Supply Chain Model in Operations Management - Example

This paper sets out to investigate the set of approaches to SCM and will seek to analyze what makes SCM effective. Based on AMR research, the effective SCM of Apple has brought it top awards for two consecutive years (2007 and 2008), which makes it a good subject for analysis. I will try to investigate how SCM of Apple has contributed to the tremendous success of its product, the iPhone. Furthermore I will critically evaluate the approaches to supply chain management and how these approaches make supply chain management effective. To this end, I shall undertake a contextual analysis of supply chain management approaches in Apple’s success with the iPhone. To start with, it is worth while saying that in the race against their competition, companies are constantly seeking for ways of improving their service, which is aimed at not only meeting, but exceeding customers’ expectations. In order to achieve their goals, they inevitably destroy old principles of work, seeking for new and better ways of providing their service. This is close to the concept of creative destruction – its truths hold in economics too. The economic concept of “creative destruction” is said to originate from the works of Mikhail Bakunin, Friedrich Nietzsche and Werner Sombart’s “War and Capitalism” where Sombart asserted: “again out of destruction a new spirit of creativity arises” (1913, p.207). Leading economist Joseph Schumpeter incorporated the term “creative destruction” as a central element of the contemporary capitalist business model; describing the process of transformation that accompanies radical innovation (Schumpeter, 1942). Moreover, it has been advocated that Schumpeter’s “creative destruction” analogy is central to effective operations management and the supply chain network in the contemporary business model and envisaged entrepreneurial vision as the force of sustained, long term economic growth, with the gales analogy symbolic of the destruction of monopolistic markets, which facilitated abuse of market position and power (Reinert, H., & Reinert, E.S., 2006) Schumpeter further argues that internal innovation within a business operational framework produces lower costs, which in turn permits companies to sell products at lower prices, which is referred to as dynamic efficiency (Utterback, J. 1996). This in turn highlights a key element of Schumpeter’s model that competition for innovation as opposed to competition for customers is the most important (Utterback, J. 1996). Indeed, the proliferation of Apple’s growth as a brand and business phenomenon in the digital arena arguably symbolises Schumpeter’s “creative destruction” model in its operations management and supply chain as it “enables organisations to control the quality of inputs and the opportunity to expand using existing skills” (Boddy, 2005). Moreover, Schumpeter’s view of entrepreneurial innovation embodies the “gale of creative destruction” as the continuing cycle of innovation, which renders existing technology, skills and equipment obsolete. Innovation in this context essentially becomes essential as the foundation of dynamism in line with Schumpeter’s theory that the evolution and sustainability of a successful business model is not dependant on how capitalism administers existing models, but rather with how it destroys them through creativity to survive long term growth (Metcalfe, J.S. 1998). From Schumpeter’s “gale of creative destruction” theory proposition, large companies benefit from economies of scale associated with segmented working practices, and in addition technological advances are generally made, or purchased by this type of organisation (Metcalfe, J.S., 1998). For example, it has been submitted that Apple’s continuous diversification and horizontal integration of effective supply chain management has cemented its position as a central digital player and thereby enhances brand value: “Competitive advantages such as brand recognition can last a long time and may take a few years to deteriorate” (Hitt., Black., & Porter, 2005). If we consider this in context of the 21st century business model, Schumpeter’s proposition clearly remain relevant to operations management and the supply chain network. For example, the manufacturing and service industries are characterised by short product life cycles and large budget requirements for research and development, fuelled by changing consumer habits and requirements (Smith, R.D. 2006). Schumpeter further distinguished between different types of innovation through the creation of novel combinations using existing knowledge, for example the iPhone, which is further evidenced by its sales figures. When the Apple iPhone debuted, it sold 270,000 units at a pace of 150 per minute in thirty hours, each price before contract fees at 499 -599. By early September, the sales had crossed the one million mark, which far outstripped the adoption rate for the original iPod. Apple then cut the iPhone’s price by $200 and the price doubled. By the year’s end, industry analysts predicted that global consumers would have purchased three million iPhones, with an approximate further seven million in 2008 (Trebilcock, 2007). Moreover, in 2007, Apple finished the year in its fiscal fourth quarter with record revenue and profits. It has been submitted that a central element of this success is logistics management and understanding of the global supply chain (Trebilcock, 2007). In simple terms, any effective supply chain management system is reliant on a cohesive interaction of capacity and funds to supply demand and the internal infrastructure of any territory is vital to the consistency of such a supply system (S. Chopra and P. Meindl, 2007). In the annual supply chain top 25 report 2007, AMR Research praised Apple for superior supply chain capabilities with the iPhone and performance, ranking the consumer maker second in a list of retail and manufacturing heavyweights (AMR Research, 2007 available at www.amrresearch.com/supplychaintop25). From practical perspective, prior to sales of iPhone, it was considered an innovative victory of design and functionality and brand value (Trebilcock, 2007). As with other products such as Xbox, PlayStation3 and Wii, analysts expected shortages when phones went onto sale but this didn’t happen and it has been argued that this pertains to the triumph of the supply chain management as emphasised by Michael Levi, director of operations and solutions strategy at i2 Technologies (quoted in Trebilcock, 2007). In fact, Levi goes further and asserts that the importance of getting the supply chain right as evidenced by Apple is vital in introducing innovative products to the market place: “A killer product is only successful if it gets to the right customer at the right price at the right time” (Levi in Trebilcock, 2007). Moreover, Levi observes that “Apple’s supply chain technology is really the silent contributor to the company’s success in executing the product innovation” (Trebilcock, 2007). The supply chain terminology covers a range of interlinked horizontal organised systems and Quayle identifies the supply chain for a product as a logistic process including all firms involved in ensuring that the product reaches the end customer at the right price and right cost and right time (Quayle M, Jones B., 1999). This is further evidenced by Levi’s observations of the iPhone supply network whereby the numbers provided were delivered to meet consumer demand. Furthermore, Lummus and Vokurka define the SCM model as follows: “Supply Chain is all the activities involved in delivering a product from raw materials through to the customer including sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, delivery to the customer and the information systems necessary to monitor all of the activities” (Lummus and Vokurka, 1999). The efficacy of a supply chain is inherently dependant on the partnership and alliances developed between manufacturing companies and their suppliers and other logistic related parties (Coyle et al, 1996, p.8). Moreover, supply chain management is an integration concept of all the value-creating elements in the supply, manufacturing, and distribution process, from raw material extraction, through the transformation process, to end-user consumption (Basnet et al, 2003). Chandra 2002 also describes supply chain management as a way of improving competitiveness by reducing uncertainty and enhancing customer service through creating relationships with suppliers and customers (Slack et al. 2007). The type of supply chain management depends on the type of supply chain being managed (Slack et al, 2007). For example, an individual supply item such as the iPhone is concerned with ensuring that there is a smooth and efficient flow from raw material to finished goods with the customer and requires close management of a chain of separate operations in different centres (Quayle, M, Jones B. 1999, p.5). Quayle further argues that logistics is an essential part of this and is a process which seeks to manage and co-ordinate all the activities within the supply chain from sourcing to acquisition and through production where appropriate and through distribution channels to the customer (Quayle, 1999, p.85). In contrast, James argues that logistics is “the applied science of defining supportable systems and of planning and implementing the acquisition and use of resources, logistics is the most important thing in the world” (Jones, 1994 p.1). Whilst the effective operation of logistics is undoubtedly vital in Apple’s global distribution of the iPhone, it is arguable Jones’ argument ignores the fact it is only part of the supply chain management. Moreover, it is submitted that truly effective operations management is inherently dependent on the successful correlation between the various co-dependant factors of which logistics is a part (Slack et al, 2007). Indeed, effective supply chain management is the effective synchronisation of a firm’s processes and the processes of their suppliers to match the flow of materials, services and information with the demand of customers. The importance of supply chain management to inventory to control is immeasurable (Slack et al, 2007). This is further evidenced by the fact that the final iPhone product is comprised of parts made in Singapore, Taiwan and the USA. All the parts from these territories are then assembled and packed in Apple’s Shenzen facility in China prior to shipping. As such, synchronisation is vital and any disruption in the material flow of the suppliers to Apple’s China facility would halt production. Additionally, the success of the logistics is inherently dependent on efficacious logistics, highlighting the point that effective operations management intrinsically requires the smooth operation of various aspects of the global supply chain. Interestingly, it was estimated by AMR, that notwithstanding the logistical dynamic, Apple still had an $80 profit margin per iPhone and “This $80 profit is greater than the price of any single input, so it is definitely greater than the value added for any of its partners” (www.amrresearch.com/supplychaintop25). This is further evidenced by Levi’s observations that “Ten or 15 years ago, a company like Apple owned its R & D and manufacturing processes from soup to nuts” (Trebilcock, 2007). However, through Apple’s horizontal diversification, it has “divided up all of the tasks with getting product from concept to market with outsourcing, collaborated on the demand signal to determine how many units to manufacture and then synchronised the delivery of the products” (Trebilcock, 2007). Levis’ further highlights what he feels were the three essential steps making the supply chain a success with the iPhone: establishing synchronisation, efficient execution and utilisation of the supply chain to address problems. The first step is to establish synchronisation communication layer so you can share a single version of the truth with your partners” (Trebilcock, 2007). The second step was successful due to apple’s full exploitation of the cost margins in the marketplace. Once this expired, it reduced the costs of the iPhone, which further fuelled sales and its dominance in the touch phone market. The success of the third step was evidenced by Apple’s quick turnaround in addressing initial teething problems with its iPod nano product, which Levi puts down to “that’s supply chain” (Trebilcock, 2007). Levi’s summary of the success of Apple’s iphone operations management further highlights the co-dependency of numerous factors, all of which must operate at an optimum level in the various levels of the supply chain. Ultimately, the efficiency of the supply chain will lead to increased sales and market share (Slack et al, 2007). Moreover, in the 2007 AMR Research Supply Chain Top 25 report, Apple received a composite score of 6.40 in the review of its supply chain management, hot on the heels of Nokia. It was commented that “Apple’s unparalleled demand-shaping capability lets its supply chain record spectacular results without sweating costs like everyone else” (www.amrresearch.com/supplychaintop25). “The importance of leadership is hard to overstate”, asserted AMR senior vice president Kevin O’marah (www.amrresearch.com/supplychaintop25). “Companies in this year’s supply Chain top 25 are able to respond quickly and efficiently to opportunities arising from market or customer demand. It is not simply a matter of cutting costs”( www.amrresearch.com/supplychaintop25). To this end, the co-ordinated supply chain management demonstrates synchronisation, leadership and effective execution in line with core supply chain strategy principles. Moreover, Demerest (1997) asserts that “Globalisation among organisations responding to improved communications and market opportunities is resulting in “virtual” organisations”. These organisations or business units retain core skills but also have the ability to rapidly exploit emerging market opportunities. He therefore argues that integrated structures increase organisational boundaries will become fluid with groups of “entrepreneurial cadres” forming directed form a virtual centre, questioning the concept of corporate headquarters. These networks then can respond rapidly to localised customer needs (Craven et al, 1996). Key factors in these networks include dynamics of organisational change, customer characteristics and core competencies (Achrol, 1991). Alternatively Weele postulates that an essential component of supply chain management is the just in time strategy (JIT), whereby products and materials are all produced when needed in the production process, not sooner and not later, but exactly in time and in the right quantity. Indeed, Levi argues that an important observation of iPhone’s success was the fact that consumers got the product at the right time at the right cost (Trebilcock, 2007). Additionally, some commentators argue that the JIT model improves quality and overall productivity, eliminates waste by providing cost-effective production and delivery of only the necessary quantity of part at the right quantity time, while using minimum resources (Morash, 2001). Morash further argues that JIT highlights on time definite deliveries and reduces buffer inventory and safety stocks. Interrelated to this is an economic order quantity approach as the main driver of inventory practices (Slack et al, 2007). A balance has to be struck between the costs of frequent re-ordering and expense of holding stock. Efficiency could be achieved by adhering to the EOQ principle and provided rationale for centralised stock holding. However problem is variable demand, which further supports the JIT approach of Apple’s iPhone supply chain management strategy. Additionally, a consistent theme of Apple’s success is its brand reputation and customer satisfaction, of which the success of the iPhone is testament to. To this end, quality and top quality management (TQM) has become a central theme in the success of supply chain management and operational strategy (Slack et al, 2007). The TQM strategy has been developed relatively recently and embodies basic principles under the following ten major principles: Leadership, Commitment, Customer satisfaction, Continuous improvement, Total involvement, Training and education, Ownership, Reward and recognition, Error prevention, Co-operation and teamwork (Berk & Berk, 2003) It is submitted that the TQM philosophy effectively embodies the interrelationship between the central theories of supply chain management such as synchronisation and JIT, which in turn is reflected in Apple’s iPhone supply chain. This is further emphasised by Berk and Berk’s model (1993), which further developed a framework identifying the central elements of TQM and necessary techniques to support a TQM philosophy. Figure 1 demonstrates this and is adapted from Berk and Berk’s model. Figure 1: Source Berk and Berk (1993) P.8 (in Walsh et al, 2002). TQM is customer focused and revolves around the concept of customer satisfaction. However once customer satisfaction has been obtained, it must then be maintained, which clearly interrelates with synchronisation and JITT. Therefore, TQM initiatives must include an in built culture of continuous improvement which can help an organisation satisfy the needs of its customers on an ongoing basis, which is demonstrated by the different iPhone features and diversification of price plans and tariffs. TQM arguably enables focus on organisational activities to eradicate causes of defective products and prevents such products reaching the customer. Quality means continuously meeting, or exceeding customer expectations (Reed et al, 1986). With a culture of universal responsibility, the success depends on everyone within the organisation or SCM network. Moreover, Schein postulates that this has to be actively supported by senior management and Schein identifies one of the common causes of failure of TQM programmes as being a lack of top management commitment (Schein, 1991). Material requirement planning is also needed to plan requirements of raw materials using bills of material, inventory, open order data and lead times with master production scheduling (Slack et al, 2007). Nagendra argues that this reduces inventory costs, which will demand that deadlines are met and supports a plan for effective production and control material costs and usage (Nagendra, 2001). Furthermore, Walsh et al (2002) argues that the central benefits of TQM include the following: elimination of defects, reduced scrap and rework, reduced levels of cost, increased levels of efficiency and productivity, increased employee morale and motivation. TQM clearly has played a key role in these developments and a key tenet of this has been customer satisfaction. Moreover, Gunneson argues that empowered network teams within SCM are an opportunity for strategic quality improvement teams to function in an optimal manner (1997). Conclusion Whilst academic debate is slightly polarised as to the importance attached to various elements of the supply chain model in operations management; it is submitted that the success of the iPhone model demonstrates that effective supply chain management is inherently dependent on the smooth interrelationship of the various sub-elements. Moreover, synchronisation between the various elements within the supply chain has arguably strengthened Apple’s brand value and position in the marketplace. Indeed, the operational management of Apple in getting the iPhone to the marketplace with such a degree of success and high profit margin highlights the ability to utilise information tools creatively and create a culture of continuous improvement within the hierarchical levels of the supply chain. Bibliography Achrol, R (1991). Evolution of the marketing organisation – new forms of turbulent environments. Journal of Marketing, pp. 77-93. 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