Like just about every other company, Apple is about to find itself in quite a predicament regarding inventory planning. They are experiencing disruption on both ends of the business spectrum, supply and demand. The question is can they successfully navigate the right balance?
We know that supply is getting pinched because factories all over the world either have shutdown or were shutdown. Apple’s main contract manufacturer in China, Foxconn, was down for over two months. But now that Foxconn is back up and running, what does Apple forecast for their production schedules for the remainder of the year?
A modern manufacturing plant is more like a lot of little plants under the same roof. A plant is typically divided into little “cells” which can all make similar products independent of one another. The more cells you invest in, the greater your production per hour. But, also the higher your fixed costs. And if your demand falls off greater than anticipated, you just invested millions of dollars that will sit unused later in the year.
Every year is challenging for Apple because the iPhone enjoys a huge rush at the beginning which slowly tapers off the rest of the year. If Apple were to invest in enough manufacturing cells so that no one has to wait more than a day to get their iPhone, they would lose millions of dollars because of unused manufacturing cells once the initial rush is over.
But this year is exponentially more difficult because now demand is a huge question. I’m hearing predictions of unemployment in the United States of over 30%. Could we be heading into a worldwide economic depression? Surely demand for this fall’s iPhone 12 will be down. A significant chunk of Apple’s customers may now be out of a job.
I’m guessing about now that Apple is seriously reconsidering their capital budget for the new iPhone. They don’t need as many cells as they once thought. But how many do they cut?
If they cut too many cells which results in longer wait times, they lose impulse buys. If they fire up too many cells, they end up flushing machinery and tooling investment down the toilet. Does Apple go for maximum top-line revenue at the possible expense of gross margin? Or do they go for maximum profitability at the expense of some top-line revenue?
Apple’s financial analysts can model the optimum mix of capital outlay for any desired level of unit sales. But it’s up to Apple’s sales group to come up with the crucial units sold forecast. Once they do, it’s up to Tim Cook and the senior management to decide if they want to err on the side of having too much inventory or too little.
If Apple is lucky, they’ll choose the perfect number of manufacturing cells to exactly meet all the demand that remains. Yes, their sales will be down but gross margins won’t suffer too much. But things rarely go according to plan. Apple is probably going to have a much tougher 2020 than they thought.
A modern manufacturing plant is more like a lot of little plants under the same roof. A plant is typically divided into little “cells” which can all make similar products independent of one another. The more cells you invest in, the greater your production per hour. But, also the higher your fixed costs. And if your demand falls off greater than anticipated, you just invested millions of dollars that will sit unused later in the year.
Every year is challenging for Apple because the iPhone enjoys a huge rush at the beginning which slowly tapers off the rest of the year. If Apple were to invest in enough manufacturing cells so that no one has to wait more than a day to get their iPhone, they would lose millions of dollars because of unused manufacturing cells once the initial rush is over.
But this year is exponentially more difficult because now demand is a huge question. I’m hearing predictions of unemployment in the United States of over 30%. Could we be heading into a worldwide economic depression? Surely demand for this fall’s iPhone 12 will be down. A significant chunk of Apple’s customers may now be out of a job.
I’m guessing about now that Apple is seriously reconsidering their capital budget for the new iPhone. They don’t need as many cells as they once thought. But how many do they cut?
If they cut too many cells which results in longer wait times, they lose impulse buys. If they fire up too many cells, they end up flushing machinery and tooling investment down the toilet. Does Apple go for maximum top-line revenue at the possible expense of gross margin? Or do they go for maximum profitability at the expense of some top-line revenue?
Apple’s financial analysts can model the optimum mix of capital outlay for any desired level of unit sales. But it’s up to Apple’s sales group to come up with the crucial units sold forecast. Once they do, it’s up to Tim Cook and the senior management to decide if they want to err on the side of having too much inventory or too little.
If Apple is lucky, they’ll choose the perfect number of manufacturing cells to exactly meet all the demand that remains. Yes, their sales will be down but gross margins won’t suffer too much. But things rarely go according to plan. Apple is probably going to have a much tougher 2020 than they thought.
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