Case Study Notes -  Cost leadership: Apple reduces its operations costs by forming a partnership PDF

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Summary

 Cost leadership: Apple reduces its operations costs by forming a partnership with manufacturers such as Foxconn in China. Costs of production such as labour and materials are significantly lower in China than the USA or Australia.
 Good/service differentiation: Apple differentiates their iP...

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Operations Role of operations management 

Strategic role of operations management – cost leadership, good/service differentiation  Cost leadership: Apple reduces its operations costs by forming a partnership with manufacturers such as Foxconn in China. Costs of production such as labour and materials are significantly lower in China than the USA or Australia.  Good/service differentiation: Apple differentiates their iPhones from its competitors by the product features and quality. Product features include their operating system (iOS), touch screen, app, iTunes and distinctive appearances. The focus on iTunes and apps has been key to Apple’s success in establishing itself as a market leader for smartphones. However, when the iPhone 5 was released in late 2012 it fell from the top position as highest selling smartphone, superseded by Samsung due to lack of innovation and rising competition in the smartphone market which are considered the main reasons for Apple’s continuous loss of market share. Quality has been one of the key focuses of Apple’s as they market their iPhones as a premium product and priced accordingly. Apple has promoted their iPhone with a focus on innovation to differentiate it from competitors. Quality issues in the production of the iPhone 5 (scratching of cases) led to the model being discontinued in 2013 and replaced by the iPhone 5c which used a low cost plastic casing. This represented a shift in Apple’s approach to quality yet low sales of the model would suggest it was not a success.

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Goods and/or services in different industries  Apples products are mostly standardised (mass produced)  Customers can customise standardised goods through apps, music, etc  Apple supplies goods and services – Apple Genius bars provide customised after sales service  Online booking system for Genius bar provides an element of self-service

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Interdependence with other key business functions  Operations/marketing – market research from previous sales of ipad provided Apple with benchmarks for ipad mini sales (how much to produce). Operations provide marketing dept with costs for production of the iPhone 5c so as to determine the price of the new iPhone  Operations/ finance – Apple allocates a price per unit for production of iPhones, which it pays outsourcing partners. Partners negotiate with Apple if prices go up  Operations/human resources – Apple tend to hire technically savvy staff from product development to retail staff. Foxconn employed an extra 10,000 factory staff to meet production of the iPhone 5c in 2013

Influences 

Globalisation, technology, quality expectation, cost based competition, government policies, legal regulation, environmental sustainability  Globalisation – Apple use the global web and sources production globally (Foxconn has factories in China, Europe and South America, produces 40% of the world’s electronics). Apple relies on partners in China to ensure production targets and

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quality standards are met. Imitation and reverse engineering an issues (Samsung copying Apple technology). Technology – Apple forced to continually patent/trademark innovations to compete. Lack of innovation saw Samsung go into top position for smartphones. Significant investments in R&D needed to be innovative and competitive. Quality expectation – A lot of Apple’s success has been due to its reliable, durable, functionally simple and clean designs. Premium price with a premium price. In 2013 the iPhone 5c (low cost option using low cost materials0 along with the iPhone 5s (premium quality) allowed them to cater for quality expectation in multiple target markets. Cost based competition – Economies of scale, Apple suppliers can adjust for changing volumes of a product by adjusting staff, reconfiguring tasks and rebalancing the line. Standardised nature of production allows Apple to shift resources and adjust fixed and variable costs to other products of volume or demand changes. Government policies – In March 2013 Apple were summoned to appear before a federal parliamentary committee to explain their pricing policies and why Australia were forced to pay more for some of their products compared to other countries. Legal regulations – Apple has been repairing phones outside the warranty period for free since the Australian Consumer Law (ACL) changed in 2011. Electronic goods should be covered for a time that is reasonable – phones for the durations of their contract. Environmental sustainability – Apple’s website states: “The way products are manufactured, used and recycled represents the largest percentage of Apple’s greenhouse emissions. That’s why we design them for better environmental performance to try and reduce our carbon footprint”

Corporate social responsibility  The Apple website in the section of Apple’s supplier responsibility states “workers everywhere should have the right to safe and ethical working conditions. 6 areas of focus: accountability, empowering workers, labour and human rights, health and safety, environment and audited results”.

Operations processes 

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Inputs  Transformed resources – Materials (Memory chips, speakers and touch screens), Information (development in technology) and Customers (tastes and preferences)  Transforming resources – Human resources (Apple Australia employed 2418 staff in 2013 while Foxconn employs around 200,000) and facilities (17 final assembly plants around the world in 2012 with 200 suppliers) Transformation processes  The influence of volume, variety, variation in demand and visibility (customer contact) Volume – The smartphone market is competitive and subject to rapid change in product design and demand. Predicting volume required involves risks and costs, such as over-ordering components Variety – iPads, iPods, iPhones, etc. Variation – In 2012 the demand for the iPhone 5 exceeded the initial supply during the launch. The ability to produce more in a short period of time depended on the suppliers and their ability to adjust operations. Visibility (customer contact) – The iPhone 4 has 2 versions with many problems in the 4 fixed in the 4S. This is due to customer feedback.

 Sequencing and scheduling – Gantt charts, critical path analysis In the assembly of an iPhone, certain components and circuitry will need to be assembled prior to others being installed in the phone. Apple have tracked an order-delivery sequence (critical path analysis) of an iPad at 12 days, 18 hours and 8 minutes.  Technology, task design and process layout Technology – Automation is used by Apple for placement of small components that are difficult to perform and error prone, not to eliminate work that can be done manually. Task design – Employees on an iPhone assembly line will require certain knowledge and skills. Unskilled workers have specific functions with no shared tasks. They are highly supervised and the speed of work is quick. Process layout – Apple suppliers use a product layout for their manufacturing. Machines and equipment is arranged according to the sequence in which the iPhone is assembled.  Monitoring, control and improvement Monitoring and control – Apple suppliers have a high level of supervision as many workers are unskilled. Tasks need continual monitoring and control checks to improve time management, improve quality, etc. Improvement - The iPhone 5 has a metal band, which is prone to scratching. Continuous customer feedback about receiving new products with scratches have led to tighter production standards and tougher quality tests and controls. Longer lead times were a result. 

Outputs  Customer Service – Apple suppliers have a high level of supervision as many workers are unskilled. Tasks need continual monitoring and control checks to improve time management, improve quality, etc.  Warranties – Apple suppliers have a high level of supervision as many workers are unskilled. Tasks need continual monitoring and control checks to improve time management, improve quality, etc.

Operations Strategies 

Performance objectives – quality, speed, dependability, flexibility, customisation, cost  Quality – CEO Tim Cook stated “We have never been about selling the most. We’re about selling the best experience and the happiest customers”. The challenge is maintaining quality due to rising competition.  Speed – The level of demand of a new iPhone cannot always be accurately determined in advance, so once it is launched operations must quickly respond to the new level of demand.  Dependability – Some features of the iPhone were criticised for lack of dependability (e.g. maps). Apple needed to respond quickly to dependability issues in order to maintain consumer confidence in the iPhone.  Flexibility – Changing the design of the iPhone 5 to embrace colour and achieve lower production costs was a strategy to increase its market share of low-cost smartphones.  Customisation – Apple products can be customised through Apps, music, cases, etc.  Cost – Apple has made cost a performance objective by: outsourcing operations to China, switching outsourcing partners to reduce production costs and designing the iPhone 5 c, with cheaper components such as plastic casing.

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New product or service design and development  Development of the iPad mini launched in 2012. o Market research, product concept and development – customers wanted a smaller screen. o Product and quality design – Apple engineers spent months designing a smaller and lighter tablet. o Testing and assessment – assessing customer feedback, improvements in future models. o Product refinement – testing iPad mini led to developments of the iPad mini 2. Improved screen resolution and large storage model were some ideas. o Product launch and distribution – in 2013 the launch of the iPad mini2 was delayed to allow the launch of the iPhone 5 to stand alone.

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Supply chain management – logistics, e-commerce, global sourcing  Logistics – In 1998, to ensure new I Macs were available at Christmas, Steve Jobs paid $50 million to buy up all the available holiday air freight space.  E-commerce – When apple.com was established, iPod sales took off. Apple realised it was economical to ship them directly from Chinese factories to consumer’s doors.  Global sourcing – Apple have a variety of suppliers from all around the world. E.g. Korea and Taiwan (LCD screens, chipset, batteries and flash memory), Europe (gyroscope, rotation of display), Inner Mongolia (rare earth minerals used in glass polishing, colour screen, etc.) and USA (software, audio chip, design and development).

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Outsourcing – advantages and disadvantages  Advantages o Reduced costs of production: labour, materials, facilities and energy o Access to expertise, Foxconn is the largest outsourcer in the world of electronic products. o Greater flexibility o Access to the best technology o Able to focus on core business activity.  Disadvantages o Increased transportation costs o Loss of control o Security risks o Human resource problems/loss of jobs o Language problems o Dependant on other businesses . Technology – leading edge, established  Leading edge – Fingerprint sensor technology  Established – The iOS operation system that runs on the iPhone, iPod tounch and iPad devices.

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Inventory management – advantages and disadvantages of holding stock, LIFO (lastin-first-out), FIFO (first-in-first-out), JIT (just-in-time)

 Apple must order components in advance of new product launches. Materials are acquired through a combination of purchase orders, supplier contracts, open orders and prepaid orders  High inventory turnover and the number of days in which inventory is warehoused is very low.  JIT is employed as once products are ordered online the product is shipped directly from China.  This reduces lead times, demands are met quickly, Apple avoids damage or warehousing costs and it minimises the chance of stock becoming obsolete 

Quality management (Control, assurance, improvement)  Apple requires a commitment to rigorous quality assurance. This ensures the highest standards of total quality management. The ideal suppliers are those who understand Apple’s culture, standards and expectations.  Control checks – Apple employs a secure online database that has regularly updated information on current and potential suppliers  Control issues with iPhone5. At least 5 million were returned to Foxconn due to an unnamed defect

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Overcoming resistance to change – financial cost, purchasing new equipment, redundancy payments, retraining, reorganising plant layout, inertia  Since Steve Jobs returned to Apple in the 80’s, executive staff have been made redundant, new equipment has been procured, change agents have been introduced and all current and new staff are continually retrained in new technology.  Supply chains are continually reorganised and any sign of inertia from suppliers/staff is not tolerated.

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Global factors – global sourcing, economies of scale, scanning and learning, research and development  Global sourcing – Benefits for Apple include cost savings by outsourcing, proximity to suppliers and overseas markets, and access to leading technologies. The majority of components come from China and Mongolia (reduces transportations costs). Negatives include worldwide economic conditions, fuel costs, unemployment, etc.  Economies of scale – Efficiencies in production by using skilled labour of mega factories such as Foxconn. Having over 300 suppliers in China, Apple outsources large overseas production to gain lower unit costs, economies of scale and quick lead times, giving Apple a competitive advantage.  Scanning and learning – Due to the competitive nature of the smartphone market, competitors need to scan and learn from competitors in the design, manufacturing and delivery of smartphones in order to remain competitive. Issues include imitation and protection of intellectual property  Research and development – Apples investment in R&D is a crucial strategy in maintaining a competitive position in the smartphone market. Total R&D expenses in 2013 was $4.5 billion.

Marketing Role of marketing 

Strategic role of marketing goods and services  Marketing at Apple plays a major role in generating sales, thereby contributing to strategic goals such as: profit maximisation, growth, the development of brand awareness, customer loyalty

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Interdependence with other key business functions  Operations – Market research enables sales forecasts for the new model which are used by operations to prepare production schedules  Finance – Budgets will be allocated to the marketing department to effectively control costs and minimise expenses in their activities.  Human resources - The launch of the new iphone by the marketing department created the need for staff training and development of Foxconn employees (assembly, etc). Employees at retail stores need to be trained in the specifications and promotional offers for the new range.

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Production, selling, marketing approaches  Selling approach in the introductory stage as products were beyond customer expectations  Apple now employs a marketing approach. Understanding what the customer wants and needs is integral to the success of Apple’s marketing and the maintenance of a competitive advantage,

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Types of markets – resource, intermediate, industrial, consumer, mass, niche  Apple sells mainly to consumer markets but also have other intermediaries such as JBHiFi selling Apple products

Influences on marketing 

Factors influencing customer choice – psychological, sociocultural, economic, government  Psychological – The perception is that Apple products are cool and innovative, motive is peer pressure, attitude is that Apple products are easy use, and personality is usually those who love new gadgets. E.g. iPhone 5c in various colours to attract teenagers (colour reveals your personality) and iPhone5s for forward thinkers.  Sociocultural – Apple users believe life is easier with Apple, apps such as Ping create social bonds.  Economic – GFC led to falling sales and the iPhone 5c was a result of this. Strong iPhone sales during 2008-2009 recession offset not so strong Mac sales.  Government – Apple needs to ensure it complies with laws related to warranties when selling in Australia.

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Consumer laws  Deceptive and misleading advertising – Apple must ensure promotional information doesn’t convey a false impression of the iPhone, or suggest certain qualities that it doesn’t have.  Price discrimination – Apple must sell the iPhone at the same price to all customers in Australia. However, this doesn’t prevent other retailers of iPhones from determining their own price.

 Implied conditions – Smartphones must be fit for purpose, correspond with their description and spare parts, repairs, etc. must be available and comply with warranty conditions.  Warranties – All Apple products come with a warranty and must be compliant with the Competition and Consumer Act. 

Ethical – truth, accuracy and good taste in advertising, products that may damage health, engaging in fair competition, sugging  Truth, accuracy and good taste – The sale of all Apple items come with a set of terms written in fine print. Apple has been criticised for influencing children through product placement in Toy Story 3.  Engaging in fair competition – Given the popularity of some Apple products, they limit the number for purchase.

Marketing process 

Situational analysis – SWOT, product life cycle  SWOT analysis Strength Well-established brand Opportunities New innovations and technologies

Weakness High price relative to competitors Threats Increased competition

 Product life cycle iPhone 6s/6s plus (introduction), iPhone 6/6 plus (growth), iPhone 5c/s and iPhone 4 (maturity) and iPhone 5 (cessation) 

Market research Data collection:  Primary data – Every month Apple surveys iPhone buyers to see what is driving demand for their products versus competitors’ products, what features they use most, customer demographics and their level of satisfaction with different aspects of the iPhone  Secondary data – Apple uses sakes data and information collected from other sources. Data analysis and interpretation:  “The growth in iPhone net sales during 2013 resulted from increased demand for iPhones in all of the Apple’s geographical regions, primarily due to the launch of the iPhone 5”.

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Establishing market objectives  Increase market share in China by 10% in the next 12 months  Develop new products and services – Apple radio and iPhone 6 plus  Expand existing markets – Increase online sales by 15% in the next quarter  Maximise customer service – Genius training  Expand sales to customers who do not yet own an Apple product

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Identifying target markets

 Apples strategy is to target different segments of the market. Apple target specific user experiences, and build the product accordingly eg iPad mini 

Developing marketing strategies  Apple integrate all of these to consistently communicate its unique benefits to consumers

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Implementation, monitoring and controlling – developing a financial forecast; comparing actual and planned results, revising the marketing strategy  Apple monitors the sales figures for the iPhone to identify market saturation (when sales are no longer increasing)  They also found the iPad was more popular with men  Corrective action may require a new model of iPhone to be launched or identify new distribution channels to increase sales and market share  Apple developed the iPad mini to attract women

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