Apple Turns Over Its Inventory Once Every 5 Days(theatlantic.com)
theatlantic.com
Apple Turns Over Its Inventory Once Every 5 Days
http://www.theatlantic.com/technology/archive/2012/05/wow-apple-turns-over-its-inventory-once-every-5-days/257915/
21 comments
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.
The 5 day inventory turnover would not be sustainable without good supply chain management. This is a strategic advantage for Apple.
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!!!!"
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!!!!"
"Mr. Cook closed Apple’s factories and outsourced all manufacturing to a far-flung network of suppliers in Asia. Inventories decreased to 60 days, then to 30 days, then to the just-in-time model. Mr. Cook virtually lived in airplanes, traveling the world to meet with suppliers and browbeat them into meeting his demands."
http://www.nytimes.com/2011/01/24/technology/24cook.html?pag...
I can't say how long it takes to make every part, but it seems like Apple has leverage with its suppliers. I do agree that looking at the 5 day metric is only part of a picture.
I can't say how long it takes to make every part, but it seems like Apple has leverage with its suppliers. I do agree that looking at the 5 day metric is only part of a picture.
Agree. Another way of looking at it is that It's five days from the time product enters Apple's system until it leaves Apple's system. If the product enters Apple essentially complete (direct from Foxconn?) then they really could turn over that quickly. In my experience, contract manufacturers are quite happy buy everything with their own money then send a single bill when the goods are delivered.
Another example: some online computer shops operate by accepting the customer’s payment then placing and fulfilling the order direct. Do these businesses display a negative number for inventory turnover, in that the sale has been made before the money has been spent on the goods?
Another example: some online computer shops operate by accepting the customer’s payment then placing and fulfilling the order direct. Do these businesses display a negative number for inventory turnover, in that the sale has been made before the money has been spent on the goods?
Comparing 5 days with the time Apple would need to change its production orders is like comparing bandwidth with latency.
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.
Not sure about the individual component scale lag, but in terms of cross-ocean transit, Apple flies pretty much all of its inventory. Minimal packaging isn't just good for the economy, it's good for the bottom line as well.
"If Apple was, say, sitting on a warehouse of unsold A5's, it wouldn't count against them."
Yes it would, just look at the cash flow statement.
Yes it would, just look at the cash flow statement.
But this isn't a cash flow statement, thus "This seems like a measurement you have to be careful with". Are there analysis of Apple's financials that show a 5 day mean inventory wait?
I am not an accountant, but i think this calculation is correct. http://files.shareholder.com/downloads/AAPL/1903881931x0x563...:
20.6/1.1 is about 18, so they have to sell their inventory 18 times in a quarter. A quarter has about 90 days; 90/18 = 5.
It is possible that they force their inventory down a bit at end of quarters to make the figures look better, but I doubt Apple in its current form will find that worthwhile.
Cost of sales: 20.6 billion
Inventories : 1.1 billion
20.6/1.1 is about 18, so they have to sell their inventory 18 times in a quarter. A quarter has about 90 days; 90/18 = 5.
It is possible that they force their inventory down a bit at end of quarters to make the figures look better, but I doubt Apple in its current form will find that worthwhile.
Parent might be referring to long-held stock as a use of capital that doesn't earn anything while it sits on a shelf (yielding a hit to cash flow).
That's right. Non-cash increases in working capital assets are deductions from operating cash flow, reflecting the fact that you have to pay cash for the new goods.
Companies can finance by borrowing, either from suppliers (e.g. payables) or lenders, which appears as sources of cash. But if the debt is long-term that cash appears elsewhere on the cash flow statement and so don't counterbalance the use of operating cash.
Why is operating cash important? Investors focus on it because that's how companies make money. Investing cash flow reflects hard-to-repeat asset sales, financing cash flows must be repaid. And it's hard to game operating cash flow without raising flags elsewhere.
But here the financial analysis is more important for its signals of marketing and operational strength.
Apple can't maintain low inventories, especially while growing revenue, without knowing its market pretty well. And low inventories mean it doesn't cost them much to obsolete their own products, and doesn't cost them as much to try products that don't work out. The dollars saved by low inventory don't mean so much relative to the overall enterprise, but they can't keep this metric low without real strength up and down the company.
Companies can finance by borrowing, either from suppliers (e.g. payables) or lenders, which appears as sources of cash. But if the debt is long-term that cash appears elsewhere on the cash flow statement and so don't counterbalance the use of operating cash.
Why is operating cash important? Investors focus on it because that's how companies make money. Investing cash flow reflects hard-to-repeat asset sales, financing cash flows must be repaid. And it's hard to game operating cash flow without raising flags elsewhere.
But here the financial analysis is more important for its signals of marketing and operational strength.
Apple can't maintain low inventories, especially while growing revenue, without knowing its market pretty well. And low inventories mean it doesn't cost them much to obsolete their own products, and doesn't cost them as much to try products that don't work out. The dollars saved by low inventory don't mean so much relative to the overall enterprise, but they can't keep this metric low without real strength up and down the company.
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.
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.
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...
"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...
And that is why Tim Cook is CEO.
I wonder how he'd do playing The Beer Game (http://en.wikipedia.org/wiki/Beer_distribution_game)
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
http://en.wikipedia.org/wiki/Kobayashi_Maru
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.
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
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
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.
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.
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.
This metric speaks as much about Foxcon's success as it does Apple's.
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 !
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 !
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.
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.
So who does it help for them to be paying to airfreight an iPod vs having built them 10days in advance and seafreighted them?
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.).
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.
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.
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.
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.
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.
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.
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.
A fire at a Foxcon factory in the run up to christmas would really hurt Apple.
In lost revenues, yes. But that just means less profit. Having inventory on hand and having to sell it at a loss or bury it (like the Lisa, for instance) means actually taking a loss.
I'm pretty sure that fluctuations in demand are precisely what Apple is geared for. They discovered that unsold inventory, stuff sitting on the shelves, is what ends up weighing down companies.
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.
From what I hear of my wife's job, though, it sounds like Trader Joe's turns over its inventory every 1-2 days.
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.
Like I said, I don't know, but those are two variables I can think of.
I believe the 5 day figure here is about how many days worth of inventory are stored in the warehouse -- not how long they sit in retail stores.
These warehouses ship to all the retail outlets (Apple Stores, Best buy, etc) and the online orders.
These warehouses ship to all the retail outlets (Apple Stores, Best buy, etc) and the online orders.
It makes sense for groceries to have a faster turnaround though--after all, many of them are actually perishable.
> 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.
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.
Yes, they mean “divide into 365”, not “divide by 365”.
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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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...
[1]: http://www.youtube.com/watch?v=9RYXqCtsZsc&feature=playe...
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.
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.
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.
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.
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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Consider how many distinct items are sold by Apple compared to Samsung, Dell and a grocery store and Apples feat seems less impressive.
Let me rephrase that for you:
"Considering how lightweight the Google homepage is compared to Amazon's, their responsiveness/uptime feat seems less impressive"
"Considering how lightweight the Google homepage is compared to Amazon's, their responsiveness/uptime feat seems less impressive"
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...
In a way it did, since the OP mentions that Dell turns over its inventory every 10 days.
Such an incredible company.
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.