Apple’s recent announcement that they were going to be assembling iPhones in the USA provides
a good excuse to look at one of the most important decisions in supply chain design, where to manufacture.
“Apple asked both Foxconn and Pegatron, the two iPhone assemblers, in June to look into making iPhones in the U.S.,” the Nikkei Asian Review reported, citing a source.
“Foxconn complied, while Pegatron declined to formulate such a plan due to cost concerns.”
||Apple iPhone (2016)
The New iPhone: Assembled in the USA
Launching a new product allows a company to take stock of their supply chain, and see if the old network they have is the best choice for the shiny new product. Many trends on both the product and supply chain sides have been changing and may start to favor on-shoring over off-shoring. For brevity and to keep with the original topic of Apple’s recent decision, let’s focus on deciding where to assemble a high-tech product such as Apple’s iPhone.
In choosing whether to off or on-shore a product there are several attributes which will drive the decision. One is the value-density of a product, and for assembly, especially, how much value is being added in the assembly step.
The second attribute is lead time(s) or more specifically the ratio of assembly lead time to total lead time.
Finally, there is uncertainty in the market which can be both supplier uncertainty or demand uncertainty.In another industry, taxes, duties, and tariffs would be other attributes, but for high-tech goods, these do not play a major role.
For the three product attributes that will affect the on-shoring decision, we will briefly examine Apple’s situation for their new Mac Pro and why that product is the most likely in Apple’s portfolio to be assembled in the USA.Higher value density (price of goods divided by weight) and value added during assembly will drive the assembly process to be closer to market. The more value added in assembly the greater the savings you can have by keeping inventory for the product in semi-finished form.
One of the interesting trends in high-tech is that more value is being attached to the software and IP in a design, which is increasing the value density added during assembly. For the iPhone case, I would argue a very large percentage of value is in assembly. Before assembly, there is some molded plastic pieces, some milled aluminum, a few expensive chips, RAM, support components, and basic electronics. After assembly, you have an iPhone for which consumers will pay well over $500 at an Apple Store. The difference in component value versus final assembly value means that every unit worth of inventory that can be kept in components instead of finished goods will save a large amount in working capital.
The ability to shave off days of inventory is directly related to the lead times involved in the supply chain, which is why the lower percentage of lead time spent on assembly, the closer to market you will want an assembly process. In general, as an assembly process becomes more complicated and longer it becomes inflexible and less inventory can be saved by moving the process closer to market. In high-tech, a lot of the cumulative supply chain lead time is devoted to electronic components.
Also, transportation modes used in the supply chain should be taken into account. If sea shipment is used in the supply chain, this can increase your lead times significantly. Removing excess lead time was a primary factor behind Dell being so successful making desktop computers in the USA, so it shouldn’t be too big a surprise to see Apple doing the same.Uncertainty in the market will also drive companies to use on-shoring for new products. Uncertainty directly drives safety stock, and also tests the supply chain’s ability to respond to new developments.
The more demand uncertainty in the market for a new product the more inventory that is needed. The more inventory that is needed, the more inventory that can be saved by having local assembly. Additionally, market uncertainty can force configuration changes in products that will greatly favor nearby assembly processes.Of course, all of this depends on what the difference in cost is for assembling locally versus assembling in a low-cost region.
If I save $100 in assembly cost per unit on a million units, it won’t matter that I could save one million in working capital by moving assembly locations. However, products that have a high-value density, a short assembly lead time, and have high market uncertainty would be good candidates for on-shoring. The new iPhone has probably the highest value density added by assembly, a small percentage of the total lead time is due to assembly, and the demand for the product will be more uncertain than most Apple products.