Are Operations Apple's Secret Sauce?

| About: Apple Inc. (AAPL)

By Martin Lariviere

So the current issue of Businessweek has an article on Apple (NASDAQ:AAPL) that I am basically (given my profession) obliged to love (Apple’s Supply-Chain Secret? Hoard Laser, Nov 3). It opens by recounting how Apple invested heavily in a special kind of laser in order to implement a design element (a little green light on a laptop so that users would know that the camera is on) and builds to this:

Most of Apple’s customers have probably never given that green light a second thought, but its creation speaks to a massive competitive advantage for Apple: Operations. This is the world of manufacturing, procurement, and logistics in which the new chief executive officer, Tim Cook, excelled, earning him the trust of Steve Jobs. According to more than a dozen interviews with former employees, executives at suppliers, and management experts familiar with the company’s operations, Apple has built a closed ecosystem where it exerts control over nearly every piece of the supply chain, from design to retail store. Because of its volume—and its occasional ruthlessness—Apple gets big discounts on parts, manufacturing capacity, and air freight. “Operations expertise is as big an asset for Apple as product innovation or marketing,” says Mike Fawkes, the former supply-chain chief at Hewlett-Packard (NYSE:HPQ) and now a venture capitalist with VantagePoint Capital Partners. “They’ve taken operational excellence to a level never seen before.”

So operations management is key for Apple! Does it get sexier than that? The article goes on with a number of examples:

Apple began innovating on the nitty-gritty details of supply-chain management almost immediately upon Steve Jobs’s return in 1997. At the time, most computer manufacturers transported products by sea, a far cheaper option than air freight. To ensure that the company’s new, translucent blue iMacs would be widely available at Christmas the following year, Jobs paid $50 million to buy up all the available holiday air freight space, says John Martin, a logistics executive who worked with Jobs to arrange the flights. The move handicapped rivals such as Compaq that later wanted to book air transport. Similarly, when iPod sales took off in 2001, Apple realized it could pack so many of the diminutive music players on planes that it became economical to ship them directly from Chinese factories to consumers’ doors. When an HP staffer bought one and received it a few days later, tracking its progress around the world through Apple’s website, “It was an ‘Oh s—’ moment,” recalls Fawkes.

In thinking about ops at Apple, it becomes clear that Apple is very much like past poster children of operational excellence like Wal-Mart (NYSE:WMT), Toyota (NYSE:TM), and Southwest (NYSE:LUV). It is not that Apple’s operational skills are great in an absolute sense. Rather it is that its operations are so intertwined with everything else that it's doing, they are essential to carrying out its strategy in the marketplace.

For example, Apple has a limited product line. It doesn’t settle for producing a few hip halo products that attract attention but were never intended to sell in high quantity. Virtually everything Apple does aims to be both hip and high volume. That means when it works with suppliers it's in a position to demand that things go its way.

Further, it aims to give the customer things she doesn’t know she needs yet. That means it's making big bets on production technologies or components before the competition knows they need that skill or that component. All of that would be horribly risky if it were not so good at anticipating solutions customers need.

What separates Apple from other paragons of ops is that much of what it does is out of sight from the customer. When Southwest chooses to fly to Midway instead of O’Hare and then not give a passenger an assigned seat, every customer sees that. How Apple’s manufacturing experts work with product designers to develop custom solutions is all internal, but it is crucial to the firm’s success.

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