As industry analysts, influencers and consultants, we often look to concrete examples validating how a firm’s supply chain capabilities have proven to be strategic to its business results, and to its competitive standing in its industry.  Apple often fits this category, and the latest recognition of the strategic implications of Apple’s supply chain is reflected in a recent New York Times published article, Apple’s Lower Prices Are All Part of the Plan.  (metered free view or paid subscription required).

This article looks back at previous product introductions of Apple’s products, including the iPhone, iPad and MacBook, and notes how Apple’s scale and leverage in capacity, production, logistics and long-term procurement of parts have provided enormous strategic leverage. Many competitors have had difficulty in undercutting Apple in product sectors of ultra-thin laptops, tablets, and smartphones.  The Times article notes that Apple has not been shy in tapping its huge war chest of cash to take long-term gambles in locking-up supplies of key parts for years. It quotes a former Apple executive and current venture capitalist as noting that: “… Apple’s management of its supply chain had become a (its) “strategic weapon”.”

How many companies are willing to invest cash in strategic procurement and long-term capacity commitment decisions?

 There is, however, another important aspect of supply chain strategy brought out by the example of Apple, one that we believe should gain more consideration. In many industry settings in addition to consumer electronics, hardware products are becoming the leveraged platform to facilitate add-on sales of content, services or other products. This is often referred to as the razor blade model, where the razor can be aggressively priced in order to leverage the more profitable sales of blades. The overall product strategy is scale, and the supply chain strategy should be one of supporting high-volume, configure-to-stock products.

In Apple’s example, most all of its consumer devices leverage the sale of content for the music site iTunes.  Similarly, the company is rolling out its own cloud storage services as an additional upsell of services.  In other industry settings, namely consumer and industrial equipment sales, aerospace, and other products, more profitable services are leveraged by the volume penetration of the hardware platform.

This raises an interesting question in terms of product planning. Should the P&L and supply chain cost considerations be managed on the basis of the product alone, or on the broader aspects of added services revenues that the product will leverage? Do cross-organizational conflicts or functional barriers in goals prohibit these types of considerations?

The Times article notes that one of Apple’s competitors for the iPad was Motorola’s Xoom, which hit the market with an entry price of $899, considerably above the iPad’s $499 entry price.  Motorola later released an adjusted entry-level model priced at $599.  Would that extra $100 in unit revenues be offset by after-market content revenues?  The same examples could probably be argued for attempts by Research In Motion and Hewlett Packard to gain a presence of scale in the tablet market.  For Supply Chain Matters and other industry observers, HP’s fire sale price of $99 to cleanout inventory, which sold out in 48 hours, was further evidence that consumers are sensitive to price features and functionality.  Amazon’s new release of the Kindle Fire could prove to be another living test of whether the scale of volume hardware sales leverages broader and more profitable services revenue, and whether the supply chain strategy should incorporate a broader revenue return.  Supply Chain Matters will feature a follow-on commentary regarding Amazon.

In the meantime, is a supply chain strategy that incorporates considerations of product and add-on revenue potential an important consideration for your organization?

Bob Ferrari

 

©2011 The Ferrari Consulting and Research Group LLC and Supply Chain Matters