Under Steve Jobs Apple revolutionized the mobile phone market. His successor, Tim Cook, perfected the art of supply chain management. 

Steve Jobs was the revolutionary mind behind some of the world’s most innovative products, with the iPhone rendering many competitors obsolete. After Steve Jobs passed away, Tim Cook took over. Production innovation may have taken a backseat under the help of Cook, but the company’s performance has seen tremendous improvement. A major contributing factor has been Cook’s relentless pursuit of supply chain and operations efficiency. How did Tim Cook transform Apple into one of the most valuable companies in the world?

Tim Cook becomes CEO

In October 2005, Tim Cook was named COO of Apple. Cook had been working as Executive Vice President of Worldwide Sales and Operations at the company since 2002. Cook joined Apple back in 1998 as Vice President of Operations. As head of Worldwide Sales, he helped expand Apple Macintosh business. In August 2011, Apple announced Tim Cook would take over Jobs’ role as CEO, with Jobs taking on the position of Chairman of the Board.  

Cook was the polar opposite of Steve Jobs. Where Jobs ruled with an iron fist. Allowing zero compromises, Cook’s leadership was one of democracy and less focussed on the product, spending more time on optimizing operations. Initially this led to much skepticism among experts and industry observers, questioning whether Apple would be able to maintain its innovative nature. However one might argue whether it was reasonable to expect another breakthrough as revolutionary as the iPhone. 

Cook’s operational expertise proved vital for transforming Apple into a highly profitable entity. In an April 2023 portrait by GQ Magazine, we learn that Cook was an “operational tactician”, being entrusted by Jobs to keep the company going until his return. Cook’s work before ascending to become CEO was vital. His diligent work as head of operations ensured all pieces were aligned to build the groundbreaking products Apple would bring to customers around the world.  

As Cook was rolling out his plans for Apple, margins greatly improved. In the first quarter of 2005 Apple’s gross margin as a percentage of revenue set a 28.5 percent. In the first quarter of 2007, gross margin had improved to 31.2 percent. Two years later, the margin had increased to 38.6 percent.  Gross margin peaked at 47.4 percent in the second quarter of 2012. The margin had fallen to 37.9 percent by the first quarter of 2015. This impressive performance was achieved through optimizing the complex Apple supply chain. 

Understanding supply chains

Before we detail how Apple, under Tim Cook, has been revamping its supply chain, we have to understand what a supply chain is, how it operates, and what levers companies can pull to optimize it. There are a wide variety of parts that come together to form the final product, which are interconnected through a global network, consisting of producers, vendors, manufacturers, transporters, retailers and the end-user. 

These are overseen by supply chain managers who ensure that all the necessary ingredients are added to make the final product. Smartphones, one of Apple’s primary revenue drivers, have a supply chain made of three critical components, the raw material extraction phase, the component manufacturing and the assembly. Smartphones are made of several raw materials of which the final make-up can differ per manufacturer. 

Ethical Consumer points out that smartphones on average are made up of 25 percent silicon, 23 percent plastic, 20 percent iron and 14 percent aluminum. Other materials are found in lesser quantities, such as copper, lead, zinc and nickel. These materials are extracted through mining activities, primarily, and unfortunately, in underdeveloped regions of the world. 

These extracted raw materials are transformed into individual components that run the devices we use on a daily basis. Essential components are the circuit board, the antenna, the display, microphone, speaker, battery and camera. But also the casing, chargers and proprietary components such as the packaging and the legal documentation. Once the components have been sourced and built, they are shipped for factory assembly. 

Each part impacts the revenue of a company, with last mile delivery taking up an estimated 41 percent of the total supply chain costs, according to figures from 2018. Delivery is followed by sorting, which accounts for 20 percent of the supply costs, parceling with 16 percent, warehousing 13 percent and 11 percent flowing to other parts of the supply chain. While these figures will have changed over time, they show that certain parts require more attention than others. 

The supply chain operations detailed by Ethical Consumer suggest that smartphone manufacturing has a strong diversified network, however, smartphone supply chains have experienced strong centralization. According to research published by McKinsey in September 2020, mobile-phone supplies have become regionally concentrated, primarily in China. Later we will detail how heavy centralization in China proved risky for Apple. 

Manufacturing excellence

Optimizing manufacturing is crucial to reducing costs and delivering high-end designs. In November 2013, The Washington Post highlighted how Apple was investing billions into advanced manufacturing processes. Machines that polish plastic, milling and laser machines to carve aluminum bodies for its MacBook products and automated testing equipment that will uphold Apple’s competitive edge over its growing rival Samsung. 

Through exclusive deals, Apple hopes it can create appealing designs whilst reducing the men hours necessary to improve profit margins. Obtaining the most advanced equipment and manufacturing processes is also Apple’s own creation, as it tries to push the limits of what is technically feasible. Luckily, Apple has the necessary resources to keep upgrading its manufacturing operations. 

As final designs are approved by the company’s executives, engineers spend weeks at facilities across Asia, The Washing Post notes, where they ensure all the right equipment and parts are ready to assemble the new line of products. Robotics experts fine-tune the delicate machines. Apple keeps tight control over the design and manufacturing process, contrary to its competitors who outsource the design stage, solely shipping the requirements and hoping whatever roles out of the assembly line passes inspection. 

The above scenario is an obvious oversimplification, but it exemplifies how Apple aims to keep tight control over each aspect of the manufacturing process. This comes at a high cost, Product development Director at industrial design firm Frog Design, Cormac Eubanks, explained to the news outlet. This could be witnessed during the assembly of the iPhone 4, where no testing equipment existed for the advanced gyroscope. The equipment had to be built from scratch to match the massive production volumes.    

Apple’s supplier network

The Apple supply chain streamlined its manufacturing operations across many locations around the globe. In 2018, CNBC made a special report about Apple’s supply chain. Every Apple product’s journey starts at the company’s headquarters in Cupertino, California where designers sketch out the new generations of devices. The products come to life through a vast global network of vendors who assemble Apple devices. 

Apple’s supply chain stretches out over 43 countries across 6 continents to manufacture all its products. CNBC highlights the different steps Apple needs to undergo for its A12 Bionic chip for the iPhone. Apple designed the chip in California, neatly packaged with Apple’s signature logo. The chip itself is manufactured at TSMC in Taiwan. Testing of the chips is conducted by Amor in the Philippines. When the chips are approved, they are shipped to Foxconn in China or returned to Taiwan, where Pegatron handles a subsection of the assembly. 

Despite the extensive supplier lists that Apple publishes, much is shrouded in secrecy, as the general public won’t know which supplier delivers which component. Nonetheless, teardowns, CNBC notes, reveal which manufacturers supply Apple with the required hardware. Hardware such as the Gorilla glass casing, is manufactured at Corning in Kentucky. These separate parts come together and are met with a strict shipment policy. 

Shipping secret iPhones

Five years prior to CNBC’s report, in September 2013, Bloomberg detailed how Apple was preparing iPhone shipments for its upcoming 5c and 5s devices, which were set for sale in the United States, Australia, Canada, China, France, Germany, Japan among others, simultaneously. The finished iPhones were moved from their respective factories at Foxconn and Pegatron to shipment companies. The report gives a rare glimpse as to how Apple plans and executes iPhone sales.

Finished iPhones are escorted by security to pre-bought airfreight space. Depending on the location, Apple would use FedEx’s Boeing 777s for shipments to the United States and decommissioned planes from the Russian military for other destinations. The shipments themselves were prepared months before the unveiling. This forecasting of parcel movements is a multi-disciplinary process at the company, with marketing, sales, operations and finance among others, predicting demand.  

After the initial forecasting has been completed, the iPhones are being moved to these key regions under heavy security. For each batch of 450,000 iPhones, Apple pays an estimated $242,000 per charter, with fuel, accounting over half of the shipping price. Once the launch-phase has been completed, Apple monitors demand in real-time at its retail-locations, third-parties and website to move shipments to where demand peaks. This can result in shipments that were initially destined for Europe to be rerouted to the United States or elsewhere to meet sudden surges in demand. 

Apple’s China expansion 

A recurring theme in the supply chain operations of Apple, are China and Foxconn. The collaboration between Apple and the manufacturing giant situated in the factory of the world, has been critical for Apple’s ability to produce millions of iPhone’s and ship them to their customers. In July 2017, Nikkei Asia zoomed in on the intimate relationship that Apple had created with Foxconn, also known as Hon Hai Precision Industry, over the course of the early 2000s.

Foxconn proved to be a reliable partner for Apple, as it was able to meet the tight deadlines it received from its most important customer, but according to Nikkei Asia, the company also played a crucial role in shaping the “aesthetic vision” for Apple. This was made possible through Foxconn’s manufacturing innovations, allowing Apple to combine different materials to create unique, innovative products. Foxconn made combining of aluminum parts possible through anodization, paving the way for slick smartphone designs. 

Apple, being impressed by the craftsmanship at the manufacturer, allocated the necessary funding for Foxconn to add new equipment to its production line. The factory received state of the art equipment used to build rockets and luxury goods, now retrofitted to make Apple’s most valuable devices. By having a tight-knit relationship with Foxconn’s operations, it can monitor output and inventory in real-time. This allows Apple to ramp up production whenever possible or adjust shipments were necessary, as noted by the Bloomberg report back in 2013.

Foxconn has seen enormous success through the collaboration, seeing its revenues grow exponentially. In 2005, Hon Hai Precision Industry had a revenue of $21.54 billion. This figure grew to 38.11 billion when the first iPhone was announced in 2007. The figure more than doubled just three years later to $79.38 billion. At the time of Nikkei Asia analysis in 2017, Foxconn’s revenue had grown to $158.15 billion. The company had grown into a true manufacturing behemoth and would grow its revenue past $200 billion as 2022 rolled around. 

Vertical integration

An important component to Apple’s supply chain superiority under Cook, has been its relentless pursuit for virtual integration. In February 2013, MacRumors cited a Q&A session with Tim Cook at the Goldman Sachs Technology and Internet Conference about his strategy to unlock growth for shareholders. Cook explained the company had made major investments in its supply chain, including its stores and corporate acquisitions. 

This helped Apple create a healthy cash position. Through these funds it could develop a strategy to bring value to shareholders. Cook commented that vertical integration became out of fashion, with people considering it to be crazy. However, Apple remained committed to vertical integration, giving it a competitive edge, with otters now having to scramble by to roll-out their own strategies. 

The same observations were made by Reginald H. Jones Professor of Corporate Strategy at Wharton School of The University of Pennsylvania, Daniel A. Levinthal, and his colleagues back in March 2012. Levinthal noticed that large tech companies like Amazon, Google and Oracle were on an aggressive acquisition spree to align software, hardware and other systems under one umbrella. But they might find themselves in a tough spot as Apple has been perfecting its craft for decades. The team at Wharton cites Google’s recent acquisition of Motorola Mobility and Oracle’s Sun Microsystems acquisition. 

These large tech companies saw the success of Apple with its hardware seamlessly connected through software and are in a rush to replicate it. However, Apple had been harmonizing its devices for 35 years. By designing its own hardware, down to the processor, and developing its software, its iPhone and iPad deliver the same Apple experiences customers have come to know and love. 

Wharton management professor, Lawrence Hrebiniak, commented that these companies can emulate the operating model of Apple, but this transformation won’t be achieved overnight. Tech companies have much expertise in the software-department, but connecting hardware with software, means optimizing the entire supply chains, from procurement to manufacturing, Hrebiniak adds. 

Challenges in vertical integration

This won’t come without risk or significant challenge, Hrebiniak pointed out. These companies have to become massive conglomerates with decentralized operations. They fall into the same challenges as other, established corporations, who have heavily diversified their businesses. Integrating all these different entities is only feasible if the company has one line of business, he explained. 

Technology companies, Apple alike, are desperately trying to maintain growth. Integration of its services to keep customers within the ecosystem is one strategy to realize production across the multiple product offerings, Director of New Media at Wharton, Kendall Whitehouse commented. Several have failed to make vertical integration work, such as Vivendi or General Electric (GE), the latter having spread itself so thin, it eventually crumbled under the weight of its complexity.

Tim Cook cuts OEM funding

Tim Cook’s pursuit of operations excellence isn’t without its flaws. In July 2020, Apple started to drastically cut expenses across its case suppliers. The move is a u-turn from Apple’s previous strategy to financially aid OEM in purchasing manufacturing equipment, Commonwealth Magazine (CW) highlighted. The revamped strategy comes after Apple has drastically reduced its capital expenditures from $16.7 billion in the fiscal year 2018 to $7.6 billion in 2019. 

An Apple case vendor commented to CW that this shows that Apple has been drastically reducing equipment funding for OEMs. A reason for decreasing funding toward these suppliers has been a slow-down in sales, with the company now having to explore other avenues to reduce costs and uphold profits. An electronics OEM executive told CW that Apple has been very cutthroat, forcing manufacturers to fork out funding for equipment. OEMs meanwhile feel pressured to give in, in fears of losing Apple as a client, he added. 

CW cites Pegatron subsidiary, Casetek, who had to invest $552.30 million for 6,000 machines to meet Apple’s demands, only to discover that no orders had come in from the Californian tech giant. This resulted in Casetek facing financial losses for the foreseeable two years. Catcher Technology, another major supplier for Apple cases, saw its revenue fall by 60 percent, coming from a revenue of $2.81 billion in 019 down to $345.8 million in less than a year, CW noted. 

Many OEM rely on Apple for their livelihoods, with some being in especially fragile positions. Power management chips supplier Dialog Semiconductor relies for 74 percent of its revenue on Apple orders. Audio chips manufacturer, Cirrus Logic meanwhile, draws 66 percent of its revenue from Apple. This brings enormous bargaining power to Apple, who can drive a company into bankruptcy just by moving its business elsewhere. We’ll refrain on commenting on the supplier strategies within this case.  

China dependency 

Apple was caught off guard by heavily relying on China for its manufacturing. This makes sense from an operational standpoint, as centralization makes executing less complex in an already complicated process. However, as Cook was laser focussed on optimizing every aspect of its supply chain, he forgot the obvious risks that come with employing a strategy centered around cost reduction and margin optimization.

In November 2022, surging COVID cases in China threatened iPhone production as restrictions forced factory shutdowns. The facility responsible for manufacturing the iPhone 14 and iPhone 14 Pro Max in Zhengzhou, China, was operating under significantly reduced capacity, the company said in a statement. The lower output could negatively impact the company’s financial performance. The zero-COVID policy enacted by authorities further amplified problems at Apple assembly lines.

Later that month, a violent worker’s revolt broke out at the world’s largest iPhone factory, CNN reported. The manufacturing disruption comes on the imposed shutdowns that hurt factory output for Apple products. Managing director of equity research at Wedbush Securities, Daniel Ives, detailed to CNN that shutdown and unrest would cost Apple an estimated $1 billion a week in lost iPhone sales, with sales estimates down by 5 percent due to factory shutdowns. 

This put the already tense relationship between tech companies and China further on edge. CNN cites analysts who predict that the unstable assembly line operations in China would accelerate tech companies divestment into the country, seeking new manufacturing opportunities in countries like India. Deep Water Asset Management revealed that Apple had already been decreasing its supplier locations in China for some time.  

Supplier analysis conducted by the asset management firm showed that facilities in China accounted for 35 percent of all locations in 2021. This was down from 39 percent in 2020. US-based locations increased from 9 percent to 11 percent over the same period. Of the 150 new facilities opened in 2021, Deep Water Asset Management notes, 79 percent were found to be operating outside of mainland China. 

An impressive 24 facilities were opened in the United States, 1 in Taiwan and 9 in Singapore. Countries like South-Korea enjoyed strong growth, with the amount of suppliers increasing from 28 in 2020 to 42 in 2021. Malaysia saw Apple suppliers grow from 16 to 24 over the same period. China however remained the top supplier, suggesting that it will take at least a decade before we will see any significant change in the regional assembly make-up. 

Operational excellence

Tim Cook proved to be a master in continuing and optimizing the foundations that Steve Jobs had laid when he retreated from his role as CEO of Apple. Cook had a deep understanding of all the intricate parts necessary to build and ship an iPhone. Through vertical integration, manufacturing techniques and production centralization, he was able to build an efficient system that could rapidly deliver Apple devices to customers around the world. 

As Apple started to grow exponentially, leaving many competitors like LG and Blackberry behind, its importance among OEMs grew exponentially, making some wholly depend on the Cupertino company for their livelihoods. This brought exponential bargaining power to Apple, who could now dictate prices and force OEMs to invest in equipment, rather than Apple ensuring they had the latest, state-of-the-art manufacturing tools. 

As business leaders and marketers it’s easy to forget how important the supply chain can be to a company’s success. Ecommerce giants like Coolblue are best known for their high customer satisfaction, but behind every happy customer is a complex supply chain that ensures the products get to the customer in time and when faults arise, they are quickly taken care off. That is one of the true super powers of brands that dominate within their industries.