retail news in context, analysis with attitude

by Kevin Coupe

Fascinating story in Bloomberg Business Week that touches on part of what makes Apple so competitive - and it has nothing to do with design or software innovation.

In fact, it has to creating supply chain barriers that prevent other companies from getting some of the components they need.

For example, it signed an exclusivity agreement with the manufacturer of customized lasers that poke holes in aluminum, allowing users to see a small light whenever the camera is being used.

Bloomberg writes: “Most of Apple’s customers have probably never given that green light a second thought, but its creation speaks to a massive competitive advantage for Apple: Operations. This is the world of manufacturing, procurement, and logistics in which the new chief executive officer, Tim Cook, excelled, earning him the trust of Steve Jobs. According to more than a dozen interviews with former employees, executives at suppliers, and management experts familiar with the company’s operations, Apple has built a closed ecosystem where it exerts control over nearly every piece of the supply chain, from design to retail store. Because of its volume—and its occasional ruthlessness—Apple gets big discounts on parts, manufacturing capacity, and air freight.”

Air freight, in fact, is a terrific example of how Apple thinks.

In 1997, the story says, “most computer manufacturers transported products by sea, a far cheaper option than air freight. To ensure that the company’s new, translucent blue iMacs would be widely available at Christmas the following year, Jobs paid $50 million to buy up all the available holiday air freight space, says John Martin, a logistics executive who worked with Jobs to arrange the flights. The move handicapped rivals such as Compaq that later wanted to book air transport. Similarly, when iPod sales took off in 2001, Apple realized it could pack so many of the diminutive music players on planes that it became economical to ship them directly from Chinese factories to consumers’ doors.”

One constant refrain that we sing here on MNB is the need for retailers to define themselves not by the items that also are sold by the competition, but by the products and services that are unique to them, that are not or cannot be offered by the store down the street or across town. While we concede that there is no such thing as an unassailable business advantage, there is such a thing as creating barriers to entry. While the story makes clear that Apple is cutthroat in its approach - some might say unscrupulous - the reality is that this is hardball, and you can’t play with anything less than total commitment.

And it is ironic that when Apple CEO Tim Cook talks about the need for supply chain efficiency, he uses a grocery metaphor: “Nobody wants to buy sour milk.”
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