How to counter demand variability?

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.

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8 thoughts on “How to counter demand variability?

  1. In order to mitigate the Bullwhip effect, is there any channel through which a company can get orders directly from the producer, reducing the wholesaler/distributor delay?

  2. This interesting piece is indeed a great example of why such processes simply cannot occur in the US infrastructure and more importantly job pool. While politicians of all parties like to consistently quip about how jobs should be here, the efficiency of operations argument makes it hard to figure out what the best thing to do would be. The NYtimes commentary also left open the conflicting argument in a quote which I found pretty compelling.

    “Apple’s an example of why it’s so hard to create middle-class jobs in the U.S. now,” said Jared Bernstein, who until last year was an economic adviser to the White House. If it’s the pinnacle of capitalism, we should be worried.”

    While this is true, one must also wonder whether it is really a fault of companies like Apple or the necessity of American society to shift its perception of the global workforce and understand where and why jobs are distributed in different places.

  3. This article makes sense because Apple also always seem to have product on demand and never seem to be backlogged. Now we understand it is because their workers in Asia are so flexible in when and how many Apple product they can make. This decreases the lead time from manufacturing to the customer which would also decrease things such as holding cost. From a pure economic standpoint, this makes perfect sense.

    I do disagree with the author’s statement that this is what’s killing the middle class here in the United States. While China has an enormous labor capacity, I highly doubt these types of work are considered middle-class work. The middle class is more of administrative, technology work and I believe those types of jobs are still prevalent here in the United States and will increase due to further need of these types of work. The article stated that 43,000 workers are here in the US as opposed to 20,000 overseas. Because Apple was able to expand through manufacturing overseas, it actually opened a lot of middle class work for the American people.

  4. The “so far” at the end of this post is what hit me the hardest. Being one of those proponents of socially responsible business, I’m always looking for a way to justify human rights, sustainability, happiness in the workplace, etc. So, when I look at exporting the whold process to China, I wonder if it’s just a “quick fix.” If anything, the Beer Game taught me that these Ops problems can be (and have been) overcome. If Apple is keeping labor in China to resist Bull Whip, why not invest a little energy in creating contracts so that the system makes rational production decisions and doesn’t overreact to demand shift? If Obama’s asking what would it take, why not respond “massive investment in factories with high degree of automation and flexible production capabilities?” I’m not arguing that bringing the factories back to the US is the most socially responsible decision or that it would necessarily address human rights or sustainability issues. I am just arguing that since the technology industry is constantly advancing, tech companies can’t have a mindset that will limit opportunities, as demonstrated in the statement, ““Those jobs aren’t coming back.”

  5. I think Apple’s biggest advantage, also against competitors, is its vertically integrated production system. They’ve used cheap land, labor, capital and enterprise (in China, Korea, Japan) in sync with their production model to make a cost and time efficient supply chain. I don’t really see any reason why they should move any of their operations back to the States any time soon. While companies like Apple can afford to effectively utilize the available resources in these emerging markets, its important to note that things can work against them anytime. While countries like China and India are making their presence in the world as super powers, it’ll be in due time that they establish a system of control just like how it is in the States. Recently, there was a huge out cry in China when labor unions took workers on strike at almost all the Fox Conn manufacturing facilities. The developing nations are becoming aware of their capabilities and more so, they are realizing the dependability that technology, and manufacturing, firms have on their resources. Apple’s success defies the term that things are “too good to be true”. But I don’t know how sustainable their efforts will be in the coming decade or so.

  6. This news story really highlights the importance of globalization. After studying abroad in Europe in the Fall I can say that Apple is a global company whose products are in high demand everywhere, not just in the US. Though it’s a US company it makes sense that they would take advantage of the opportunities that global production offers.

    I think that the quote from the article “If it’s the pinnacle of capitalism, we should be worried,” is important to think about. I would say that most business minded individuals look up to Apple, so if given the chance to operate in a similar manner I think many companies probably would. This makes the future of production in all industries something that will be very interesting to monitor. I wonder if in the future the US will need more government regulation to improve the economy. The “tax holidays” mentioned in the article might become more commonplace. I’m not sure that this would actually happen given the capitalist mentality of our country but it will be something else to be aware of.

    Globalization has changed all aspects of business from production to marketing. I liked the comments about changing any small detail of operations requiring much more organization and coordination than you would think, which in turn increases the bullwhip effect. I enjoy reading these articles that are relevant to what we discuss in class!

  7. I would like to compare Apples offshore assembly system to auto industry. In addition to the efficiency and high flexibility, I believe the low customization of Apple products makes the oversea production strategy more possible. Thinking of the main products of Apple such as iPhone and iPad, basically there are just 6 options for customer to choose: two color choices and three memory size choices. However, the demand for car industry faces much more diverse and particular tastes which require additional assemble processes to fulfill. Professor Osadchiy mentioned that auto companies own customization assembly lines at ports which complete the customization parts and release the final outcome for customer. Furthermore, Hyundai–they have run the localized assembly line in Alabama since 2005–forecast high demand in US market and planned to expand the factory for more production capacity. Not only Hyundai but numerous auto manufacturers such as Toyota and Honda have chosen to localize their assembly lines which reduces leadtimes and accomplish diverse customized demands. Also, the localization of assembly lines has created more than five figures of job openings so the US economy betters off. I think each industry has different ways to counter the demand variability: Apple gained efficiency and flexibility by offshore assembly line in and around China and Hyundai fulfilled customized and increasing demand by localization of assembly line, which both systems reduce leadtimes and costs in different ways.

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