What’s the secret behind Apple’s supply chain?

About five years ago, Apple Inc design guru Jony Ive decided he wanted a new feature for the next MacBook: a small dot of green light above the screen, shining through the computer’s aluminum casing to indicate when its camera was on. The problem? It’s physically impossible to shine light through metal.

Ive called in a team of manufacturing and materials experts to figure out how to make the impossible possible, according to a former employee familiar with the development who requested anonymity to avoid irking Apple. The team discovered it could use a customized laser to poke holes in the aluminum small enough to be almost invisible to the human eye but big enough to let light through.

Applying that solution at massive volume was a different matter, Bloomberg Businessweekreports in its November 7 issue. Apple needed lasers, and lots of them. The team found a US company that made laser equipment for microchip manufacturing which, after some tweaking, could do the job.

Each machine typically goes for about $250,000. Apple convinced the seller to sign an exclusivity agreement and has since bought hundreds of them to make holes for the green lights that now shine on the company’s MacBook Airs, Trackpads and wireless keyboards.

Most of Apple’s customers have probably never given that green light a second thought, but its creation speaks to a massive competitive advantage for Apple: operations.

‘Nevers seen before’

This is the world of manufacturing, procurement and logistics in which the new chief executive officer, Tim Cook, excelled, earning him the trust of Steve Jobs. According to more than a dozen interviews with former employees, executives at suppliers and management experts familiar with the company’s operations, Apple has built a closed ecosystem where it exerts control over almost every piece of the supply chain, from design to retail store. Because of its volume — and its occasional ruthlessness — Apple gets big discounts on parts, manufacturing capacity, and air freight.

“Operations expertise is as big an asset for Apple as product innovation or marketing,” says Mike Fawkes, a former supply-chain chief at Hewlett-Packard Co and now a venture capitalist with VantagePoint Capital Partners. “They’ve taken operational excellence to a level never seen before.”

Nitty-gritty details

This operational edge is what enables Cupertino, California-based Apple to handle massive product launches without having to maintain large, profit-sapping inventories. It’s allowed a company often criticized for high prices to sell its iPad at a price that very few rivals can beat, while still earning a 25 per cent margin on the device, according to the estimates of Gene Munster, an analyst at Piper Jaffray Cos.

And there is speculation that Apple’s operational expertise is likely part of what gives the company enough confidence to enter the notoriously cutthroat television market by 2013 with a TV set that would tightly integrate with existing Apple software like iTunes. The widespread skepticism over Apple’s ability to compete in such a price-sensitive market, where margins are often in the single digits, is “exactly what people said when Apple got into cell phones,” says Munster.

 

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