“Inventory Is Fundamentally Evil” – A Quick View into Apple’s Inventory Management by Philipp Cirkel

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When Tim Cook, the former Chief Operation Officer (COO) took over Steve Jobs position as a CEO of Apple in 2011, he put the focus of his company on optimizing the Supply Chain. Soon after taking over control at Apple he declared war on inventory. “Inventory is fundamentally evil” is what Tim Cook allegedly said. Within his first year as a CEO he closed ten of the 19 warehouses, leaving only one central warehouse in the United States.
But what is his problem with inventory? Is it not a key goal of a complex organization such as Apple to always have products in stock to satisfy the demand and avoid losing sales by keeping the customers happy? He compares his consumer electronics to milk and urges his staff to think about Apple products as “daily business”, because “if it gets past its freshness date, you have a problem”. Apple assumes that its products depreciate one to two percent in its value per week as it is waiting in the warehouses. A look in the most recent annual balance sheet I could find (09/2016) shows that Apple holds inventory worth 2,13 billion Dollars. They lose almost 43 million Dollars per week due to the loss of value of its stock. Even though 2,13 billion Dollars sounds like a large figure, if you put it into perspective to the 321 billion Dollars in total assets, inventory only makes up for 0,6%. Moreover, inventory is also an important factor when it comes to taxes. Since companies calculate its profit by deducting COGS (costs of goods sold) from total revenue (sales), all the cost of unsold goods will not be deducted from the profits and therefore do not lead to a tax benefit. Even though this is very much simplified, it also proves that inventory is expensive.
So, the question is: How does Apple satisfy its customers while minimizing inventory? First of all, how do they meet the demand. Since Apple has outsourced the production and shipping of all its products, they never physically handle an iPhone, iPad or whatever, if it is not bought it in one of the Apple retail stores. Their products go directly from the factory, that is not owned by Apple, to a service provider (FedEx or UPS) which delivers the product to the customer. If a company outsources its production it tends to be very dependent on the reliability of its suppliers and partners, in this case like Foxxcon, Samsung (second biggest supplier in 2011), FedEx and UPS. Even though a partnership with Apple is something very prestigious, how does Apple make sure that they meet their requirements? Tim Cook drastically reduced the number of strategic alliances. He decreased the number of suppliers from 100 to only 24, which means that these companies face though competition. To keep Apple as a client they must always perform at its very best and meet the demand on time. Having outsourced all the production also has the benefit that Apple does not have to worry about capacity utilization or excess capacity (not producing at optimal level). Therefore, they do not have the fixed costs, like wage, electricity, rent, for underutilized factories in case the demand is low.
When it comes to saving money, many companies try to reduce logistic costs along their supply chain. Apple however put the emphasis on the inventory. In 2011 Apple had an outstanding 69.4 inventory turnover ratio, which means that they sold and replaced its inventory almost 70 times within a year. On average their product stayed in inventory for 5.3 days. Even though Dell is also very good when it comes to reducing inventory, Apple outperforms them by being twice as good. Samsung, probably the most prominent competitor, for example holds inventory for more than 21 days on average. Having a high fluctuation in inventory makes the inventory management very difficult. Therefore, refilling the warehouses works on a 24 hours schedule. Apple does everything in its power to avoid or minimize its inventory. The low number of stock also reduces the reliability on accurate forecasts. Especially in the fast-developing tech industry, products of older generations quickly lose value. If the forecasts are wrong and there are many unsold products the company loses a lot of money. Apple minimizes this risk, by simply minimizing inventory. Also, the long and constant lifetime of Apple products ease the forecasting. Right now, Apple expects large sales in the iPhone business due to the fact that many iPhone customers own their phone for almost two years now, which means that the lifetime of the product is about to be reached for many customers. Having relatively stable periods until the products get replaced, makes the sales estimates more accurate, which leads to less excess inventory. It is obvious that Apple has gained a competitive advantage due to its inventory policies.
Regardless of whether or not Tim Cook actually said that “inventory is fundamentally evil”, his actions speak for themselves. Apple is the world-wide leader in inventory optimization and proved again to be a very innovative company, but this time it is not about the products but about its logistic processes.
Philipp Cirkel 17.10.2017
Sources:
Supply Chain Blog: APPLE’S SUCCESS MANTRA: INVENTORY MANAGEMENT http://cmuscm.blogspot.com.es/2014/09/appless-success-mantra-inventory.html
Morningstar: Apple Inc http://financials.morningstar.com/balance-sheet/bs.html?t=AAPL

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