A Report About Outsourcing In Apple Company

Introduction

Apple Inc is a large technology company that outsources manufacturing of its products, it outsources to competent technology manufacturing companies around the world. It does so in other to focus on its core competence and maximize outsourcing advantages. The benefits of outsourcing come with risks which ought to be well studied and mitigated, which we will going to do in "Risks And Rewards: Sample Essay About Outsourcing For Apple Company" paper.

Background

Apple is a major multinational technology company located in America. Its headquarters is in Cupertino of California USA. It was founded by Steve Jobs, Ronald Wayne and Steve Woznaik in 1st April 1976. Apple Inc designs manufactures and markets, laptops (MacBook), smartphones (iPhone), iPad, Apple watch and technology accessories. Apple Inc offers technology software, services, programming, applications and network solutions. The company also provides music and video streaming services through its watchOS, tvOS and itunes stores. Apple products are sold worldwide through their 506 retail stores, retailers, wholesalers, third party agents, direct sale and online stores. Apple Inc generated 265. 6 Billion USD in 2018.

Apple Inc contracts manufacturing of its iPhone, iPad and iPod to Foxconn Technology Group in Taiwan, a subsidiary of Hon Hai Precision Industry Co. LTD. Foxconn is a multinational electronic company specialised in contract manufacturing. Its top are Acre, Amazon USA, Apple and Blackberry. It generated 152. 62 billion USD in 2017. The company headquarter is in Tucheng, New Taipei, Taiwan, it was established by Terry Gou in 1974. It has multiple factories in China, India, Japan, Europe, Malaysia, South Korea, Mexico and the United States. Apple products are produced in Foxconn factories in China.

Apple runs a complex supply network, to further explain the web, the following is a breakdown of Foxconn’s suppliers of components needed for a in making an IPhone:

• Accelerometer: Bosch in Germany, Batteries: Samsung in South Korea and Huizhou Desay Battery in China,
• Cameras: Sony in Japan. OmniVision in the United States produces the front-facing FaceTime camera chip but subcontracts TMSC (in Taiwan),
• Chipsets and Processors: Samsung in South Korea and TSMC in Taiwan. Alongside their partner GlobalFoundries in the United States,
• Display: Japan Display and Sharp in Japan. LG Display in South Korea,
• DRAM: TSMC in Taiwan. SK Hynix in South Korea,
• eCompass: Alps Electric in Japan, Fingerprint sensor authentication: Authentec makes it in China but outsources it to Taiwan for manufacturing,
• Flash memory: Toshiba in Japan and Samsung in South Korea,
• Gyroscope: STMicroelectronics in France and Italy,
• Inductor coils (audio): TDK in Japan,
• Main Chassis Assembly: Foxconn and Pegatron in China, Mixed-signal chips (such as NFC): NXP in Netherlands,
• Plastic Constructions (for the iPhone 5c): Hi-P and Green Point in Singapore,
• Radio Frequency Modules: Win Semiconductors (module manufacturers Avago and RF Micro Devices) in Taiwan. Avago technologies and TriQuint Semiconductor in the United States.
• Qualcomm in the United States for LTE connectivity, Screen and Glass (for the display): Corning (Gorilla Glass) in the United States. GT Advanced Technologies produces the sapphire crystals in the screens. Semiconductors: Texas Instruments, Fairchild and Maxim Integrated in the United States.
• Touch ID sensor: TSMC and Xintec in Taiwan.

Apple outsources the manufacturing of its Mac line of products to Wistron Corporation, a large technical service provider in Taipei, Taiwan with factories in China. Apple outsources the manufacturing of its Touchscreen Controller to Broadcom in the United States. The manufacturing of IPhone’s transmitter and amplification modules are done by Skyworks and Qorvo in the United States. Audio Chipsets and Codec are outsourced to Cirrus Logic in the United States. Baseband processor is outsourced to Qualcomm in the United States and controller chips is outsourced to PMC Sierra and Broadcom Corp in the United States.

Reasons for Outsourcing

Tim cook CEO of apple explained the major reason of outsourcing manufacturing is 'The number one reason why we like to be in China is the people. China has extraordinary skills. And the part that's the most unknown is there are almost 2 million application developers in China that write apps for the iOS App Store. These are some of the most innovative mobile apps in the world, and the entrepreneurs that run them are some of the most inspiring and entrepreneurial in the world. Those are sold not only here but exported around the world'.

The unavailability of expert software developers and programmers of applications (Apps) for the AppStore of Apple Inc in-house is another reason the company outsources. Apple’s large outsourcing to china is because they believe it is near impossible to find that much “pull” of skills and expertise anywhere else. Specialisation and precision are motivating factors for Apple outsourcing manufacturing. Apple cited an example with ICT Company their AirPod manufacturer in New Zealand. Apple desires the engineering and development process that ICT can innovated from their research and development, with the capacity of producing millions of products at zero defect level.

On outsourcing Cook says: 'The products we do require really advanced tooling, and the precision that you have to have, the tooling and working with the materials that we do are state of the art. And the tooling skill is very deep here. In the US you could have a meeting of tooling engineers and I'm not sure we could fill the room. In China you could fill multiple football fields'. Outsourcing provided the optimum option in this case.

Apple outsources manufacturing of its products in other to focus on core business activities of designing sophisticated products and running a successful enterprise, which cannot be done if Apple bore the burden of manufacturing. Apple also outsource in other to improve efficiency, by outsourcing to specialists and experts with years of experience, extensive research and development, manufacturing capacity and large capital, all which Apple cannot easily build.

To be cost efficient Apple outsources to companies that provide lower cost without compromising quality. These companies access labour and raw materials at lower cost than Apple would if it manufactured its products in America, this will mean higher cost of production and eventually products become more expansive. By outsourcing Apple takes advantage of economies of scale.

Apple outsources to companies with large factories in China with highly developed and technologically advanced capacities and facilities which otherwise is expensive or inaccessible. Outsourcing gives Apple greater competitive advantage in the industry, Apple is apple to leverage on skills, expertise and knowledge along its supply network. By outsourcing Apple saves time to focus on core competencies.

Risks of Outsourcing

Apple enjoys numerous benefits by outsourcing, the company can maximise profit, improve quality, save time, gain competitive advantage, explore the world’s best technology experts, focus on the core of the business and foster innovation. With all these benefits it comes at a surprise that Apple faces risks by outsourcing. Apple faces supply, demand, control, environmental and process risk as it outsources product manufacturing to Foxconn Technology Group, ICT Co and Wistron Corporation.

Supply Risk

Apple is an efficient Company with a fast-moving supply network. It is heavily dependent on constant supply to meet high customer demand. It faces high supply risks, if a contract manufactures supper any set back in it affects the availability of products. This could lead to significant decline in demand, leaving the company in turmoil. Apple Inc also risks delay in deliveries by manufactures to its distribution centres, this could lead to unavailability of products in stores and online. The company risks damage of products from suppliers, if products are not properly packaged. Labour unrest, supplier bankruptcy and fire outbreak are risks Apple may face by outsourcing the manufacturing of products.

Process Risk

Transportation of outsourced products from contract manufacturers comes at a high risk. It is estimated that amount 10,000 containers are lost on sea yearly. Adequate and efficient modes of transportation need to be explored to ensure products are delivered “in on piece”, if not products could be damaged or lost in transit, the risk of transportation could lead to the loss of millions of dollars.

Knowledge transfer is a major outsourcing risk for Apple. The more manufacturing and apps development roles and operations are outsourced, the more unlikely for in-house staff to support such operations should it be moved back internally.

Demand Risks

The reputation of suppliers is crucial, if the reputation of any supplier is damaged Apple risks losing customers because of association, like in the case of Nike where it was discovered that contract manufacturers where involved in child labour and maltreatment. Fluctuations in demand posses a high risk on suppliers, the risk of fluctuations in demand could lead to unavailability of products and a potential bullwhip effect.

Control Risk

By outsourcing manufacturing Apple is at a risk of losing control of quality, as it can’t have its people in all suppliers’ facilities at all time, it can only monitor to some degree. An example would be in 2017 when Samsung batteries blow up when charging. If any damage is made Apple control while products are in-house. Lack of communication and visibility deeps the threat of control loss. The company risks minimum batch sizes forced on it, as supplier might require a minimum batch size higher than Apple’s required batch size. Control risks affect safety stock levels.

Environmental Risk

Apple’s major risk currently is the economic war between the United States of America and China. The sanctions USA is placing on China have a domino effect that risks Apple outsourcing at a higher cost and more restrictions when China responds.

Catastrophes Such as tsunamis, affect supplies. Catastrophes can cause unavailability of products due to destruction of facilities like the collapse of Rana plaza in India which lead the loss of a clothing factory and member of staff. Economic changes such as currency fluctuations have caused serious threats and risks with foreign suppliers.

Another risk Apple could face face is the possibility of contract manufactures abandoning service due to internal reasons such as the loss of key workforce members, inadequate capital, employee transgression, employee contracting a disease (a company closed when one employee contaminated a disease in Asia) or mismanagement. External factors could be due to changes in the food industry, economic recession, political turmoil, civil unrest, or acquisition by competitors.

Risk Mitigation

Apple faces diverse risks and to eliminate these risks the company must be deliberate, strategic and fundamental. Toward mitigation of high risks from the ever fast changing economy, manufacturing process and consumer demand, Apple needs to adopt the agile strategy for its supply network. The network should be flexible to meet customer demands, be quick and proactive in responding to change in situations, improve lead time, improve service quality, increase variability of work, have more local control in manufacturers’ facilities, maximize customer satisfaction, be cost efficient and less structured through the empowering members of staff.

To reduce the risks of outsourcing Apple should improve supplier relationship management to improve supplier management, achieve lower hidden costs, improve productivity and product quality, shorten lead time, purse long term investment and improve service quality. This can be done by integrating supply networks where information is shared, contract manufacturers know exact stock levels and replenishes almost automatically. This improves the traceability of products as they move through and out of manufacturers’ facilities and product delivery.

To improve supplier relationship Apple should plan jointly with suppliers, this leads to the improvement in product quality and lead time. Joint research and development are necessary going forward, this ensures the Apple and its contract manufacturers it outsources to will share similar systems which will aid the flow of information and process, an example will be sharing similar barcoding systems. A formidable supplier relationship will result in both Suppliers and Apple advancing technologically together making outsourcing easier.

To mitigate the risk of viability of vendor, it is crucial that Apple follow a structured and precise approach to reduce the chance of being subjected to a failure in delivery and make contingency plans should failure occurs. Prior to entering outsourcing agreement with contract manufacturers, the company should perform a thorough and detailed background check process. The agreement should also anticipate the possibility of failure and include a consequence if it should ever occur. This agreement should also provide Apple the freedom to source from alternative contract manufacturers to avail itself should there be a break in contract. Alternative contract manufacturers list should be regularly updated to ensure continuous supply, this is difficult with larger products but feasible with smaller once like AirPod and applications.

To reduce the risk of hidden cost incurred by Apple Inc, the company should choose the correct contract manufacturers, create the right outsourcing approach, create a fundamental internal strategy and generate a safe and efficient integrated system with manufacturers. Apple Inc. should pay more attention to how vendors present estimates and provide descriptions for money distribution and chose the most suitable contract. Apple should also create a risk management team in-house.

Conclusion

In a dynamic world Apple will continue to explore best options in other to maximize profit and increase customer satisfaction, in doing so the company will continue to outsource to the best companies and explore the option of either continuing outsourcing or bringing back outsourced operations in-house. Going forward Apple needs a risk management department to analysis current and future possible risk in other to formulate agile strategies to eliminate or reduce this risk.