Read the case study below and answer the question that follows. The changing dynamics in the worldwide mobile phone market: creating excellence through innovation management and collaborative relationships. Introduction Recent developments in supply chain management (SCM) practices and information technology (IT) have revolutionized the whole process of product innovation and introduced the updated concept to the market, which has resulted in shortening both the product life cycle and the time required to bring a product to the market. This phenomenon is best reflected by how the scenario in the market segment of mobile phones is presently changing. An example of this phenomenon is Nokia, which ruled the market in terms of share for many years during the features-based mobile phones era, and is continuously yielding space to the aggressive market penetration by emergent players. Another important player in the mobile phone market is LG Electronics (LG), who suffered a negative growth of 18.9 per cent in the second quarter of 2011 compared to the same period in 2010 while the market as a whole grew by 11.3 per cent (IDC). This happened in spite of LG achieving their stated aim of becoming a worldwide leader in the digital industry by ensuring customer satisfaction through innovative products and superior service while aiming to place the company among the world’s top three electronics, information and telecommunications firms by 2010 (LG India Home Page). “Efficient supply chain operation is the key to gaining a competitive advantage in a global business”, said the Managing Director of LG Electronics, Mr Kevin Cha. LG focused on three identified core capabilities: product leadership, market leadership and people leadership, each a key part of realizing its growth strategies for “fast innovation” and “fast growth”. LG has also reaped the benefits of a revamped SCM system, making $350 million during the period from January to September 2009. The company projected to close the year with a savings of $400 million and expected a cash flow increase by more than $800 million due to this supply chain revamp. But all this activity belied the fact that Apple was emerging as the world market leader in the mobile segment throughout this period. Almost all players in the electronics industry believe that fast growth is the result of implementing strategies designed to swiftly expand market size and earnings, with an eye toward monetary growth. And in recent times, Apple set a new world standard for SCM to achieve a new high of swiftness and fast innovation never seen before in the industrial world. It has enabled Apple to take on the established giants of the mobile industry, particularly in the smartphone segments, and SCM in Apple is already been dubbed “Apple’s Exclusive Supply Chain of Advanced Technology [Is] Literally Years Ahead of Anyone Else on the Planet”. Fast innovation requires securing a competitive edge over the competition by setting and meeting the highest of goals in all realms of innovation, by at least a margin of 30 per cent. This applies to new product development and unveiling, innovation in design and technology as well as product sales, market share and corporate value. Apple’s emergence also underlines the importance of China, both as one of the nine globally important markets for smartphones as well as the assembler of various models of Apple iPhones. Many components that are designed in various European countries and the USA are actually manufactured by Taiwanese, Malaysian and other Asian companies. These companies play a crucial role in Apple’s world-famous supply chains (www.financeonline.com). A recent report on the global market share of various companies in the mobile handset sector is given in Table I. Related developments The relationship between product innovation and global supply chain strategy has vital implications for the mobile handset industry. A few interesting developments in recent times, such as innovations being carried out in the sphere of how components and operating systems for smartphones are determined by various players and how quickly devices can be brought to the market, are reflections of this importance. The stakes involved are increasingly becoming higher, to the point where company fortunes and long-term presence is dependent on them. LG had to replace its CEO Nam Yong in September 2010 and Koo Bon-joon, the brother of the Chairman of LG Group, took over. Coincidentally, the Chief Executive of Nokia, Olli-Pekka Kallasvuo, was also replaced, in this case by Stephen Elop, the Business Manager of Microsoft at the same time. The CEOs of both Nokia and LG had to step down due to their respective company’s perceived shortfall in its capability to aggressively compete in the smartphone market, especially concerning their main rival Apple. Why this happened to two previously immensely successful companies is the big question. Two things seem to have created this situation: the speed of product and market innovation, and the creation of an efficient supply network. From what was happening in the mobile phone market at the time, it is clear that Apple was the only company who understood the situation the best. For some time, the mobile handset market has been in flux, moving from a basic mobile device offering just Web surfing or music player capabilities to a full-fledged personal productivity device that brings together email, Web and media capabilities, as shown by Apple’s current iPhone series designed to satisfy the consumer demand fuelled by social networking sites such as Facebook, Twitter and Weibo. China had 564 million Internet users by the end of December 2012, 50.9 million more than the year before, and roughly representing 40 per cent of the total Chinese population (http://synthesio.com). The results of this is the shortening of a product’s life cycle to an unbelievable few months for some of the world’s most technologically complex products. Apple’s superior integrated global chain capabilities that fuse product design, new product introduction, vertical supply chain sourcing and rapid time-to-market is seen as the culprit, and it seems that competitors were either remaining static or trying to catch-up. Table 1 Top five mobile phone vendors, shipments and market share, (units in millions) Q2 2011 unit Q2 2011 market Q2 2010 unit Q2 2010 market Year-over-year Vendor shipments share (%) shipments share (%) change (%) Nokia 88.5 24.2 111.1 33.8 (20.3) Samsung 70.2 19.2 63.8 19.4 10,00 LG Electronics 24.8 6.8 30.6 9.3 (18.9) Apple 20.3 5.6 8.4 2.6 141.8 ZTE 16.16 4.5 12.2 3.7 36,00 Others 145,00 39.7 102.3 31.2 41.7 Total 366.40 100,00 328.46 100,00 11. 41 41 Observations and conclusion Apple’s strategy yields two distinct groups of advantages: 1. Apple gets access to new component technology well before its rivals, allowing it to release ground-breaking products that are actually impossible to duplicate. It is a well-known fact that a year after the introduction of the iPhone, none of the imitation iPhones could get a capacitive touch screen to work well and it wasn’t just because of the software. Apple also had access to new components earlier, before anyone else in the world was able to gain access in mass quantities to make a consumer device. First to market and first to win. Firms introducing product innovation to the market first often reap extra financial benefit compared to other firms (Xin et al., 2010), and one extraordinary example of this is the aluminium machining technology used to make Apple’s laptops: this remains an exclusive trade secret that allows Apple to make laptops with unsurpassed strength and lightness. 2. By the time competitors catch up in component production technology, Apple already has their arrangement in place whereby it can source parts at a lower cost due to the discounted rate they have negotiated with the highly experienced and skilled providers of parts, who have most likely also brought production costs down. This discount is possible because competitors buy those same parts from the same supplier, therefore commoditizing the part. Hence, a factory is allowed to produce parts for all the buyers, but Apple gets special pricing. Apple is not just crushing its rivals through superiority in design, Steve Jobs’ deep experience in hardware mass production (early Apple, NeXT) has created an unrivalled exclusive supply chain of advanced technology literally years ahead of any other producers. Once the technologies become sufficiently commoditized, Apple is able to compete effectively on cost and undercut rivals. It is not true that Apple only makes premium products – it does makes them but only in that their products are literally more advanced than anything else (i.e. the price premium is not just for design), and once the product line is no longer premium, they are produced cheaper than competitor equivalents, yielding higher margins and more cash, which results in more ability to perpetuate the cycle. An interesting part is that the seemingly well-sourced Quora responder credits Steve Jobs with this strategy, even though “the operations guy”, “supply chain genius” at Apple is usually thought to be its COO Tim Cook. It goes to show just how deep Jobs’ expertise and methods run and how different Apple will probably be without him. Adapted from: Emerald Emerging Markets Case Studies, Vol.5 Issue: 1, pp.1-7, https://doi.org/10.1108/EEMCS-02-2014-0037 Provide a detailed discussion on how Apple achieved a competitive advantage through its operations in the worldwide mobile phone market. QUESTION 2 (25) A company makes bicycles. It produces 450 bicycles a month. It buys the tyres for bicycles from a supplier at a cost of R20 per tyre. The company’s inventory carrying cost is estimated to be 15% of the purchasing cost of the tyre and the ordering is R50 per order. You are required to answer the following questions: 2.1. Calculate the Economic Order Quantity. (6) 2.2. What is the number of orders per year? (4) 2.3. Compute the average annual ordering cost. (4) 2.4. Compute the average inventory. (4) 2.5. What is the average annual carrying cost? (4) 2.6. Compute the total cost.
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