
Apple Turns Over Its Inventory Once Every 5 Days - avirambm
http://www.theatlantic.com/technology/archive/2012/05/wow-apple-turns-over-its-inventory-once-every-5-days/257915/
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ajross
This seems like a measurement you have to be careful with. It's measuring
completed products shipped only, as far as I can tell. So the fact that Apple
is selling hot products which can't stay on shelves (alternative: selling
products with such high value that customers demand doesn't drop when they
have to order them) counts as "good supply chain management" when it's really
a reflection of the desirability.

If Apple was, say, sitting on a warehouse of unsold A5's, it wouldn't count
against them. And if their battery supplier goofed and they ended up with a
million incomplete iPads, they'd still be "selling" all the inventory they
had.

~~~
snitzr
The high speed of manufacture and distribution means that if demand goes up or
down, Apple could throttle the manufacture of goods to keep the same high
inventory turnover regardless of demand flux. Low inventory is desirable
financially and JIT (just-in-time manufacturing) can make it possible.

The 5 day inventory turnover would not be sustainable without good supply
chain management. This is a strategic advantage for Apple.

~~~
ajross
No, that's wrong. Apple can't throttle the manufacture of flat panels or
batteries or chips because they don't make them. Semiconductor components
especially have a month-long trip through the fab (from where the wafer is
started until it comes out ready for packing); it's quite literally not
possible to get 5-day scale bandwidth out of that process. Likewise cross-
ocean transits make that 5-day number impossible to tune for in real time.

I'm not dinging Apple's supply chain management (they are, after all,
competing very well on price vs. competing products -- that's the ultimate
goal). I'm saying that this number alone isn't very good evidence for or
against it. It's a complicated issue not well served by "OMG! Apple sells its
inventory every 5 days!!!!"

~~~
vladd
Comparing 5 days with the time Apple would need to change its production
orders is like comparing bandwidth with latency.

~~~
ajross
I was using "bandwidth" technically, in the signal processing sense. The 5
days is a wavelength, as is (say) the month it takes a chip to get through
Samsung's fab. Apple has a knob to control the latter signal, but it's too
coarse (by literally an order of magnitude) to modulate the former. Ergo
snitzr's supposition that it was Apple's agility and control over the supply
chain that is responsible for the 5 day inventory size cannot be right.

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nateberkopec
Apple is one of lean manufacturing's greatest success stories. I mean lean in
the original Taiichi Ohno sense: reducing waste during the manufacturing and
fulfillment process.

In 1997, Apple had 437 million in inventory with 7 billion in revenue. By
2006, Apple had just 270 million in inventory - with 20 billion in revenue.
Today, it's 1.2 billion in inventory on a staggering 108 billion in revenue.
Since the instatement of Tim Cook as the top guy in Apple's operations
department, Apple has become one of the most efficient consumer electronics
manufacturers in world.

By comparison, HP currently has 7 billion (!) in inventory with 127 billion in
revenue - that's nearly 5 times as much inventory per sales dollar than Apple.
Sony has something like 8.6 billion in inventory on 89 billion in sales -
almost 10 times worse than Apple.

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snitzr
The Steve Jobs biography mentioned Apple's supply chain success. Tim Cook was
noted as being responsible for great improvements in inventory management.

"When Cook took over the supply chain, he cut the number of component
suppliers from 100 to 24, in a move to force the companies to compete for
Apple's business. Cook then shut down 10 of the 19 company warehouses to limit
overstocking, and by September 1998 inventory was down from a month to only
six days."
[http://www.appleinsider.com/articles/11/10/21/jobs_trusted_c...](http://www.appleinsider.com/articles/11/10/21/jobs_trusted_cook_to_know_exactly_what_to_do.html)

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mikek
And _that_ is why Tim Cook is CEO.

~~~
Splines
I wonder how he'd do playing The Beer Game
(<http://en.wikipedia.org/wiki/Beer_distribution_game>)

~~~
idoh
The Beer Game is like the Kobayashi Maru test - the rules are set up so you
can't succeed, and the failure is supposed to teach you a lesson.

<http://en.wikipedia.org/wiki/Kobayashi_Maru>

~~~
eru
So the solution is to cheat?

~~~
idoh
always

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hemancuso
Consider the huge number of iPads/Macs/etc sold through apple.com that never
hit inventory, they ship right off the line straight from China. Adding a lot
of 0's to the numerator can really drive down an average.

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micks56
Some misconceptions in this thread on how inventory turnover is calculated.

It is (commonly) calculated as COGS / Average Inventory.

Let's say your COGS for a Macbook is $500. You buy material on Jan 1 to make
it, assemble on Jan 2, and ship Dec 31. Your turnover is $500 / $500 = 1 for
the year.

If you buy parts to make 2 Macbooks on Jan 1 your inventory turnover would be
0.5 ($500 / $1000).

This accounts for unused A5 chips in stock (or anything else unused), and
online sales don't count as "0 days".

More here: <http://en.wikipedia.org/wiki/Inventory_turnover>

~~~
excuse-me
But if you buy finished iPads from Foxcon then they don't count until the
finished iPad is shipped out the door. Whereas Dell might buy in NVidia cards,
Intel CPUS, Corsair memory and assemble it itself so that does count.

Although Apple are good it's largely a trick of how they manufacture. If Dell
had it's assembly plant as a subsidiary company and wasn't billed for the
computer until Fedex shipped it - they could have a 1minute turnover.

~~~
micks56
Sure, but don't try to hack this metric too much. Manufacturers use it and
don't try to game it. They actually want to improve it. Apple partners with
Foxcon to get this number at 5, and wouldn't have it at 5 if they didn't
believe Foxcon could manage demand. Apple would maintain inventories in their
warehouse if that was the case.

This metric speaks as much about Foxcon's success as it does Apple's.

~~~
excuse-me
Yes this is mostly down to Foxcon and that Apple sells a relatively small
range of machines with little customization. And it only counts for Apple's
own stores, not machines on the shelf at Staples etc

And if you take this metric to extremes then something like the Morgan car
company - where there is a multi-year waiting list for their hand built
sportscars - is the most efficient company in the world !

------
stretchwithme
I believe it.

Back in 2005, I ordered my sister an iPod on apple.com, complete with custom
etched message on the back on Monday afternoon. It was shipped from China and
arrived in New York on Thursday, not even 70 hours later.

It seems like Apple has figured out what things are really worth spending
money on and invested heavily in those those things. Almost as if they had
applied the Taguchi method to the enterprise.

Certainly, the speed with which materials and products move through a company
is a thing worth optimizing.

~~~
excuse-me
So who does it help for them to be paying to airfreight an iPod vs having
built them 10days in advance and seafreighted them?

~~~
ctdonath
Custom-etched iPods mean a real customer has in fact paid full price for the
product, so it can be shipped directly to the customer for less than the total
cost of routing it thru the brick-and-mortar pipeline (truck to store,
inventory, shelve, pay for store space & utilities, pay in-store staff
overhead, etc.).

~~~
excuse-me
True, the saving of engraving on the production line is probably enough to
offset the cost of posting a single item.

Interestingly there was recently an analysis of why Apple offer free
engraving. It's to reduce the number of used products (iPods especially) on
the market.

Since the product is ubiquitous, built to last and doesn't change much - the
used market would be a significant drain on sales.

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bstar77
I'm very impressed with Apple's ability to turn over inventory, it seems to be
an extremely well oiled machine.

But... I have to wonder if these optimizations work against Apple if there is
a sudden significant downturn in demand. Since Apple pumps so much money into
the supply chain to keep it consistently rolling at a high level, would it
hemorrhage cash at epic proportions if a significant drop in demand occurred?

If I draw a parallel to the 80's video game crash, the big players were the
ones that seemed to take the biggest hit while the significantly smaller
players did not have to shift their operations so drastically to survive. They
were able to sustain themselves on crumbs. Right now we're seeing largish
companies like Palm and Rim try to live off of crumbs and it's not going too
well.

~~~
apike
The whole point of having so little stockpiled inventory is that if there's a
reduction in demand or a new product is released, the minimum amount of money
is lost unloading the excess product.

Back in the day, Apple would always be sitting on 10 weeks of inventory. When
a downturn or new product would come out, it would force them to sell the
backlog at a loss, which was very painful for them.

~~~
excuse-me
There is a flip side to this. An earthquake in Japan has car factories in the
USA sitting idle a year later because of a shortage of parts.

A fire at a Foxcon factory in the run up to christmas would really hurt Apple.

~~~
arkitaip
But would it be worse than having billions in inventory?

~~~
excuse-me
They have got billions in inventory, it's just on Foxconn's books rather than
Apple's.

Having very lean stock levels in a retail business can have drawbacks.

------
joshuahedlund
I used to work at an Apple retail store, and I'm pretty sure we didn't have
turnover every 5 days. Of course this is an average, and I'm not exactly sure
what it's measuring, and regardless we definitely got a lot of stuff shipped
every day.

From what I hear of my wife's job, though, it sounds like Trader Joe's turns
over its inventory every 1-2 days.

~~~
ImprovedSilence
You make a good point, and while I don't know the answer, maybe online sales
play a part in their turnover rates? And it's possible that some large stores
(think NYC) have 2-3 day turnovers, with others being slower?

Like I said, I don't know, but those are two variables I can think of.

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lordlicorice
> We calculated these times from the report's "Inventory Turn" metric, which
> estimates the number of times a company's inventory is sold in a given time
> period. Apple's number is 74, according to Gartner (or 76, according to
> Forbes). From there, it's a common practice to divide by 365 to "estimate
> the number of days [of] sales sitting in inventory."

Shouldn't it be 365 divided by the number of times per year they sell their
average inventory?

They're going to have the reciprocal of the actual answer. Like, if it takes
an entire year to sell off their inventory then their formula will give you 1
day turnover.

~~~
mooism2
Yes, they mean “divide into 365”, not “divide by 365”.

------
jcampbell1
This is just absurdly high if it includes Apple retail stores. It makes sense
that samsung would have high inventory turns since they don't hold finished
products in inventory, but Apple must keep finished inventory in the retail
stores, which makes the number that much more impressive.

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ekosz
I remember Evan Koslow talking about[1] this back in 2010 at the University of
Waterloo. Really thought provoking stuff.

[1]:
[http://www.youtube.com/watch?v=9RYXqCtsZsc&feature=playe...](http://www.youtube.com/watch?v=9RYXqCtsZsc&feature=player_detailpage#t=1280s)

------
eitally
As micks56 said below, this has everything to do with how the combination of
Apple selling product for enough profit to be able to do things like pay
advance cash to their suppliers. This pushes almost all the inventory
(material & finished goods) off their books entirely, and by enabling things
like direct ship by Foxconn they basically then only have to semi-accurately
forecast demand at their retail stores and minimally ship to stock for the
shelves and small warehouses that support them.

This doesn't belittle Apple's achievements at all, but considering they only
have ~20 component suppliers and 1 integration partner, it's a pretty damned
simple supply chain.

------
petermcd
The numbers I've heard here in China are three weeks from the factory door to
a warehouse on the West Coast of the USA (don't forget loading/unloading and
time clearing customs). Typically, factories require you to complete payment
and take possession before the product leaves their factory doors. There is
often an inspection of completed goods at the factory before payment is made,
and the buyer takes possession.

Perhaps Apple has told their manufacturing partners they will only take
possession once the product arrives at their warehouse in the US, moving this
time window from Apple's books to their supplier's books.

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philwelch
According to the article, that's over twice as fast as Dell. I guess if Dell
can't compete, they should just liquidate the company and give the proceeds to
the shareholders.

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iblaine
Consider how many distinct items are sold by Apple compared to Samsung, Dell
and a grocery store and Apples feat seems less impressive.

~~~
r00fus
Let me rephrase that for you:

"Considering how lightweight the Google homepage is compared to Amazon's,
their responsiveness/uptime feat seems less impressive"

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buster
I wonder if a story like "Dell turns over its inventory once every 5 days"
would have made it to the frontpage for a whole day...

~~~
icarus_drowning
In a way it did, since the OP mentions that Dell turns over its inventory
every 10 days.

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7952
Surely stock piling is happening somewhere to cope with Christmas?

~~~
bonzoesc
Not at the moment, it's June.

------
netcan
Such an incredible company.

