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

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.

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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 04, 2014, at 10:39 AM, Heidikitty wrote:


  • Report this Comment On September 04, 2014, at 5:49 PM, DukeMontrose wrote:

    The recent pause in AAPL's upward march created

    some interesting LEAP option opportunities.

  • Report this Comment On September 04, 2014, at 6:45 PM, ProcurifyDotCom wrote:

    I wonder if delays are due to the market's pull on Apple products. Rather than seeing the issue from the push (supply) side of Apple's operations, I wonder if the issue is found in inappropriate/adjusting market-demand (pull) predictions.

  • Report this Comment On September 04, 2014, at 9:11 PM, TMFJCar wrote:


    An interesting and astute observation. Probably a combination of the above, but it appears to be more push side derived. If it was pull you'd probably see a release and then a delay thereafter. Also the watch is a new product so I'd assume they'd rather deal with stockouts than overproduction of a totally new --and untested-- product. Again, that's my thought from the outside.

    Thanks for reading

    TMFJCar--the author

  • Report this Comment On October 03, 2014, at 9:33 PM, gregknasel wrote:

    I think that Apple's supply chain issues are the biggest challenge they face and could become the companies downfall.

    It's expected that large companies will lack innovation and will make safe, fully developed advancements in technology. The loss of innovation is also expected as you spread your development resources out over a broad array of products. Let's face it, while we really aren't seeing major changes to any of the product lines we are recognizing small updates across 15 hardware product lines and 3 main software product lines. That takes a large number of developers and product teams.

    Failing to accurately forecast demand and develop a supply chain to handle demand in a timely process is a far bigger failure. Market expectations are such that mature companies are not expected to face such problems. The lack of innovation in queue management is also a problem. The real question is, at what point do Apple consumers start to jump ship and move to other options.

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Jamal Carnette

After working at The Motley Fool, Jamal Carnette decided to try his hand at writing for a change. You can find him writing about technology, consumer goods, sports, and pontificating on any competitive advantage. His previous jobs include Mortgage Trainer, Financial Advisor, and Stockbroker. Jamal graduated from George Mason University with a bachelors of science in finance and is a CFA Level III candidate. Follow me for tech trends, info on consumer brands, and sports banter.

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