In a previous post, “Don’t Lose How To Make Things,” I discussed some of the perils of outsourcing either your production or your production technology.
Yet there are many successful companies that manage to do just that. One of the most successful is Apple.
We all know Apple as a cutting-edge innovator. Their products have created, and destroyed, entire industries and changed social paradigms.
What is behind that cutting-edge innovation, though, is one of the best (if not the best) supply chain management systems on Earth. Lets look at a couple of key characteristics of how they do this, and you can compare them to the more common mindsets about outsourcing.
First, Apple understands intimately how an iPhone words and how to make one. While they may outsource actual production, they do not outsource their core knowledge. They know their product and their process.
But what really got my attention (and inspired me to write this) was a fascinating anonymous response to a question about a logical strategic investment for Apple.
The comment describes how Apple uses their resources and supply chain knowledge to stay on top of the cutting edge and maintain competitive advantage.
When new component technologies (touchscreens, chips, LED displays) first come out, they are very expensive to produce, and building a factory that can produce them in mass quantities is even more expensive. Oftentimes, the upfront capital expenditure can be so huge and the margins are small enough (and shrink over time as the component is rapidly commoditized) that the companies who would build these factories cannot raise sufficient investment capital to cover the costs.
What Apple does is use its cash hoard to pay for the construction cost (or a significant fraction of it) of the factory in exchange for exclusive rights to the output production of the factory for a set period of time (maybe 6 – 36 months), and then for a discounted rate afterwards.
He goes on to describe how Apple first has exclusive access to the latest technology, then as it becomes commoditized, maintains cost advantage as they are searching for the next paradigm shift.
What I think this does is allow Apple to use their supply chain savvy to change things up faster than their competitors can respond.
Apple is not just crushing its rivals through superiority in design, Steve Jobs’s deep experience in hardware mass production (early Apple, NeXT) has been brought to bear in creating an unrivaled exclusive supply chain of advanced technology literally years ahead of anyone else on the planet. If it feels like new Apple products appear futuristic, it is because Apple really is sending back technology from the future.
Here is the bottom line: If you want to outsource, that is actually OK. But only if you are using that as an opportunity to continuously improve your process of supply chain management while striving to become the best in the world.
If it is a short term ROI problem, rather than working hard to develop a key strategic advantage, well, good luck with that.