Too Much Profit?

This week in class we learned about supply chain management. The most important thing I learned about supply chain management is the strategic importance of it. The strategy companies employ is the integration of activities to procure resources and transforming them into goods. One company that clearly has a superior supply chain strategy is Apple. However, in an article from Bloomberg, “Apple’s Greatestness and Its Shame” raises important issues regarding Apple’s supply chain strategy.

Last Tuesday, Apple reported 4th quarter revenues of $46 Billion and profit of $13 Billion. A week prior to the earnings release, Apple released their report disclosing their audit of suppliers. The results from that report identify issues in their supply chain. One important question the Bloomberg article raised is whether management should increase shareholder value at all costs. Should Apple reduce profits to improve working conditions in their supplier’s factories? Remember, suppliers are separate companies.

I think that this is an ethical dilemma that some companies can only dream about having to make. I know this sounds odd, but think about it. Apple has doubled in value in about three years. Most companies can’t have that kind of growth in a decade. It is a dream for companies to have to question if they are paying their suppliers too little. A company is in business to provide goods and services to consumers. Management’s role is to increase shareholder value.

Just to play devil’s advocate, I ask, if a company makes any profit should it reduce profits and voluntarily pay suppliers more? If a business reduces profits by allowing suppliers to increase their costs, (i.e. higher wages, more workers, additional safety equipment, added employee benefits), would a company continue to do business with them?

When would an altruistic approach to selecting supplier contracts go too far? Should a company ensure that all employees of a supplier are paid minimum wage commensurate with the foreign nation? Should a company pay for the supplier’s employee vacation and retirement plans?

I think these questions should be considered when a company weighs the risk of their supply chain. These questions are likely to fall under political and currency risks. In my opinion, a company should consider the working conditions and employee wages when choosing a supplier. I think this should be applied universally regardless of the profitability of the company. Lastly, I think companies should select suppliers that operate efficiently. The more efficient a supplier is they will be able to reduce manufacturing costs and the more cash they will have to ensure the employees are taken care of.

China, The New Big Apple

Last week in class, we briefly discussed globalization. We learned about the reasons to globalize. Globalization can do many things like reduce costs, improve supply chain, and assist in providing better goods and services. We discussed the reasons for globalizations but we didn’t discuss issues that can affect strategies to globalize. One company that has continued to target globalization as a strategy is Apple. Apple in the past few years has had considerable success spreading throughout the world with its innovative products.

According to an article from the Wall Street Journal, Apple has had problems conducting business in China with sales operations and a part of their supply chain. Last week Chinese authorities forced Apple to shut down their Beijing store with fear of riots during the iPhone 4S release.  Chinese authorities aren’t particularly fond of these types of occurrences. Usually, Apple has large product debuts and violent occurrences could cause strained relationships as a result.

Additionally, upon scrutiny from activists in the US and abroad, Apple released a report regarding the work conditions at some of Apple’s suppliers. The author noted that the results from Apple’s audit report could affect the relationship between Apple and China. The report consisted of the results from the audits of 229 factories that showed 112 factories weren’t properly storing, moving or handling hazardous chemicals. Apple said it was taking new steps to improve conditions at factories. Additionally, close to a third of its suppliers didn’t follow Apple’s standards on wages and benefits. The audits also found five facilities that employed underage workers.

Companies globalize to reduce costs. A majority of Apple’s suppliers are in Asia where the cost of labor is significantly lower. Lower wages can lower direct and indirect costs, thus providing Apple with more profit.

Furthermore, companies globalize to improve the supply chain. Apple has numerous suppliers in Asia, such as Sony, Intel and Tianjin Lishen Battery Ltd. The suppliers from this region are important to Apple because with an improved supply chain they are able to reduce costs and provide better goods and services. However, to prevent public scrutiny they must make ethical decisions in order to maintain a positive reputation. Over the past few years there have been several incidents involving Apple’s suppliers in Asia. In 2010, there was a wave of employee suicides at the facilities and several deadly disasters. Even though Apple has taken steps to prevent disasters from occurring certain standards may not be practiced as the supplier report identified.

China is estimated to be a $14 Billion dollar market for Apple and competitors so proper globalization strategies are important.

What do you think can occur involving increasing working conditions for Apple’s suppliers? Do you think costs will increase because of more wages and benefits? Do you think they will see significant changes in supply chain? Will suppliers stop working with apple? What do you think will happen to Apple if China cracks down on Apple for how they do business in China?

 

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