How Apple blocks its competition

Apple's supply chain dominance means cheaper products that are delivered faster than its rivals'. By David Goldman, staff writer


NEW YORK (CNNMoney) -- Apple is a force to be reckoned with when it comes to the supply chain for gadgets. It gives buyers what they want faster than its rivals -- and in the process, it sometimes delays the competition's products from coming to market.

Japan's earthquake, tsunami and aftershocks halted or slowed production of hundreds of components that are found in consumer electronics devices, including the iPhone and iPad. Memory chips, touch screens, image sensors, batteries and the special resins that are used to hold chipsets together have all been in scarce supply lately.

Yet Apple (AAPL, Fortune 500) sold a remarkable 18.7 million iPhones and 4.7 million iPads last quarter. COO Tim Cook said Wednesday that the company would suffer "no material supply impact" in the current quarter, despite what he called "the mother of all backlogs" thanks to very strong demand for the iPad.

Other consumer electronics makers haven't been so lucky. Sony Ericsson, for instance, said it would delay its eagerly anticipated Xperia Play "PlayStation phone" because of the Japan earthquake's impact on the supply chain. Research In Motion (RIMM) finally launched its PlayBook tablet last week, after delaying its release by a month.

"A number of equipment manufacturers are getting delayed or shut out due to Apple's supply chain dominance," said Brian White, supply chain and Apple analyst at Ticonderoga Securities.

Not only has Apple been able to beat competitors to the market with devices, it also sells them more cheaply. Despite having a year to catch up, no major tablet competitors have been able to match Apple's $499 entry point for the iPad.

How does Apple do it?

"The products are hot, it's got $60 billion in cash, and it's a big company," White said. "Those three factors allow it to get more of its fair share of components, and ultimately market share."

Apple aggressively uses its size and vast array of resources -- including its very deep pockets -- to get the deals it wants with component makers. The company sent executives to its Japanese suppliers literally with cash in hand to make sure supply remained adequate, White said.

But Apple's key to supply-chain success isn't as simple as its ability to bring bigger briefcases of $100 bills to its partners than its rivals. Part of the reason Apple wins in the supply chain is simply because Apple is so successful overall.

"In times of a shortage, suppliers are going to sell to their biggest customers first," said Tom Dinges, senior electronics manufacturing consultant at IHS iSuppli.

Sales of Apple's devices have risen astronomically over the past several years, and the company has grown to become one of the world's biggest component purchasers.

But there are lots of big companies out there. What separates Apple from the rest is its ability to sell a lot of products while selling remarkably few different kinds of products.

Apple predominately sells just five different gadgets -- iPad, iPhone, iPod, Mac and Apple TV -- and a combined total of 15 different variations of those devices, excluding modifications like the amount of available memory.

That small handful of products shares many parts common to all the devices. That makes Apple's supply chain among the most precisely honed in the world.

"For a company of Apple's size, no one out there sells so few different products," Dinges said. "As a result, Apple's sourcing strategy can be much more finely tuned than other companies with very disparate products."

All of that adds up to a very well-oiled machine. Despite ongoing worldwide supply constraints, Apple's Cook said the company is "so confident in its ability to supply" that it's launching the iPad 2 in 13 more countries next week.

The Motorola (MMI) Xoom isn't even available in 13 countries yet. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 16,890.47 -21.64 -0.13%
Nasdaq 4,464.88 22.18 0.50%
S&P 500 1,971.59 1.64 0.08%
Treasuries 2.55 0.09 3.74%
Data as of 3:40pm ET
Company Price Change % Change
Bank of America Corp... 15.58 0.24 1.58%
Facebook Inc 74.58 0.87 1.18%
Genworth Financial I... 13.94 -2.32 -14.24%
Apple Inc 98.26 -0.12 -0.12%
Pfizer Inc 29.26 -0.21 -0.73%
Data as of 3:25pm ET

Sections

Goldman Sachs downgraded Walmart -- and made the case that big-box retail is quickly losing ground to the Internet. More

Goldman Sachs downgraded Walmart -- and made the case that big-box retail is quickly losing ground to the Internet. More

Restrictive immigration policies prevent talented entrepreneurs from launching businesses in the U.S. So, they're moving to Canada. More

Steve Mason, a pastor from California, inherited more than $100,000 in student loan debt when his 27-year-old daughter died suddenly in 2009. With interest and late penalties, the debt has since ballooned to $200,000. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.