
Working Capital Optimization Trade-Offs: Does Apple Ship iPhones by Air or Sea? - thedogeye
http://learn.flexport.com/does-apple-ship-iphones-by-air-or-ocean/
======
bluedevil2k
I would argue that Apple's cost of capital is 0%. They don't have a better way
to invest the money, which is evidenced by their almost $200B sitting in the
bank doing nothing for their company or shareholders (seriously, how about a
Microsoft-style massive one-time dividend). I would guess they ship their
phones by air to keep delivery times fast and consistent.

~~~
smoyer
I'd guess they use a hybrid approach ... the statement about iPhones always
being on the verge of selling out is a red herring.

Whether you ship by air or sea, so long as you do it consistently, the number
of phones you have available is a constant based on the rate you're
manufacturing them. All the air versus sea argument does is change the lag in
receiving them.

Assuming the rate they can be manufactured can be adjusted based on demand,
you want to make sure you're always on the verge of selling out to avoid
carrying more inventory.

So my guess is that they normally ship by sea but increase the manufacturing
rate and ship some percentage of phones by air to keep the stores "just
stocked enough".

~~~
sachingulaya
Ocean is great for west coast logistics. But then you can either do overland
trucking or air to the rest of the US.

------
fragmede
After the initial demand surge at product release, is supply really that
constrained? istocknow.com shows the iphone 6 is currently widely available in
the US. If they're not in short supply in stores, why _not_ save some $15
million?

Sitting in a cargo container in the middle of the Pacific vs the back room of
a store for 30 days doesn't seem that different to me.

The watch, however, is sold out until July, if not later for some models, so
it would make sense to ship them by air.

~~~
MCRed
Apple is still shipping by Air.

I doubt there is 30 days of phone inventory, more like 1-2 weeks. They are
keeping their supply below 4 weeks, as part of lean manufacturing. Thus their
turnover in supply is less than the amount of time it takes for a shipment to
cross the ocean.

This might still be doable, but demand shifts would mean that some models that
are suddenly more popular (Eg: the white vs gold colors) would cause outages.

The goal is zero supply- the phone arrives at the store just as the customer
spontaneously walks in to buy it.

That would be most efficient.

~~~
wiredfool
According to their most recent investor conference call, they are at about 5
weeks of channel inventory for iPhones. (Essentially at the low end of the
range that they said that they want to be in)

------
LukaAl
There are many problems in this article. The biggest problem I see is in the
value of an iPhone and in the capital that is locked while it is in transit.
Although there is little information on Apple's operation, a quick look at
their balance sheet provides some insights. For instance their 2014 10-K
([http://www.sec.gov/Archives/edgar/data/320193/00011931251438...](http://www.sec.gov/Archives/edgar/data/320193/000119312514383437/d783162d10k.htm))
list 112,258 million $ as CoGS and 2,111 million $ as inventories. These give
us around 53.2 as inventory turnover or, better around 7 days. It is a very
short time even for air shipping, and this value is an average of all the
product. It is highly probable that Apple ships FOB destination making the
choice between air and sea not important for them (or better, choosing the
preferred one on other consideration). Another aspect to consider is that when
the product is registered in the book is not necessarily when the product is
paid for. If we take from the 10-K the Account Payable turnover ratio we get
3.7, so apples pay on average after more than 90 days. That's a pretty
impressive value. So Apple put the iPhone in their inventories only when he
receives them and pays them 90 days after he received them. My guess, seeing
this numbers, is that the immobilized capital is not the biggest issue for
Apple and their shipping strategy is a little more sophisticated. P.s: this is
a quick analysis of publicly available data. If you check my calculations, you
could find that I simplified them. The conclusion doesn't change if the
correct formula is used.

------
vinnyglennon
195,000 iphones on a 747: [http://www.huffingtonpost.com/2014/09/16/plane-
loaded-with-i...](http://www.huffingtonpost.com/2014/09/16/plane-loaded-with-
iphones_n_5827226.html)

------
jugad
This still doesn't answer what Apple actually does. Its all just speculation
to the best of the writer's abilities.

And whatever it does, it probably has some good and interesting reasons why it
does it that way.

~~~
snowwrestler
Apple ships by air. This article is explaining why.

------
mschuster91
I'd guess Apple did a mixture - air freight for the peak of the demand (aka
early adopters), and ships for the time when initial demand has settled (if
existing stock is enough to cover the demand, why expensive air transport when
restocking can be done for cheap).

------
Aloha
Counting the capital cost of the inventory in transit is not a way I'd sure to
determine it, as the inventory is not counted to the purchasers book in most
cases until its received, not when it enters transit.

That said, there are many other reasons why apple wouldn't want to ship by
sea, mostly the longer lead time to correct problems, and the potential for a
large amount of defective inventory in the chain, not the mention the vagaries
of market demand, and other factors.

~~~
kyllo
Apple almost certainly takes ownership of the freight at the origin--either at
the airport or maybe even at the factory. The reason for this is it allows
Apple to use their buying power to negotiate much lower freight rates with
carriers and track incoming shipments better than their manufacturers can.
Large importers generally want to exercise more control over their supply
chain because it saves them a lot of money and gives them opportunities to
optimize it.

Source: I work for a logistics and freight forwarding company.

~~~
LukaAl
First of all, I'm not totally sure a huge seller like Foxconn has less
negotiating power with logistics company than Apple (actually is probably
higher). Then, Apple could negotiate the logistics but still account the
merchandise as FOB Destination. Source: negotiated this kind of deal for
consumer electronic products.

~~~
kyllo
You're right that Foxconn is a powerful company too, and they do have their
own rates/contracts in place with logistics companies. And for any big company
with a complex supply chain like Apple, there is probably a mix of different
INCOTERMS happening. That said, in my experience the general industry trend is
for the importer to try to gradually and strategically extend their control
over their supply chain further toward the origin over time. When a buyer
signs up a brand new vendor they may buy CIF or even DDP at first, but as the
buyer/seller relationship matures they will tend to move toward FOB or even
EXW terms. So I'd be really surprised if Apple weren't taking ownership of
most of their products at the origin side, at this point. Also, with air
freight the inventory carrying costs from transit time are not nearly as great
of a factor as with ocean freight, so the impact on cashflow is minimal.

------
jheriko
This is not a valid line of reasoning. Why not use boats in the main and
planes in an emergency? You get the same lead time for much less. It also
seems not to understand the continuous nature of supply/demand... the
reasoning only works for one shipment in isolation.

Maybe it's easier to use only planes and never boats or something... but it's
certainly not cost effective

Also, why is the watch sold out for over a month if this is true?

------
IBM
Even when I've ordered Apple products long after the Christmas season they've
always been delivered from Shenzhen too fast to be by sea.

~~~
MCRed
I've experienced this also with slower selling products like the MacBook Pro.

I think Apple has simply built up a logistics infrastructure based on Air
Freight and built it in as a cost.

This is kinda smart because the AirFreight is going to be roughly comparable
anywhere in the world.

------
maclaren
The entire premise of this argument is flawed. Cost of capital (or even of
shipping) likely has nothing to do with the decision:

\- the value of an extra 25 days of product development for one of the most
successful consumer products in the world exceeds shipping costs by orders of
magnitude

\- $20M is completely negligible on $58B revenue. 0.03% or so. It would be
insane to wait 25 days over that.

