Strategic Initiative

The relationship between strategic and financial planning can be studied through the annual reports of Apple Inc. (“Apple”). In response to a rapid surge in consumer demand Apple initiated a new strategic plan to consolidate its existing supply chain. The development, implementation, and consequences of this strategy can be studied through the company’s consecutive annual reports. The company identified potential problems within its supply chain in 2008, announced its responding strategy in 2009, and reported on its progress in 2010.

Consolidating the supply chain has affected the organization’s costs and sales. Initiating these plans poses some additional risks and potentially adverse financial effects. The recent annual reports of Apple indicate that the strategic planning initiative to consolidate its supply chain was successful. In Apple’s 2009 annual report the company reported that it had begun a new strategic planning initiative to consolidate its supply chain in response to a rapidly increasing consumer demand.

A 2008 internal audit on Apple’s supply chain, management identified potential concerns with the procurement of component parts. Namely, what Apple identified was that while many component parts are generally available from multiple sources, some procured components necessary to Apple’s products are purchased from sole or limited sources. The dependability of Apple on some supplier’s ability to manufacture, sell, and deliver these crucial components create serious risks and any deviations could have adverse effects on the company’s finances. Apple identified further concerns in outsourced manufacturing.

The company’s 2009 annual report indicated that significant portions of Apple’s Mac computers, iPhones, iPods, logic boards, and other important products were being manufactured by only a few outsourcing partners, mostly in Asia (Apple, 2010). Some of these outsourcing partners were identified as sole source, meaning there is currently no other source that Apple can use. If these sole source suppliers go out of business or a competitor of the company buys them, the results could have a devastating impact on the production and distribution of Apple products.

In response to the vulnerability that this situation created Apple took the initiative. In the following years annual report of 2010, the company reported that it has executed Long-Term Supply Agreements with Toshiba and LG Display. These agreements will help secure the supply of certain inventory components. To help them secure the new Long-Term Supply Agreements with other suppliers Apple terminated an existing Long-Term Supply Agreement with Intel and received the remaining prepaid balance of $167 million. The consolidation of Apple’s supply chain has affected other areas of the organization.

The implementation of this strategic planning initiative affects costs. Eliminating or reducing the amount of limited or sole sources of components or manufacturing is important to keep a constant or decreased cost-base. There is a significant risk involved in operating with limited sources of materials or labor. In the event that one of these sources fails to deliver to its expectations, operational risks can dramatically increase, as production cannot continue without the necessary labor or components. Production downtime means breaks in efficient operations.

As efficiency is one of the driving factors in decreasing prices, eliminating this will likely create the opposite result (Apple, 2011). An increased price to compensate for production issues is a realistic possibility, depending on the severity of the disruption. This is due to price being impacted by this variable cost structure and its effect on margin. Readily available resources are imperative to lower the cost structure. By assessing their production operations and key risks Apple realized that the company was facing substantial inventory risks, as well as risks with other assets.

Identifying issues such as these allows companies to create action plans in an effort to take corrective measures (Apple, 2011). The initiative to consolidate Apple’s supply chain affected sales. With Apple’s belief that both consumers and professionals are entering a digital lifestyle, possessing a strong supply chain to support the digital devices such as iPods, iPhones, televisions, and other digital devices has never been so important. Additionally, Apple has expanded its distribution to consumers with a retail expansion from 197 stores in 2007 to 317 stores in 2010.

Between third party vendors and retail stores, Apple had increased net sales from $24. 5 billion in 2007 to $65. 2 billion in 2010, an increase of 165% or $40. 7 billion. With increased sales it is vital that Apple continues to have favorable pricing of components through its multiple sources. Potential supply shortages adversely affect the renewal of agreements, pricing fluctuations, future financial conditions, and operating results. Competing for the same raw materials as Apple’s competitors can put significant pressures on supply and demand even though Apple does use many of its own unique components.

Consolidating Apple’s supply chain has impacted the company’s gross margins. In 2008, before this strategic intiative had started the company had a gross margin of $13. 2 billion or 35. 2%. In 2009, after the start of supply chain consolidations, the company had a gross margin of $17. 2 billion or 40%. In 2010 the company’s gross margin of stood at $25. 7 billion or 39%. The increase of gross margins in 2009 and 2010 indicate that the consolidation of its supply chain has helped Apple increase profits.

With higher cost structures for digital devices throughout the industry future gross margin percentages will likely decrease to about 36%. This is a direct result of the increased costs or availability of microprocessors, NAND flash memory, DRAM, and LCD’s. Apple’s strategic planning initiative to consolidate its supply chain poses some risks and potentially adverse financial effects. Selling technology has risks associated with products and in some cases cause businesses to fail. Apple has found ways to become a technological leader.

The risks Apple works with daily include the evolving characteristic of its inventory. The development of new products combined with a rapidly growing consumer demand creates a greater chance of depleting the supplies faster than they can be replenished. Apple’s dependency upon several suppliers for the components used to make finished products makes their financial problems Apple’s problems. If a suppliers encounters credit problems, the credit problem could be harmful throughout the entire supply chain and Apple itself.

The company’s initiative to cement ties with crucial suppliers will not remove Apple’s dependency on other firms. In fact, this plan may increase Apple’s reliance on others and discourage the company from beginning to produce certain components themselves. Establishing long-term contracts with foreign suppliers increases the financial risks of working and selling products in foreign countries.

According to Apple’s 2010 annual report the “weakening of foreign currencies relative to the U. S. dollar will adversely affect the U. S. dollar value of the company’s foreign currency-denominated sales” (Apple, 2010, p. 22). According to financial statements within Apple’s annual reports the venture has succeeded. Carefully analyzing potential problems before they arise gave Apple a strategic initiative that influenced financial planning. The rising demand for Apple products increased the company’s focus on supply chain pressures. Establishing long-term contracts with the limited and sole suppliers of essential component parts has strengthened the company’s strategic and financial position.

These important suppliers can focus production on Apple’s needs without worrying about losing its business anytime soon. Apple has benefited financially by the establishment of these contracts due to the higher volumes of business associated with them. New long-term contracts enabled Apple to withdrawal from preexisting contracts with competitor companies such as Intel. The financial figures and ratios within the companies financial statements reveal that the companies gross margin has increased during a time when the digital device industries overall margins have been declining (Apple, 2010).

Consolidating its supply chain has helped the organization increase sales by maintaining the complex logistical infrastructure behind the highly publicized release dates of their newest products. The benefits of this initiative have clearly outweighed the risks, as Apple has recently become one of the largest and most successful corporations on earth. The relationship between the companies strategic and financial planning has created a dynamic company that responds effectively to consumer needs.

The annual reports of Apple highlight the relationship between strategic and financial planning. An analysis of Apple’s 2008 identification of supply chain problems and its strategic response of 2009 reveals how its actions influenced 2010’s finances. The organization’s financial planning has been affected by its initiative to consolidate supply lines. The risks and financial effects associated with these changes have been successfully managed making the venture a success. The annual reports of Apple highlight the importance of the relationship between strategic and financial planning.