Very timely comes this article about the Beer game and our favorite trillion-dollar-company-to-be Apple. The Beer game is a board game where the idea is to simulate a (beer) supply chain. It seems pretty simple – in order to fulfill the end demand retailers have to order inventory from wholesalers, wholesalers – from distributors, and distributors from factory, that produces beer. Each level has to decide how much to order or produce based on their demand. Things can get out of whack pretty quickly – a small increase in end consumer demand usually leads to inventory shortage at the retail level and that drives up the ordering quantity. Wholesalers facing increased demand, also start having backlog and increase order sizes even more. When the demand hits the factory, it has to produce crazy amounts to satisfy it…
All of this is the classical Bullwhip effect… One of the reason for it is the delay between the moment when the order is placed and when it is delivered. If the delay is shorter, supply will be matched with demand quicker and inventories will be reduced. How is this all related to Apple? Well, their entire supply chain – from the component manufacturers to final assembly – is in China, Korea and Japan. This presumably should decrease the leadtimes and tame the bullwhip. Here is what that article says (citing NY Times):
“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.
and one more:
When President Obama asked Steve Jobs what it would take to make iPhones in the United States, the late Apple co-founder supposedly quipped: “Those jobs aren’t coming back.”
Time reduction is important. Apple clearly understands that and cares enough to reduce it even beyond the production cycle by air-lifting finished products to the retail stores. Still, I think there are at least two other important consequences of having the final assembly in China (and reasons for that Jobs’ comment). First, if you buy online orders are drop-shipped from China. This eliminates the need for infrastructure in the States. Also the bill is partially picked up by customers: even though the standard shipping on orders of $50 or more is free, customers still have to pay for expedited shipping. These costs would have to be absorbed if the assembly is done in the States. Second, Apple enjoys enormous labor flexibility by doing final assembly in China: it can layoff workers as the need be, or make them work overtime. They could hire 3,000 people overnight – says the same article. In the sense, production flexibility deals with the bullwhip even better!
Doing this in the States would be next to impossible – and to me this is the main reason for offshore assembly. Achieving same degree of flexibility here would require massive investment in factories with high degree of automation (hence lower labor requirements) and flexible production capabilities (so that the production capacity can be allocated between products based on the demand). All these benefits come free in China. So far.