Is Apple's Supply Chain a Risk to the Company?

Tim Cook was known to be a "supply chain guy," so why's Apple having so many issues?

Sep 3, 2014 at 9:12PM

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Apple CEO Tim Cook. Source: Wikimedia Commons.

If the rumors are to be believed, Apple's (NASDAQ:AAPL) newest product, the iWatch, will be announced at its Sept. 9 event but possibly won't ship until 2015 because of supply chain issues. This was originally reported by Apple analyst Ming-Chi Kuo, and subsequent memos have pushed back the launch date from October to early next year.

Kuo has a pretty good track record on these things. Based on a thorough analysis of Apple's supply chain, he has been relatively accurate on delays. In fact, he predicted Apple's iPad Mini with Retina display delay in 2013. In addition, he predicts a delay in Apple's larger-size version of its newest iteration -- the iPhone 6, a 5.5-inch "phablet" model -- pushing the release date for that unit back to 2015 as well.

So if two of Apple's three products for this event are delayed, coupled with the iPad Mini Retina last year, does this mean Apple's supply chain presents a risk of sorts to the company?

Supply chains are more difficult than they appear
Most consumers are relatively unaware of supply chains, but let's not understate their importance. Simply put, supply chain management is the process of logistics -- how to create value by moving raw materials to finished products to customer delivery. And while it seems rather boring, and in some ways it is, supply chain management can add value or destroy it.

A slightly ironic point is that these issues seemed to crop up after Tim Cook took the reins. Widely considered a "supply chain maven" among the analyst crowd, Cook started his Apple career as a senior vice president for worldwide operations. Through a relentless focus, he quickly fixed the supply chain, eliminating lags from months to days. Cook was promoted to chief operating officer before becoming the company CEO in the wake of Steve Jobs' declining health.

The issue with revolutionary products ...
Compounding Apple's supply chain problems is its visionary product line. That's a constant issue with revolutionary products -- nobody else has combined these products in the same way before, so the raw materials and work-in-progress inventory processes need to be updated.

It appears there is generally a similar sticking point when it comes to recent supply chain hiccups with displays, especially when combined with a new form factor and new technologies. Apple's iPad Mini Retina combined a new, smaller form factor for its iPad line with the improved and updated Retina display. In addition, reports blame issues with the display/touch-panel interaction for the holdup with the larger, "phablet-like," version of the iPhone 6 and its sapphire cover lens for the iWatch.

Is this a concern for Apple investors?
There's not enough here for long-term investors to be overly concerned with. Even if the rumors are true, Apple appears to be on track to release its 4.7-inch iPhone on schedule. Look for that model to sell briskly during the North American seasonally heavy quarter, like all prior iterations.

The 5.5-inch phablet unit should do well in the Asia-Pacific region, where phablets are more popular and the holiday season isn't as important to move units -- therefore, the delay isn't as important. The short-term risk is that there will be holdouts for the 5.5-inch model in the U.S., but the phablet (defined as 5 inches and above) form factor isn't as popular here, and this is only a short-term concern.

As far as the smartwatch is concerned, this is incremental revenue and profit. Therefore, these expectations don't appear to be valued into the stock. That hasn't stopped a few analysts from attempting to model -- Morgan Stanley's Katy Huberty anticipated between 30 million and 60 million units in its first 12 months of sales at a price of $300 apiece. However, subsequent reports peg the average selling price at $400 per unit.

Final thoughts
As an investor, you'd like for your company to have as few delays as possible. With that being said, long-term investors should give Apple a pass here. As Apple continues to bring new and exciting technologies to its products, at times there will be delays in both supply and manufacturing processes. In addition, Apple's going to take its time bringing a cohesive, end-user-focused, product to market. It isn't always fast, but it's worth waiting for.

Leaked: Apple's next smart device (warning -- it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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