By: Miles Leung
Whenever you unbox your Apple product, you will see “Designed by Apple in California.” This design is where the magic begins—the magic that brings Apple a great fortune. In fact, Apple’s market value has been doubled from one trillion dollars to two trillion dollars in two years. The company’s revenue would not be so high if not for its supply chain system. This article will focus on Apple’s supply chain flowchart, their relationship with suppliers, and its supply chain strategy.
Apple’s Supply Chain Flowchart
Figure 1 shows the production process of Apple products from initial design to the customer’s hands. The research and development of any Apple product is mainly done in America. Take the iPhone as an example: after Apple finishes its planning process, it needs to purchase raw materials to manufacture the phone.
In order to obtain the necessary resources for production, Apple partners with 200 companies around the globe. For example, Africa provides minerals, Japan provides cameras, South Korea provides memory cards, and Germany provides semiconductors. All these components are shipped to Foxconn, a manufacturer that has twelve factories in China, to be assembled into iPhones.
After being assembled, the iPhones will be shipped by aircraft from China to either Apple or UPS/FedEx warehouses. Then, they are directly delivered either to your home (if you order it online) or to your local retail stores.
Apple’s Relationship with Its Suppliers
Apple has two types of relationships with its suppliers: collaborative and synergistic. A collaborative relationship occurs when each corporate entity needs the core competency of the other to maintain customer value. However, a synergistic relationship occurs when multiple entities work together to create something worth more than the sum of their individual parts.
Apple’s designers must maintain both types of relationships in working with the suppliers. For example, the suppliers provide human resources management and Apple provides creative ideas, thus forming a collaborative bond during development. For instance, “for new designs such as the MacBook’s unibody shell . . . Apple’s designers work with suppliers to create new tooling equipment.” Both entities need each other’s core skills to fulfill the market’s demand. However, this relationship also works synergistically, as “Apple Inc. . . . designers closely work with suppliers for helping translate prototypes into mass-produced devices.” In other words, when Apple works with multiple suppliers, their relationships bring out something that affects the world.
The percentage of iPhone users in the U.S. from 2014 to 2021 indicates that more than 45% of Americans are currently iPhone users. This large market demand makes partnering with multiple suppliers extremely necessary. “Pointing to Mr. Cook’s past job as a procurement manager and his key role in building Apple’s supply chain with contract manufacturers,” said Mr. Yang, an investment banking analyst, “as a procurement manager, Cook wants more than one supplier.” For this reason, more than one million people work in product manufacturing at Apple’s supplier facilities.
Since this quantity of employees can easily lead to human rights problems, part of Apple’s supplier relationship involves protecting their workers. Most prominently, Apple made its supply chains transparent due to previous suicide reports from its largest manufacturer, Foxconn. Tim Cook had to respond to protect the reputation of Apple and ensure every worker in the supply chain was treated fairly and afforded their basic human rights.
As a result, every year Apple releases a supplier responsibility progress report, which evaluates all of their suppliers’ compliance to human and labor rights laws regarding their workers. The rights, safety, and treatment of these contract workers have been accounted for most recently in 2019. Most importantly, Apple requires their suppliers to limit their employees’ worksheet to under 60 hours, makes sure all work (including overtime) is voluntary, and ensures that every worker’s wages, benefits, and contracts meet legal requirements to prevent underage laboring, discrimination, harassment, and abuse.
This report shows that Apple is willing to put in the effort to maintain and grow its partnership with its suppliers. Both types of relationships, collaborative and synergistic, help Apple to ensure its dominance in the technology industry.
Apple’s Supply Chain Strategy
To further excel in the technology market, Apple uses a strategy called differentiation. This means that Apple offers something unique compared to other competitors in the same industry. In other words, in that they make “. . . the decision to focus on a few product lines, and to do little in the way of customization, is a huge advantage.”
However, Apple’s most important strategy by far is using outsourcing instead of near-sourcing. Outsourcing refers to the process of moving production to another firm, while near-sourcing means moving production geographically closer to where products are sold. Apple’s outsourcing strategy significantly saves them money on production, as the labor cost in China is much more affordable than in the United States of America.
Figures 2 and 3 illustrate the production costs of an iPhone with 4G network access in China and America. As is evident below, the assembly cost in China is cheaper than in America by about $158.57 for the same working hours. Additionally, if an iPhone is assembled in China, the gross profit margin for selling one iPhone is 71.7%. If they were to instead assemble their products in America, Apple would lose 25.2% of of their gross margin per iPhone. Therefore, outsourcing is one of Apple’s most prominent financial success strategies.
These cheap production costs carry other interesting consequences for the company. Apple’s inventory turnover ratio was 46.2 in the past twelve months, meaning that Apple turned over its inventory every 7.7 days. Its delivery time takes only one to two days if items are in stock.
However, Cook was aware that large numbers of inventory cause risks. Therefore, when he took over the supply chain, he shut down ten Apple warehouses to cut down on overstocking. Keeping the stock of inventory low is crucial because customers’ demands are unpredictable. This strategy reduces Apple’s cost for the maintenance and operation of each warehouse.
A lot of businesses were affected by the pandemic in 2020. However, it has not stopped the growth of Apple. “From April through June . . . Apple . . . posted $11.25 billion in profits, a growth of 12 percent from the previous year.” Such data proves that Apple has a strong supply chain which prevents the company from losing money from temporary problems like the pandemic.
Because of their intelligent economic strategies, Apple has become the first U.S. company to be worth two trillion dollars. Apple’s financial success depends on its partnership with its suppliers. By utilizing both differentiation and outsourcing strategies, Apple has boosted its market value and gross profit margin significantly. As supply chain students work in their future careers, they should consider prioritizing the firms’ relationships with other suppliers. They should also remember that concentrating on their most valuable supplier will bring the firm quality services and drive more successful outcomes. Additionally, in order to facilitate the other end of the supply chain, maintaining a customer-focused goal by providing quality customer services is essential. By focusing on customer retention and building loyalty, you can maximize profits in the long run. Although Apple’s supply chain is not perfect, it has continued to bring Apple tremendous economic value.
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