So if your marketing group just cut the price on your $800 computer to $700 what is your average CEO going to do? He’s going to look at his VP of Operations and ask him where he’s going to make up that shortfall so that gross margins don’t suffer.
First, only buying what we needed. It’s a cardinal sin in PC manufacturing to have excess inventory laying around. Imagine purchasing a hundred thousand hard drives at $80 per unit. If the price of that hard drive falls to $60 per unit three months later and you still have twenty five thousand hard drives sitting in your warehouse, you just vaporized a half million dollars. I have no clue what hoops Apple has to jump through when they procure material months in advance for a product launch. It seems that in some way they have muscled enough clout to minimize what manufacturing insiders lovingly dub “revaluation risk”.
Second, minimizing scrap. Labor may be relatively cheap, but the damage that the assembly workers inflicted was not. I used to roll up the manufacturing metrics for our North American Plants and consistently, damaged parts during assembly was always a problem. No matter how much you tried to fool proof inserting CPU’s and chips, a certain amount were always damaged. And not only that, parts would get mixed up periodically so you had to rework units produced with the wrong specs. And parts don’t just sit in a warehouse, they somehow walk away in the middle of the night or get run over by forklift trucks. So you can see where I’m going with this. There are only so many ways to squeeze the cost of manufacturing down but minimizing the amount of loose parts in your factory that get damaged or lost is one of them. Purchasing circuit boards that require little assembly may be more expensive in the short term but it is more than offset in other areas downstream.
So when the VP of Marketing tells the VP of Operations that he needs to be ready to make up the revenue shortfall, the VP of Operations is going to respond with a “Be careful what you wish for”.