride, either, since suppliers end up relying on Cupertino for a healthy chunk of their revenue. Just ask tumultuous component providers like Cirrus Logic (NAS: CRUS) , which sources audio codecs, Triquint (NAS: TQNT) , whose recent miss can be blamed on Apple, or OmniVision (NAS: OVTI) , which proved me wrong and is probably sharing the image sensor spot in the iPhone 4S.

Not the weakest link
The last link in the chain is Apple's vertically integrated retail stores, which provide insights into the action on the front lines. Store-specific demand can be tracked by the hour, which facilitates more accurate production0forecast adjustments. It's no wonder that Gartner has ranked Apple as the world's best supply chain for the past four years.

The best use of cash
This is one reason all the Apple dividend talk is so misplaced: Apple uses its $81.6 billion cash pile to invest in its superior supply chain. Plus, two-thirds of it is overseas anyway. Earlier in the year, Apple had reportedly dropped nearly $4 billion to lock up LCD-panel supply from providers like LG Display (NYS: LPL) and Toshiba. Over the next year, the company has said it will be spending roughly $7.1 billion in supply-chain investments and prepaying $2.4 billion to critical suppliers.

If you ask me, this is one of the most effective uses of the company's hoard, far more useful than paying it out as a dividend. But then again, this is Tim Cook's Apple now, and although he is a supply-chain master, he's also more open to the dividend idea than the late Steve Jobs ever was.

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At the time thisarticle was published Fool contributorEvan Niuowns shares of OmniVision Technologies and Apple, but he holds no other position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of TriQuint Semiconductor, Apple, and Cirrus Logic.Motley Fool newsletter serviceshave recommended buying shares of Dell and Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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