Supplier Contracts
Apple retains capital assets at many of its suppliers’ facilities and engages in inventory prepayments at negotiated prices. This pattern is convenient and keeps Apple’s processes lean, but there are risks. The company’s purchase commitments can be as long as 150 days, and technology moves quickly. While Apple continually reviews these holdings, with the pace of innovation, some of these inventories, whether finished products or components, can become obsolete. However, Apple needs to have some inventory ready to go, so when it comes to these types of contracts, suppliers have limited power.
Overseas Suppliers
Many of Apple’s suppliers are overseas, and the company relies on them to ensure the components and products they produce adhere to the standards of quality that Apple and its customers expect. Apple extends warranties to its customers, and in some cases, may have to make good on any quality issues before it can be reimbursed by those suppliers. In a worst-case scenario, such as a batch of defective computers, Apple may have to absorb considerable costs temporarily. Also, Apple has to trust that its suppliers’ shipments are prepared correctly and packaged appropriately for customs and safety in transit. Otherwise, items may be damaged in transit causing Apple to be unable to fulfill orders in a timely fashion.
Third-Party Issues
Apple relies on a variety of third-party digital content, including movies, music and books. The company uses these products to fuel its ecosystem and tie its product portfolio together. Apple has to offer the digital content its customers want, and this means negotiating commercially reasonable terms with its suppliers. Suppliers have an extremely high degree of power in this regard. Also, Apple needs good relationships with third-party software developers. There is no guarantee these developers will create software that can run on Apple systems, and if there is not enough available software that works with Apple devices, customers may stop buying its products. This risk is significant and holds true with both mobile devices and computers.