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How Apple's Inventory Can Shed Light on the Genius of Tim Cook

By Motley Fool Staff - May 25, 2016 at 12:23PM

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While Steve Jobs may have been the visionary behind the iPod and iPhone, it was arguably Tim Cook who made it possible for Apple to become the most profitable company in the world.

Although Tim Cook is not seen as the same innovative, ground-breaking leader that Steve Jobs is now remembered as, his genius as an operations and supply chain guru shines through in the inventory management strategies he implemented after joining Apple (AAPL -1.17%) in 1998.

Perhaps his most impressive accomplishment has been his ability to maintain extraordinarily high turnover ratios (and profitability), even as the company continues to generate hundreds of billions of dollars in sales each year. Smaller retail outfits, even ones where turnover is imperative to their business like grocery stores, fail to match Apple's record.

In this clip from the Industry Focus: Consumer Goods podcast, Sean O'Reilly and Vincent Shen talk about how Cook helped guide Apple to its position as the gold standard for inventory management.

A full transcript follows the video.

This podcast was recorded on May 16, 2016. 

Sean O'Reilly: Vince, you were talking about the company that epitomizes great inventory management at the beginning of the show. I'm going to go out on a limb and say it's Amazon.

Vincent Shen: I'd say this is generally a company you would discuss on the tech show with Dylan.

O'Reilly: It's not Amazon? What are you talking about?

Shen: This is one where I think their retail stores have become famous worldwide. They're almost like a tourist destination unto themselves. I think there was a fun fact on the board here at Fool HQ that said that more pictures are taken of the Apple store in Manhattan, I believe the one in Midtown, than are of the... what was it, the Empire State Building?

O'Reilly: It was the Statue of Liberty. I maintain that that's because the Statue of Liberty is harder to get to. But, OK, it's Apple.

Shen: It is. Here's the company that has the highest sales per square foot in retail. I think it's almost $5,000.

O'Reilly: It's second only to... do you know?

Shen: No, it's first. Who do you...

O'Reilly: Per square foot, it's second only to Tiffany.

Shen: Tiffany's is actually No. 2.

O'Reilly: You're kidding me! Apple beat them out?!

Shen: Yes. 

O'Reilly: Wow. Sorry, Tiffany's.

Shen: In case you're not aware, for some background, before Tim Cook took over as CEO, he had a long tenure in operations for the company. He is known for making major improvements. When he joined in 1998 that really changed the ability for Apple to not only manage the huge demand it would have for some of its iPhones and other products, but to do so very profitably. For example, he scrapped all of their in-house warehouses, all of their in-house manufacturing facilities and went to the contract manufacturers that became so famous, like Foxconn, for example. And something that allows them to do this is, if you order a phone, it'll likely be shipped directly to you from the manufacturing facilities abroad. Apple never even has to...

O'Reilly: Do anything.

Shen: ... take possession of them at any time. That's very efficient for them. A really funny quote is, Tim Cook has several times used dairy products as an analogy for inventory, the idea being, "Kind of like the milk in your fridge, the longer it sits, the more likely it is to go bad." He's even gone so far as to describe inventory as "fundamentally evil." That's probably a bit of a stretch, but he believed that inventory in hand would shed about 1-2% of its value each week in normal conditions, maybe even more so during a challenging retail environment. So, it's really important to be able to turn these very quickly. 

With all that in mind, the numbers here are really impressive. Instead of having billions of dollars of parts, components, and completed product sitting around, they don't have to deal with that nearly as much with the contract manufacturers. Trailing-12-month inventory turnover, as of the most recently reported 2016 second quarter, 58.6 times.

O'Reilly: Wow!

Shen: Blowing out even a company that sells perishables, like a supermarket. Average inventory balance during the period was only about $2.3 billion. Days of inventory, they can sell through it in about six days.

O'Reilly: I just realized, when I bought my iPhone last spring, it was probably a week old at that point! (laughs) 

Shen: And I think the scale here is what's really so incredible and hard to imagine. Billions and billions of dollars of product, and they're able to maintain a really well-oiled machine. 

O'Reilly: Revenues were $50 billion... yeah.

Shen: With those numbers, Tim Cook taking over, a lot of people complain or argue that he's not quite the visionary in terms of design that Steve Jobs was. But he was also a huge contributor in his time there, both in operations and as CEO, in developing this model and the systems in place that allow Apple to be so profitable, to cut out the costs wherever he can, and to have these numbers... six days they can turn through their entire inventory.

O'Reilly: And this is on revenues for the fiscal year ending September 26 of last year of $233 billion. That is just... I can't even conceive of doing things that quickly.

Shen: Beyond some of the other sectors we talked about, that's one I really wanted to touch on, just because it is this gold standard, I think, within retail.

O'Reilly: That's awesome!

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