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Editor’s blog: Finally, a flaw in Apple’s strategy

A week after the earthquake and tsunami in Japan, news is starting to come through about how companies in Europe and the US are being affected by supply chain issues as a result. Japan is one of the world’s most important markets for producing technologies needed to run a plethora of goods we rely on every day, from our phones to our cars, and major producers of those products, or components thereof, are beginning to see a problem because they’ve relied on Japan so heavily.

A BBC story this morning says that Sony Ericsson has said it faces supply shortages for parts for its phones, while General Motors has had to shut down a truck production plant in Louisiana due to shortages of parts that come from Japan, and it is believed that one of my personal favourite inventions, Boeing’s Dreamliner, “is likely to be hit by yet more delays” as some of its parts come from Japan. But what strikes me most is that Apple is doubly affected because its critical product lines are totally dependent on its own supplier in Japan – and it seems to be the first flaw I’ve seen in the company’s business plan.

Apparently, the flash memory and super-thin battery that Apple puts in the iPad are produced exclusively for it by Apple Japan, in Japan (the iPad itself is put together in China). “Logistical disruptions may mean that Apple could have difficulties obtaining this battery, and it may not be able to secure supply from an external, non-Japanese source,” says a report by research group IHS iSuppli, cited by the BBC.

Not only that, but it won’t be able to get hold of the in-built compass, DRAM memory and glass that covers the iPad touchscreen. And even worse, given its recent launch, IHS iSuppli thinks it won’t be able to source certain parts for the iPad 2 either. Apple itself has not commented on the problems it faces and won’t have had much time to do contingency planning: the tsunami hit on the day of the US launch (it has postponed the launch in Japan and has not said when it will be rescheduled).

It strikes me as hideously risky to rely on any single company in any single location for these parts. True, they are no doubt highly specialised parts and personalised to the needs of Apple’s products, so they will definitely rely on a specialised workforce and environment. How Apple manages this supply chain risk now – and it must act fast – will be interesting to watch. I’ll certainly be watching to see if and how it will adapt its supply chain sources to carry lower risk of this type on a permanent basis.

Since we know that its stores sell out of new products within hours of launch, Apple has particularly interesting levels of pressure on its supply chain when it is unable to source from its sole parts supplier in the days, weeks and potentially months after the devastating earthquake and tsunami. It is easy to imagine that other suppliers will be biting Apple’s hand off to get a contingency contract going and will do all they can to deliver – but if Apple needs specialised products and needs them now, can it find manufacturers who can fulfil what might be huge orders with very short timescales? And while Apple probably has the clout to name their price to such rivals, might the sheer pressure to deliver on time that its supply chain is under mean they pay more than they’d like to keep the show on the road?

Analysts think it won’t see a dent in profits until around June, but it will take super-swift and super-deft crisis management from Jobs and Co to make it happen. Apple is held up as a beacon of brilliance by the management world, so let’s hope it can respond to this challenge with its usual style.

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Jimmy Eyerman...Chief Financial Officer, EDM Group, USA
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