Tuesday, July 6, 2010

iPhone 4 Supply Chain, Operational Efficiency, and China

Do you know the value of the parts in your iPhone and what it took to put them all together?

The way to calculate the various costs of the components plus the labor that is needed to manufacturer and assemble them so that consumers can acquire the latest hot product from Apple is to deconstruct the iPhone supply chain.

At a cost of about $600, the iPhone 4, can be deconstructed by tracking its components from the dozen integrated chips and flash memory to the casings to the embedded GPS system. The hardware we can all see and these physical components contribute just under $200 to the price of the iPhone 4.

According to an article in The New York Times, the smallest part of Apple’s costs are those in manufacturing and assembly, which takes place in China, right now in Shenzhen. The Chinese assembly-line workers put together the microchips, which come from Germany and Korea, a touch-screen module from Taiwan, even American-made chips that pull in Wi-Fi or cellphone signals, and more than 100 other components! This is truly a global supply chain with the greatest value to the product coming at the front-end and the back-end. In the iPhone 4, more than a dozen integrated circuit chips account for about two-thirds of the cost of producing a single device, according to iSuppli.

However, soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and other issues such as inflation and rising housing costs are all threatening to sharply increase the cost of making devices such as notebook computers, digital cameras and smartphones.

Desperate factory owners in China are already shifting production away from this country’s dominant electronics manufacturing center in Shenzhen toward lower-cost regions, even in China’s mountainous interior.

The world of contract manufacturers is invisible to consumers. According to The New York Times, it is a $250 billion industry, with only a few companies like Foxconn (which has been much in the news lately because of the worker strikes), Flextronics, and Jabil Circuit manufacturing and assembling for all the global electronics brands.

These companies compete on price to earn small profit margins, analysts say. As we who work and conduct research in operations and supply chains know, such firms try to benefit from even minute operational changes to attain competitive advantage. For example, the Chinese companies have very low profit margins and increasingly the Chinese are not favoring low-end assembly work. At the same time, Foxconn is spending heavily on manufacturing many of the parts, molds and metals that are used in computers and handsets, even trying to find larger and cheaper sources of raw material and locating plants closer to mines with sources of necessary raw materials.

So when you look at your smartphone, think about what went into your latest hightech gadget and favorite product, from the knowledge resources that helped to create its design, from the natural resources that enabled the construction of its components to the human resources that put the components together to the transportation services that delivered it to the stores.

And remember, as you hold the product in your hands, which was made possible by the complex global supply chain that enabled its design, its manufacture, assembly, and distribution, the long journey that the product took to you.