Yesterday and today, business media has featured front page headlines concerning Apple and its latest report of financial performance. The byline of The Wall Street Journal and other business media is that the latest iteration of iPhones failed to meet sales expectations for the holiday quarter. Once more, Apple indicated to investors that revenues may fall next quarter, the first time that has occurred in 13 years. As I pen this commentary while visiting Silicon Valley and speaking at an Oracle conference, you can literally sense the topic of hallway conversations.

As I pen this commentary, Apple’s stock closed down 6.6 percent today as a result of the latest news.

If readers had been following our most recent stream of Supply Chain Matters commentaries related to Apple’s iPhone supply chain, you would have discerned perhaps a typical pattern of new product introduction and its integration with global supply chain planning and customer fulfillment. The iPhone is a critical product for Apple since it fuels upwards of 60 percent of overall corporate revenues, thus many eyes turn to the iPhone supply chain for indications of trends.

In our early July 2015 commentary, we called attention to a WSJ published report indicating that Apple had requested suppliers to support a production build volume of between 85 million and 95 million iPhones for the all-important end-of-year holiday buying season that ended in December, despite expected modest hardware changes for the latest iPhone model. A third contract manufacturer, Wistron, was brought on-board to support higher volume requirements as was additional hiring of workers among existing contract manufacturers and suppliers.

In contrast, the consumer electronics icon had reportedly planned its supply chain output for a range of 70-80 million phones, and actually shipped 74.5 million smartphones during the 2014 holiday fulfillment quarter. Speculated In July was that hardware changes for the iPhone 6 were expected to be less noticeable and that Apple was in-essence betting that consumers will flock to upgrade their existing iPhones. Subsequent media reports indicated that Apple was making bold bets that emerging market demand, in particular China, would boost holiday sales.

At the end of July Apple reported its fiscal third quarter financial performance and the Wall Street buzz was immediately one of disappointment. This was despite reporting that profits had surged 38 percent from the year earlier period along with total revenues that grew 33 percent. The concern was a perception that Apple was trending toward a one-product company, that being the iPhone. Unit sales of the iPad tablet had declined for the sixth consecutive quarter. As a result of this news, Apple’s shares plunged 7 percent in afterhours trading and dropped as low as 21 points before a small rebound.

By January of this year, the WSJ validated what those in Apple supply chain ecosystem had already suspected, that the global consumer electronics icon was scaling back supply chain requirements for iPhones. Citing three informed sources familiar with the Apple supply chain, the report indicated that order forecasts to iPhone suppliers have been pared back in the prior several months. Apple was in essence, dynamically adjusting its supply chain plans based on expected iPhone demand volumes. Further noted was that iPhone factories had some idle capacity in the final two months of the calendar year when they typically would be all-out. That situation surprised this author since Apple has consistently been good at product demand forecasting. Major contract manufacturer Foxconn Technology reportedly began dismissing some employees earlier than usual from its Zhengzhou China facility that employs upwards of 200,000 workers.

This author’s January commentary therefore opined that financial and operational performance results for the all-important holiday quarter were therefore a rather important indication of the consequences of iPhone focused supply chain activity in the first-half of 2016.

Now we have visibility to the results of the holiday quarter.

For financial performance, Apple reported a net income rise of 1.9 percent and total revenue increase of 1.7 percent, somewhat of a shock from a track record of previous double-digit growth in financial performance, and the slowest growth since June 2013. The top line revenue number was nearly $1 billion short of analyst estimates. Sales in the now closely watched greater China region rose 14 percent, considerably down from the 84 percent growth trajectory reflected in the September ending quarter.

Operational performance included 74.5 million iPhones sold in the December ending quarter, slightly higher than the 76.5 million iPhones shipped in the prior year’s holiday quarter.

We often lament that hindsight can provide important learning and perhaps planning for the new model iPhone at previous production volumes may have averted supplier shock and cutbacks. Then again, sales and operations (S&OP) teams can set bold objectives and expectations for a new product, but also must incorporate timely product demand sensing capabilities at each and every review period.

The evidence suggests that supply chain teams were indeed re-calibrating and lowering production requirements, but the decline was steep. Further, when planning one of the most highly watched supply chains on earth, decisions are scrutinized and speculation is pervasive. When it comes to Apple, all decisions have implications because so many fortunes are predicated on Apple.

This commentary should not be perceived as a negative connotation to Apple’s new product planning and S&OP processes. Rather it provides our community additional reinforcement that synchronization of decision-making among product management, sales, supply chain planning and fulfillment is essential and that includes the most up-to-date information on product demand and supply. Bold product decisions are fine, provided they can be supported by dynamic and well-informed integrated business planning. When planning millions in shipment volumes, monthly planning does not suffice and sometimes weekly planning has it drawbacks. The linkage of product management, procurement and supply chain is no longer an option, it is essential and it includes far more integrated business planning.

Bob Ferrari

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