iphone supply chain under threat case study

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iPhone's Supply Chain Under Threat

By: Benjamin Yen, Minyi Huang

The outbreak of COVID-19 (coronavirus disease, 2019) posed unprecedented challenges to the global supply chains. As a leading and innovative supply chain that achieved just-in-time manufacturing,…

• Length: 17 page(s)
• Publication Date: Jun 1, 2021
• Discipline: Operations Management
• Product #: HK1284-PDF-ENG

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The outbreak of COVID-19 (coronavirus disease, 2019) posed unprecedented challenges to the global supply chains. As a leading and innovative supply chain that achieved just-in-time manufacturing, Apple's performance was put in the spotlight. This case describes how Apple's supply chain has coped with the COVID-19 pandemic. Apple's supply chain has weathered natural disasters, such as earthquakes, fires, floods, and SARS; the risks and challenges brought by the outbreak of COVID-19 were unprecedented and complicated. Unlike the symptoms of SARS patients with high fever, the symptoms of COVID-19 varied; some patients had no symptoms at all, which made them difficult to identify. Moreover, the pandemic complicated supply chain planning because it was difficult, if not impossible, to predict where the next epicenter would be and what measures local governments might take to prevent the further spread of the virus. Social distancing was effective to control the pandemic, but it brought both challenges and opportunities for companies like Apple. On the one hand, social distancing slowed the manufacturing process and had a negative impact on the economy, which could dampen consumer confidence and reduce demand. On the other hand, social distancing boosted the demands for electronic devices, as many people had to work at home. Using this case study, students will understand the importance of risk management in supply chain management and learn the challenges and opportunities of the disruption posed to business operations. The case provides an opportunity for students to discuss and understand why some companies can recover from the disruptions better than other companies and how a resilient supply chain can improve a company's competitiveness.

Learning Objectives

To allow students to understand the advantages of a lean and agile supply chain

To enable students to understand the importance of resilience in supply chain management

To provide an opportunity for students to discuss different strategies to cope with unexpected disruptions in supply chain management

Jun 1, 2021

Discipline:

Operations Management

Industries:

Consumer electronics

University of Hong Kong

HK1284-PDF-ENG

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iPhone's Supply Chain Under Threat

iPhone's Supply Chain Under Threat ^ HK1284

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Publication Date: June 01, 2021

Source: University of Hong Kong

The outbreak of COVID-19 (coronavirus disease, 2019) posed unprecedented challenges to the global supply chains. As a leading and innovative supply chain that achieved just-in-time manufacturing, Apple's performance was put in the spotlight. This case describes how Apple's supply chain has coped with the COVID-19 pandemic. Apple's supply chain has weathered natural disasters, such as earthquakes, fires, floods, and SARS; the risks and challenges brought by the outbreak of COVID-19 were unprecedented and complicated. Unlike the symptoms of SARS patients with high fever, the symptoms of COVID-19 varied; some patients had no symptoms at all, which made them difficult to identify. Moreover, the pandemic complicated supply chain planning because it was difficult, if not impossible, to predict where the next epicenter would be and what measures local governments might take to prevent the further spread of the virus. Social distancing was effective to control the pandemic, but it brought both challenges and opportunities for companies like Apple. On the one hand, social distancing slowed the manufacturing process and had a negative impact on the economy, which could dampen consumer confidence and reduce demand. On the other hand, social distancing boosted the demands for electronic devices, as many people had to work at home. Using this case study, students will understand the importance of risk management in supply chain management and learn the challenges and opportunities of the disruption posed to business operations. The case provides an opportunity for students to discuss and understand why some companies can recover from the disruptions better than other companies and how a resilient supply chain can improve a company's competitiveness.

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Case Details

iPhone’s Supply Chain Under Threat

Benjamin yen , minyi huang, share: iphone’s supply chain under threat, wechat share.

The outbreak of COVID-19 (coronavirus disease, 2019) posed unprecedented challenges to the global supply chains. As a leading and innovative supply chain that achieved just-in-time manufacturing, Apple’s performance was put in the spotlight. This case describes how Apple’s supply chain has coped with the COVID-19 pandemic.

Apple’s supply chain has weathered natural disasters, such as earthquakes, fires, floods, and SARS; the risks and challenges brought by the outbreak of COVID-19 were unprecedented and complicated. Unlike the symptoms of SARS patients with high fever, the symptoms of COVID-19 varied; some patients had no symptoms at all, which made them difficult to identify. Moreover, the pandemic complicated supply chain planning because it was difficult, if not impossible, to predict where the next epicenter would be and what measures local governments might take to prevent the further spread of the virus. Social distancing was effective to control the pandemic, but it brought both challenges and opportunities for companies like Apple. On the one hand, social distancing slowed the manufacturing process and had a negative impact on the economy, which could dampen consumer confidence and reduce demand. On the other hand, social distancing boosted the demands for electronic devices, as many people had to work at home.

Using this case study, students will understand the importance of risk management in supply chain management and learn the challenges and opportunities of the disruption posed to business operations. The case provides an opportunity for students to discuss and understand why some companies can recover from the disruptions better than other companies and how a resilient supply chain can improve a company’s competitiveness.

1.    To allow students to understand the advantages of a lean and agile supply chain

2.    To enable students to understand the importance of resilience in supply chain management

3.    To provide an opportunity for students to discuss different strategies to cope with unexpected disruptions in supply chain management  

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Apple’s Response to COVID-19 Disruptions: Supply Chain Risk Analysis and Mitigation

• By: Parminder Singh Kang , Rajbir Singh Bhatti & Aditi Patil
• Publisher: SAGE Publications: SAGE Business Cases Originals
• Publication year: 2023
• Online pub date: January 02, 2023
• Discipline: Supply Chain Management , Decision-Making , Management Science
• DOI: https:// doi. org/10.4135/9781529610635
• Keywords: customers , manufacturing , mitigation , risk , risk analysis , risk management , supply chain management , supply chain risks , supply chains , value chains Show all Show less
• Contains: Data | Document | Teaching Notes Region: Eastern Asia Industry: Manufacture of computer, electronic and optical products | Manufacturing Organization: Apple Inc. Organization Size: Large info Online ISBN: 9781529610635 Copyright: © Parminder Singh Kang, Rajbir Singh Bhatti, and Aditi Patil 2023 More information Less information

Teaching Notes

Apple Inc. is a U.S. multinational organization that designs, manufactures, and markets consumer electronic products. Apple also sells various software, services, peripherals, networking solutions, third-party digital content, and applications. The unprecedented COVID-19 pandemic event has posed significant challenges for supply chains globally. The actions taken to prevent the spread of the disease, in the form of multiple national lockdowns, led to a slow—or even temporarily stopped—flow of raw materials and finished goods, disrupting manufacturing as a result. These measures exposed supply chain vulnerabilities. This case elaborates on current and post-pandemic supply chain issues for Apple Inc. based on published reports and datasets (Thomson Reuters Apple Inc. Value Chain Dataset and World Development Indicators dataset from World Bank). Students, in the position of decision makers, are asked to analyze Apple Inc.’s existing supplier base, perform a risk analysis, and develop a risk management plan to minimize the impact of very low-probability risks, such as a pandemic, that have potentially very high impact.

Apple’s Response to COVID-19 Disruptions: Supply Chain Risk Analysis and Mitigation

Learning objectives.

By the end of this case, students should be able to:

• Identify and explain in general global supply chain issues.
• Analyze and assess low-probability and high-impact risks in the global supply chains.
• Identify and analyze factors contributing to longer-term risk assessment and mitigation.
• Propose a supply chain risk management plan.
• Use Excel (or other tools such as PowerBi) in the analysis of descriptive analytics on supplier and World Health Organization data.

Apple Inc. and Its Supply Chain

Apple Inc. (hereafter Apple) is a U.S. multinational organization that designs, manufactures, and markets consumer electronic products. Apple also sells various software, services, peripherals, networking solutions, third-party digital content, and applications. Some well-known products are the iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and Mac OS X operating systems, iCloud, and various accessories, service, and support offerings. The company is a leading provider of digital content and applications through the iTunes Store, App Store, iBookstore, and Mac App Store (Thomson Reuters Eikon, 2020).

Apple’s value chain includes 294 tier 1 suppliers and 43 tier 1 customers across the globe. (In a given industry, tier 1 refers to the largest companies, tier 2 intermediate, and tier 3 the smallest.) The suppliers are from many industry segments; nearly 70% are technology, telecommunication services, and essential materials suppliers. Of the suppliers, 64% are not based in the United States, and of this 64%, 17% are based in China. This information is only based on tier 1 supplier data and the country of their headquarters. For example, Foxconn Technology Co. Ltd. is the computer hardware supplier for Apple. Foxconn Technology’s headquarters are in Taiwan. However, Foxconn Technology Co. Ltd. has a network of factories in China. Also, for a given supplier, their tier 2 or tier 3 suppliers may also be based in China.

For the purposes of this case, the tier 1 supplier refers to the immediate suppliers to Apple, such as technology suppliers. For tier 2, the technology suppliers are categorized into software, communication and networking, and others. Finally, tier 3 suppliers to the tier 2 suppliers, such as Cisco System Inc., is a tier 3 supplier under communication and networking suppliers. The classification of suppliers into different tiers is used to visualize the relationship between various suppliers and analyze the focal firm’s supply chain (Fawcett et al., 2007).

The spreadsheet Apple Value Chain Student Data File lists 294 suppliers and 43 customers along with their industry type, country, confidence score, implied rating, and revenue. Figure 1 shows the geographical distribution of suppliers, and Figure 2 provides information about the total suppliers segmented by industries. Figure 3 provides the complete supply chain breakdown for Apple, including both suppliers and customers.

The suppliers indicated in the map are as follows. Canada, United States of America, Cayman Islands, Brazil, Finland, Sweden. United Kingdom, Netherlands, France, Austria, Germany, Israel, Cyprus, Mauritius, India, Sri Lanka, China, Taiwan. Hong Kong. Malaysia, Singapore, Hong Kong., Japan and Australia.

Figure 1. Geographical Distribution of Apple Suppliers

The horizontal axis is labeled industry. The vertical axis is labeled total number of suppliers and ranges from 0 to 40 in increments of 20. The approximate data from the graph is tabulated below.

Figure 2. Apple Inc. Suppliers According to Industry Segment

An illustration lists tier 3 – suppliers, tier 2 suppliers, tier 1 suppliers, tier 1 – customer in four columns.

The suppliers listed in tier 3- suppliers reads as follows.

Sunway Communication Co. Ltd

Cisco Systems Inc.

Precision Manufacturing Co. Ltd.

BrightPoint Inc.

Huawei Technologies Co. Ltd

Audience Inc.

The suppliers listed in tier 2- suppliers reads as follows.

Software (16)

Communication and networking (14)

Computer Hardware (20)

Electronic equipment and Parts (29)

IT services and consulting (10)

Other Services (9)

Phone and Handheld devices (3)

Semiconductor equipment and testing (3)

Semiconductors (46)

The suppliers listed in tier 1- suppliers (suppliers (249)) reads as follows.

Basic materials (32)

Industrials (49)

Consumer cyclicals (22)

Consumer non-cyclicals (1)

Financials (4)

Healthcare (1)

Technology (159)

Telecommunication Services (1)

Others (11)

The customers listed in tier 1- customer (customers (34)) reads as follows.

Industrial (1)

Consumer cyclicals (12)

Consumer non-cyclicals (3)

Financials (5)

Healthcare (2)

Technology (12)

Telecommunication Services (8).

Six arrows from Sunway Communication Co. Ltd., Cisco Systems Inc., Precision Manufacturing Co. Ltd., BrightPoint Inc., Huawei Technologies Co. Ltd., and

Audience Inc., respectively are indicated toward Communications and networking.

Ten arrows from Software, Communication and networking, Computer Hardware, Electronic equipment and Parts, IT services and consulting, Other Services,

Phone and Handheld devices, Semiconductor equipment and testing, and Semiconductors respectively are indicated toward into Apple Inc.

A vertical line separates tier 1 suppliers and tier 1 customers. The center of the vertical line is labeled Apple Inc. On the left side of the Apple Inc. tier 1, tier 2, and tier 3 suppliers are listed. Along the right side of the Apple Inc., the tier 1 customers are listed. Seven arrows from Apple Inc. are indicated toward Industrial, Consumer cyclicals, Consumer non-cyclicals, Financials, Healthcare, Technology, and Telecommunication Services.

Figure 3. Apple Inc. Supply Chain Breakdown—Suppliers and Customers. Adapted from Thomson Reuters Eikon (2020)

COVID-19 and Global Supply Chain Issues

Until the end of February 2020, several news stories reported on the over-reliance on Chinese suppliers and markets. For instance, Lucas (2020) and the BBC Business News (2020) also reported layoffs and business closings due to the complete lockdown situation in China. However, the global spread of the virus highlighted other issues around the world. The balance of this section lists and discussed selected news stories regarding global supply chain issues so as to highlight supply chain disruptions caused by the pandemic.

A report published by the New York Times described a rattled global economy that included disrupted supply chains in various industry segments and an overreliance of major manufacturers across the globe on Chinese markets (e.g., Stevenson, 2020; Yaffe-Bellany, 2020; Bloomberg News, 2020; Government of Canada, 2020).

• 1. December 31, 2019—the novel coronavirus outbreak occurred in Wuhan, and the Chinese authorities imposed mandatory restrictions, which impacted the flow of materials, components, logistics activities at ports and travel of workers (Xu et al., 2020).
• 2. January 30, 2020—the governments of Chinese provinces (Shanghai, Jiangsu, Guangdong, and Chongqing) mandated that the timing of the return to work, which occurs after the new year holidays, be delayed to February 10, 2020. This was an early sign of potential electronics component shortages as these provinces are home to the crucial manufacturing hubs of global supply chains (Hille et al., 2020a).
• 3. March 2020—serious concerns about consumer electronics supply were raised by this dramatic slowdown of China-based contract manufacturers. It was estimated that the replenishment lead time would increase by three times. The supply chain uncertainty was seen for all downstream actors of the supply chain, who primarily relied on Chinese contract manufacturers who reported delays in shipment of components, finished parts, and spare parts (Hille et al., 2020b). In Malaysia, key suppliers such as Murata Manufacturing Co., Renesas Electronics Corp., and Ibiden Co. have halted production due to restrictions on movements imposed by the government. Micron Technology Inc. is affected too, but an exemption allowed limited semiconductor operations to continue (Bloomberg News, 2020). The data provided by Resilinc (a supply-chain-mapping and risk-monitoring company) sums up the supply chain crisis based on the industries located in the quarantined areas of China, South Korea, and Italy. For high-tech, semiconductor, and consumer electronics, approximately 92% of the manufacturing and warehouses were located in the quarantined areas of China (Linton & Vakil, 2020). This directly impacted not only Apple but also other consumer electronics manufacturers who rely heavily on Chinese suppliers.
• 4. April 2020—the weakened global consumer demand and disrupted manufacturing across Asia (electronic component suppliers) led Apple to push back the production ramp-up for its iPhones by about a month (Kubota, 2020). The issues are far beyond the demand and supply challenges. When it comes to product management, the engineering verification process is limited under remote conditions as the Apple engineers cannot fly to Chinese manufacturing facilities due to work-at-home conditions being imposed in the United States (Ferrari, 2020). This situation with the mandatory lockdowns across the globe created a ripple effect across supply chains, with the reduced production capacity at the contract manufacturing facilities, projected shortages of raw materials, and the product management issues at Apple exposing the several variabilities with global supply chains focusing on cost reduction only.
• 5. October 2020—for the first time since 2011, iPhone was not launched in September. The pandemic impacted the Chinese suppliers and assembly plans, and the spread of the virus globally impacted Apple’s suppliers based in the rest of the world (Culpan, 2020). For example, Peru’s (June 2020) state of emergency and nationwide lockdown have led significant mining companies, such as Freeport-McMoRan Inc. and Newmont Corp., to curb copper production. The same is happening in other mining centers such as Chile, Canada, and Mongolia. The initial result from Chile and Peru alone points to a loss of some 325,000 metric tons of copper production or about 1.7% of global annual output. The decline in copper production directly impacts the semiconductor industry (Everstream Team, 2020).
• 6. Moving ahead to October 2021—during 2020, lockdowns and work-from-home mandates increased the demand for consumer electronics products by 7%, mainly driven by increased demand for desktop and laptop computers and gaming consoles. The increased demand for electronic products led to a longer-term supply chain crisis as chipmakers and component suppliers had not returned to full production capacity. Foxconn reported decreased production on iPhone 12 devices, produced at the manufacturing facilities in India, due to the lockdowns imposed to contain the spread of Covid-19 (Trends, 2021). The global chip shortages lead to steep increases in the waiting times for most Apple products, such as the iPhone 13 models, whose shipping was delayed until mid-November. It is also anticipated that the initial projections of 90 million iPhone 13 units will be decreased by more than 10 million devices (Ferrari, 2021).

The pandemic impacted supply chains beyond manufacturing and component suppliers. Lack of transportation capacity outside China forced electronics distributors to use airfreight, which is as much as four times more expensive than average shipping costs (Hoek, 2020). In 2021, several developments have contributed to supply chain problems, including new coronavirus variants of concern, additional global supply chain disruptions (e.g., the Suez Canal blockage in June 2021), increasing COVID-19 cases in Shenzhen and Guangzhou, leading to lockdowns and stricter measures. Lack of capacity due to stricter measures increased shipping costs, and the average vessel waiting time increased from 0.5 days to 16 days (Hoek, 2020; Tan, 2021).

The pandemic forced companies to focus on aspects other than cost, such as bottlenecks and other strategic concerns. Several organizations reported seeking alternatives such as Taiwan, Indonesia, Vietnam, or India, to set up alternative manufacturing facilities. However, China, an advanced electronics manufacturing hub, is unlikely to lose its place due to a competent workforce, an efficient distribution system, an interacted network of suppliers, and a large home market for consumer electronics. Apple reported in early 2020 that the company was not looking to make any quick moves out of China in light of the virus-related supply chain interruptions (Wu, 2020).

Rethink Supply Chains—It’s Not All About Cost

The COVID-19 pandemic has not fundamentally created any new challenges for supply chains. It has, however, brought to light previously unseen vulnerabilities, unaddressed issues, and exemplified the lack of resilience in global supply chains. Furthermore, many organizations have experienced staff shortages and losses as a result of COVID-19. Due to these and other factors, the pandemic has accelerated and magnified problems that already existed in the supply chain. For the past two decades, supply chains have focused on cost reduction by moving production to lower-cost countries and locating plants closer to the new sources of demand. This made sense when everything was running smoothly, and economies were growing in a perfectly predictable world. The focus was never on dealing with very low-probability and very high-impact risks, such as a pandemic. COVID-19 has proved that no industry is immune to these very low-probability and very high-impact risks.

The pandemic presented an opportunity for organizations to improve their supply chain and make it more resilient by diversifying their suppliers geographically. It is not that companies need to switch their suppliers completely, but having resilience is vital to fulfilling demand. It is as yet unclear what impact COVID-19 will have on supply chains, how long the different regions will stay under lockdown, and how often lockdowns need to be extended. The new variants of concern and lack of vaccinations among the developing countries, as of December 2021, create more uncertainties in the global economy and supply chains.

With this pandemic, consumer expectations will not change, especially the demand for high-quality products at competitive prices. Organizations must think about short-, medium-, and long-term actions to fulfill the current demand and have a strategic initiative to protect against unforeseen risks by examining factors other than lower cost alone. At the same time, to maintain price competitiveness, shifting manufacturing to high-cost home markets does not look attractive either. The challenge for companies will be to make their supply chains more resilient without weakening their competitiveness. The risk management plan requires thinking beyond cost reduction and lean supply chains by building resilience through redundancies and diversification.

Case Instructions

For this case, work in teams to perform the risk assessment, develop mitigation strategies, and prepare a risk management plan for Apple Use the data provided in the Apple Value Chain Student Data File as the existing supplier database to understand the diverse nature of Apple’s supply chain and tier 1 supplier ratings.

Keep in mind that the pandemic is changing, with new variants of concern and low vaccination rates among developing nations. Combine recent information from news and/or other online sources with the World Bank datasets on World Development Indicators ( https://databank.worldbank.org/source/world-development-indicators ) while deciding on an alternative supplier base.

Use the first three Discussion Questions to test the supply chain management knowledge required to complete the case analysis. The Appendix contains a review of the fundamental knowledge required to respond to the case questions.

Discussion Questions

• 1. Differentiate between the terms value chain, demand chain, supply chain, and supply chain management.
• 2. Consider the statement: Combining the activities of material management and physical distribution, a supply chain does not merely represent a linear chain of one-on-one business relationships but a web of multiple business networks and relationships. Justify this statement based on the data provided in the Apple Value Chain Student Data File .
• 3. Consider the statement: The total systems approach is a “holistic, integrated approach” whereby all the business processes involving demand planning, purchasing, production, transportation, warehousing, and marketing are coordinated to make the best tradeoffs within them to achieve the optimal outcome for the whole system. Justify this statement based on the data provided in the Apple Value Chain Student Data File .
• 4. Analyze the Apple value chain. Is Apple’s supply chain sufficiently resilient to cope with the risks posed by COVID-19? Justify your answer using supportive data from the Apple Value Chain Student Data File .
• 5. Discuss the very low-probability and very high-impact risks involved in supply chains and their impact on operational and strategic levels.
• 6. Use the World Bank data on World Development Indicators to identify five influential factors you may consider as a procurement director to diversify your supply chain. Would you suggest any other factors outside the World Development Indicators dataset? (Hint: retrieve the World Development Indicators dataset from https://databank.worldbank.org/source/world-development-indicators )
• 7. Develop a risk assessment matrix for Apple Assign an RPN value (see Appendix) for each risk identified and provide the mitigation plan for the risks identified. Justify the identified risk, RPN, and selected mitigation.
• 8. From a supply chain management perspective, what are the operational and strategic problems caused by COVID-19? What are the possible options to address these problems? Will they be feasible? Justify your answer.

Appendix: Supply Chain Terms and Definitions

Supply Chain Management : Supply chain management encompasses the planning and managing of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly , it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies.

Demand Chain, Value Chain, Supply Chain

Most of the time, the terms demand chain, value chain, and supply chain are used interchangeably. However, it is important to differentiate these activities.

As shown in Figure 4 , the supply chain can be characterized by three flows: The forward flow from raw materials to finished goods, the backward financial and information flows. The organizations across the supply chain can be viewed as an end-to-end interrelated business process (Martha et al., 1997) to:

The framework comprises five rectangular boxes interconnected to each other with arrows. From left to right the boxes are labeled as follows. Suppliers, manufacturers, distributors, retailers, and end customers respectively.

Five dotted down arrows from a dotted horizontal line above the rectangular boxes, are directed toward the suppliers, manufacturers, distributors, retailers, and end customers respectively.

Five solid upward arrows from a solid horizontal line beneath the rectangular boxes are directed toward the suppliers, manufacturers, distributors, retailers, and end customers respectively.

A spaced dotted right arrow is directed from end customers toward retailers.

A spaced dotted right arrow is directed from retailers toward distributors.

A spaced dotted right arrow is directed from distributors toward manufacturers.

A spaced dotted right arrow is directed from manufacturers toward suppliers.

A thick right arrow is indicated beneath the horizontal line. The side toward the tail end of the arrow is labeled inbound logistics and is spread across suppliers and manufacturers. The side toward the head of the arrow is labeled outbound logistic and is spread across the distributors, retailers and end customers. The solid line arrow depicts the material flow. The dotted line arrow depicts the information flow. The spaced dotted line arrow depicts the financial flow.

Figure 4. The Supply Chain Process at Apple

• 1. Acquire raw materials, parts, and services.
• 2. Transform the raw materials and parts into finished goods and services.
• 3. Add value to the supply chains by creating demand for new and existing products, distributions, and facilitating the exchange of information, parts, goods, services, and finance among various supply chain nodes.

In the context of the supply chain management definitions provided in this section and Figure 4 , the ultimate goal of supply chain management is to serve the customer better by adding end-to-end value—in simple terms, producing only the products and services for which the customer is willing to pay. This entails high-quality products at a competitive price and customer service level (delivery speed, customization, etc.).

Now, let’s consider both demand and value chain viewpoints. All the upstream activities to a focal firm are considered part of the supply chain. The focus is to ensure the efficient supplies of raw materials, parts, and other services to serve the upstream processes of the value chain most effectively. The demand creation, fulfillment, outbound logistics, sales, and marketing activities form the demand chain process (see Figure 5 and Figure 6 ).

The double headed arrow comprises series of seven rectangular boxes labeled purchasing, warehousing, manufacturing, distribution, marketing, sales and services from left to right respectively. Beneath the double headed arrow there are three rectangular boxes interconnected with double headed arrows between them. The box on the left reads suppliers, the box in the middle reads focal firm, and the box in the right reads customers.

Figure 5. Demand, Supply, and Value Chain

The framework comprises an oval structure between two circles.

The circle on the left is labeled Supplier, Supply Chain.

The circle on the right is labeled Customers, Demand Chain.

The oval shaped structure is labeled Focal firm.

The various correlated steps are listed below. The data are tabulated below.

Figure 6. Supply Chain vs. Demand Chain. Adapted from Shankar (2001)

Systems Thinking

To improve the end-to-end value and capture the synergy of inter-functional and inter-organizational coordination across the supply chains, it is essential to realize the strategic planning, controlling, and designing of a supply chain as an autonomous system. The lack of connectivity between various system functions can lead to suboptimal organizational goals, inefficiencies, and duplication of effort across the organization. In the modern global environments, organizations no longer compete as separate entities but as a complicated, integrated, and coordinated network of supply chain partners. There are different viewpoints and areas of focus when supply chains are analyzed through the lens of the supply chain and demand chain (see Figure 6 ). Scholtes (1998) lists the following benefits of such integrations:

• 1. Increased competitiveness.
• 2. Increased sales and profitability.
• 3. Improved value-added and customer service levels.
• 4. Enhanced fixed capital.
• 5. Optimal asset utilization.

Risk and Risk Management

Whether you are a manufacturer or a service provider, organizations cannot survive on their own. The raw materials, parts, tools, and maintenance, repair, and operations (MRO) suppliers must be sourced and delivered to produce an end-product or a service to deliver products most efficiently and effectively. Most firms deal with complex interrelationships between suppliers and distribution networks. According to a report published by Bosman (2005), supply chain disruptions pose the highest risk to supply chain execution and can be a significant source of revenue decline.

Risk is the combination of the probability of an event and its consequence. Consequences can range from positive to negative (Institute of Risk Management, 2020). A risk may result in a positive or a negative outcome or may resolve an uncertain situation. From the supply chain management viewpoint, the risk can be defined as an event that can impact (inhibit, enhance or cause doubt about) the efficiency and effectiveness of the whole or some parts of the supply chain. However, from the systems thinking perspective, a risk will impact the whole system even if a part of the system is under threat. The impact can be measured as strategic, financial, operational, etc., objectives of the supply chain. Literature classifies risks based on different approaches. A generic categorization is provided in Table 1 .

From the systems thinking viewpoint, the categories described in Table 1 can be analyzed from the supply, process, and demand side:

• 1. Supply risk : these are the risks that occur on the supply side of the value chain linked with raw materials, parts, and inbound logistics services.
• 2. Process risk : these are the risks associated with the focal firm or the processes linking the demand and value chains. Some examples include machine breakdowns, human resource errors, operations failures, and financial problems.
• 3. Demand risk : these are the risks that occur on the demand side of the value chain. For example, risks associated with distribution channels, demand fluctuations, and service issues.

A composite assessment called a risk priority number (RPN) can be developed using:

• 1. Severity (S) of the occurrence of particular events
• 2. Likelihood or probability (P) of the occurrence of particular events or outcomes
• 3. Detectability (D) as the probability of the failure being detected before the impact of the failure to the system or process being evaluated.

RPN = S x P x D

Tables 2 – 4 show possible severity, probability, and detectability criteria, respectively.

Supplementary Resources

download icon SC Risk Assessment TN Pivot Table

download icon Apple Value Chain Student Data File

Further Reading

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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iPhone counterfeiting case highlights risks of supply/support chain manipulation

The conspirators returned fake iPhones with legitimate IMEI numbers to Apple for warranty replacements, which they then sold. Key unanswered question: Did an insider provide the IMEI numbers?

The sentencing of Haiteng Wu on February 2, 2022, for his participation in a three-plus-year conspiracy to defraud Apple out of just over $1.5 million shines the light on criminals who operate in the margins of warranty fulfillment of consumer products, such as the iPhone. All in, the criminals were able to garner 2,500 new iPhones for subsequent resale and had attempted to acquire 600 more but failed due to Apple quality control rejecting the warranty submission.

Wu graduated from the master’s program at Virginia Tech in 2015. He secured a position as an architectural engineer shortly thereafter. He also embarked on creating, evolving and growing a criminal enterprise that netted him $987,000, allowing him to pay cash for two condos (McLean and Arlington, Virginia).

Wu was arrested in December 2019. He pleaded guilty to his crimes in April 2020, was sentenced in February 2022 to time served, and was ordered to make restitution of $987,000 to Apple and an identical amount in forfeiture. (His two condos had previously been ordered sold).

As the prosecutor noted in court, when it came to crime, in Wu’s case, crime did pay.

Mechanics of Wu’s iPhone scam

The Department of Justice announcement of Wu’s sentencing guides us through the mechanics of how Wu and his co-conspirators conducted their hustle from August 2016 through the summer of 2019:

Wu and other conspirators received shipments of inauthentic iPhones from Hong Kong. Those phones contained spoofed IMEI numbers and serial numbers that corresponded with authentic in-warranty iPhones. The conspirators then returned the inauthentic phones to Apple, claiming that the phones were legitimate, in-warranty phones, all in an effort to receive authentic replacement iPhones from Apple. The fraudulently obtained authentic iPhones were then shipped back to conspirators overseas, including in Hong Kong.

Interestingly, Wu’s ability to navigate the warranty fulfillment infrastructure of Apple was more labor-intensive than complex. The warranty process required the criminals to either bring the device to an Apple Store or use the online process and ship the defective device via UPS. All told, Wu created more than 45 separate aliases that he used, and he and his co-conspirators opened mailboxes at various UPS stores across a variety of states. In addition, each returned iPhone had to have an associated email address, which he created on the “sina” domain.

DHS inspectors cataloged more than 10 shipments associated with Wu over the course of their inspection, each containing bogus iPhones.

Once an investigation into Wu was opened, DHS cataloged the IMEI numbers and had Apple confirm that they were a valid number that had been placed on the counterfeit iPhones.

How was Wu and company detected?

It is unclear from the court documents if it was the Department of Homeland Security inspector at the DHL facility doing routine package inspections in August 2016 or if it was Apple’s brand integrity investigator who highlighted the crime being committed. The DHS inspector initially seized a box containing 20 counterfeit iPhones addressed to Wu. In September 2016, Wu was sent a letter from U.S. Customs and Border Protection notifying him of the seizure and Wu signed the “return receipt” acknowledging receipt.

This early indicator that the gig might be up should have induced Wu to stick to engineering, yet according to one of the prosecuting attorneys, “He decided to double-down on his criminal behavior.”

CISO brand protection takeaway

Brand protection involves counterfeit detection as well as identification of the support infrastructure required to manipulate company processes, such as warranty fulfillment. This case highlights the need to protect the key components of the fulfillment process – in this instance IMEI and serial numbers, which were key to Wu’s criminal success.

The court documents tell us about the process:

… IMEI and serial numbers on the suspected counterfeit phones submitted for replacement belonged to other customers with in-warranty iPhones. Thus, when Apple employees conducted a preliminary review of these returned phones, the spoofed numbers led Apple to believe that the devices were legitimate iPhones, which were under warranty, and thus, were eligible for replacement iPhones.

What the court proceedings in this instance don’t reveal to us is how the co-conspirators were able to acquire active the IMEI and serial numbers of those known iPhones. Were they acquired by deduction by Wu or via an as yet unidentified insider?

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Christopher Burgess is a writer, speaker and commentator on security issues. He is a former senior security advisor to Cisco, and has also been a CEO/COO with various startups in the data and security spaces. He served 30+ years within the CIA which awarded him the Distinguished Career Intelligence Medal upon his retirement. Cisco gave him a stetson and a bottle of single-barrel Jack upon his retirement. Christopher co-authored the book, “Secrets Stolen, Fortunes Lost, Preventing Intellectual Property Theft and Economic Espionage in the 21st Century”. He also founded the non-profit, Senior Online Safety.

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