Reviewing Apple's supply chain during the iPhone 3G rollout

Everyone has got an opinion about the new Apple 3G iPhone (faster? yes! battery life? booo!), but how did Apple's behind-the-scenes supply chain systems and processes fare during the much hyped rollout last week?

According to news accounts of frantic Friday, there were enough of the ultracool devices in the Apple stores, which means Apple's physical supply chain processes (manufacturing, inventory and logistics) worked well. In fact, Apple reported on Monday, July 14, that it had sold 1 million iPhones by Sunday. (By comparison, it took 74 days to sell 1 million of the original iPhones).

But it appears that the digital supply chain side of Apple's house was unable withstand the barrage of activation demands (through the iTunes site) that stormed in from 21 countries. Many frustrated customers had to wait varying lengths of time on Friday to get their new iPhones up and running. "The iTunes software appeared to have been so overwhelmed by demand today that customers were not able to go through that final stage and sync their iPhones," said AT&T spokesman Mark Siegel. (So far, Apple has not commented on the problems and did not return a message fromCIO to talk about its supply chain.)

"To me, the physical supply chain is working just fine," says Kevin O'Marah, the chief strategy officer at AMR Research. "But the pioneering position they have taken in the digital supply chain is showing how tough it is to compete in this new realm."

In AMR Research's 2008 "Supply Chain Top 25" list, Apple took home the top spot, besting Nokia, Dell, Procter & Gamble, IBM, Wal-Mart and others, due to "an intoxicating mix of brilliant industrial design, transcendent software interfaces and consumable goods that are purely digital," noted the report's authors, who included O'Marah. "The mechanical and financial benefits of this approach include extremely high inventory turns, minimal material or capacity limitations to growth, and excellent margins." (For more on what those top 25 companies do, see "Apple, Nokia, Dell Tops Among Global Supply Chains.")

O'Marah says he was surprised that it was the digital side of Apple's operations that encountered difficulties. Apple's physical supply chain operations have a "checkered past," says O'Marah, though that has recently changed.

But it appears to O'Marah that Apple's digital supply-chain strategy, which he applauds for its infinite scalability and zero-marginal cost, may have "bottlenecked" on Friday. "Who would have even thought that was possible?" he asks.

The future supply chain

In the AMR "Supply Chain Top 25" report, the analysts noted that while Apple could have stumbled in meeting the demand for the original iPhone in 2007, it did not. "Behind-the-scenes moves like tying up essential components well in advance and upgrading basic information systems have enabled Apple to handle the demands of its rabid fan base without having to fall back on their forgiveness for mistakes," notes the AMR report. (See "Fraud and Theft Risks in Global Supply Chains Are Everywhere" and "How ConAgra's Pot Pie Recall Bakes In Hard Lessons for Supply Chain Management" for more on today's top supply chain issues.)

Even with the technical problems and mild customer frustrations on Friday, O'Marah doesn't think there's cause for alarm at Apple. "No one's chucking their iPhone," he says.

"You can look at that and say, 'Shame on them for not thinking this through,'" O'Marah says. "But a fairer observation is: Good job to Apple for mastering the physical supply chain so well that you have this high-profile launch and your problems are not on the physical side-you have product in stock. So, you've done it. And yet what you're doing is so successful in putting this product out there, that the pressure ends up falling back on the content side of the business. Which is kind of amazing."

There aren't too many companies that experience the physical and digital convergence intensity like Apple is. O'Marah notes that Disney (which is also on the AMR top 25 supply chain list) may be the closest comparison. Disney must coordinate its digital and physical supply chain operations for its movies through its distribution arm (shipping DVDs to stores), its TV properties, theme parks and Disney websites.

"Though," O'Marah says, "there's not quite as much of a surge in demand on its digital supply chain" as what happened with Apple's. (Going green with your supply chain? See "Can You Build a Carbon-Efficient Supply Chain?" Read about how four CIO 100 honorees plan for unexpected events in their supply chains in "The Supple Supply Chain.")

The importance of blending digital and physical supply chains is a trend that will only continue, however. "It's an interesting story because it's the digital and physical converging and lo and behold it's the digital that had trouble," O'Marah says. "There are lessons to be learned for everyone."

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