Apple Manufacturing:
Should More Apple Products Say “Assembled in the USA”?

Production and Operations Management, BUS 5461

Abstract Apple, Inc. is a $170B global corporation that designs, markets and sells consumer electronic products such as the iPhone, iPad, and the Mac computer. Apple has structured their manufacturing and supply chain processes to take advantage of China’s cheap and plentiful labor. However, Apple has made an innovative decision to have the new ultra high-end Mac Pro partially manufactured and assembled in the US. This report includes research and analysis on the benefits available to Apple by expanding production in the US. Recommendations are presented that will help ensure apple succeeds in moving production to the US, and help reduce the risks Apple faces as a global corporation. Tables of Contents Chapter I – An Introductory Look at Apple, Inc………………………………………. 5-6 Chapter II – The Issues Facing Apple…………………………………. ……………… 6-8 Chapter III – Analysis: A Closer Look into Apple..…………………………………… 8-15 Chapter IV – Recommendations..……………………………………………………… 15-20 Chapter V – Summary ……………………….………………………………………… 20-22 References……………………………………………………………………………… 23-26 List of Figures
Figure 1:Average Hourly Compensation Costs in Manufacturing, U.S. Dollars, 2002-2009….....9
Figure 2: Average Hourly Compensation Costs in Manufacturing, U.S. Dollars, 2002-2009……9 Figure 3: Air Charter Shipping Costs Estimate ………………………………………………...13

Chapter I: An Introductory Look at Apple, Inc.
As the story goes, Apple, Inc. originated in the garage of Steve Jobs’ parents in Los Altos, California, by Steve Jobs, Steve Wozniak and Ronald Wayne in 1976. The company became recognizable with the 1984 launch of Macintosh. The Mac II launch in 1987 made the Macintosh line a viable and powerful family of computers. Over its 37 years of existence, their products transformed through aggressive and continual enhancements and innovative product launches. Today, Apple markets many products that fall into several product lines including; iPhone, iPad, Mac, iTunes, Software and Services, and Accessories; with global sales topping $170 billion.
Apple has exemplified the term “globalization” through its expansion and availability in eighty-eight countries with thirty-five of those countries having official online stores. The most recent earnings call revealed that 55% of Apple’s profits were generated outside the United States. Apple executives feel that global saturation is imperative to Apple’s future and project those earnings outside the U.S. to grow to as high as 80% of company profits with the emerging middle class in many countries. To foster this growth, Apple recognizes the needs to expand its current distribution methods to consumers worldwide including a larger online store presence, increased retail outlets, more partnerships with corporate resellers, catalog and internet resellers, government agencies, and collaborations with colleges and universities.
Apple has been under scrutiny for its decision to manufacture the majority of its products in China with over 700,000 manufacturing workers and engineers in the country. This paper will explore the need for Apple to develop a strategy that includes manufacturing in the United States, investments in manufacturing robotics for new product plans, improved delivery time of certain products to customers, and maintain low manufacturing costs - all while providing Apple with a powerful new marketing tool.

Chapter II: The Issues Facing Apple
A Shift Away from American Manufacturing
Consumer electronics companies’ manufacturing operations are often outsourced to Asian countries. Cheaper labor is not the only reason companies have moved their manufacturing to Asian countries. There have been many examples cited where Asian manufacturers and suppliers proved to be lot more flexible and efficient than their U.S. counterparts (Duhigg & Bradsher, 2012). For example, early iPhone prototypes had a plastic screen prone to scratches and Steve Jobs was unsatisfied and demanded a glass screen. Corning ultimately manufactured with the desired glass, but it required a lot of processing to adapt it to the iPhone. A Chinese factory placed a bid on the business, and when an Apple team visited, the Chinese plant’s owners were already constructing a new plant wing using government subsidies. “This is in case you give us the contract,” the manager said, according to a former Apple executive.
The factory had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day (Jain, 2012). In another example, there was a design change and within 96 hours, the plant was producing over 10,000 updated iPhones a day. “The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”
Fast forward to today, essentially all of the 110 million iPhones, 48 million iPads and 59 million other products Apple sold in 2012 were manufactured overseas (Apple Inc, 2012). Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence, and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products (Duhigg & Bradsher, 2012).
The company’s decisions pose broader questions about what corporate America owes Americans as the global and national economies are increasingly intertwined. “We sell iPhones in over a hundred countries,” a current Apple executive said. “We don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible (Apple Inc, 2012).”
Manufacturing Returns to the US
Despite the aforementioned advantages to manufacturing abroad, Apple is now locating a manufacturing facility in Fort Worth, Texas to manufacture newly released Mac Pro computers. This is a high-end computer with a starting price of $2,999 (without a monitor) and has a revolutionary aluminum core design. Apple has had an operations center in Austin for several years, so the Texas business climate is familiar to them. They have been named the number one supply chain by Gartner’s Ninth Annual Supply Chain Top 25 six years in a row, so Apple’s move was likely well-reasoned (Gartner, 2013).
Other companies have also begun to move manufacturing back to the United States. Rising energy costs, rising wages, quality control risks, political risks, the desire to keep the majority of the supply chain close to the largest consumer base have all been cited as reasons for the moves (Wigfield, 2012). While Apple has gotten bad publicity over the past couple years for criticism of working conditions in suppliers’ factories (Eshkenazi, 2012), Flextronics will be working with Apple on the Texas manufacturing facility and they have many of the same issues. It is unlikely that concern over image is the sole force driving the decision to re-shore since some in Apple don’t believe it is their job to solve America’s problems.
The Mac Pro is currently the only Apple product currently being produced in the US. There are several factors that may make the US a good production location for such a high-end product: 1) Many of the labor-intensive parts will be assembled on an automated line, minimizing the increased labor cost of producing in the US. 2) Quality concerns can be reduced due to more reliable oversight of quality practices. 3) A smaller finished goods inventory makes it quicker to activate product improvements and reduced working capital costs. 4) It should also minimize the bullwhip effect with fewer inventory locations. 5) A shorter supply chain should decrease the possibility of disruptive events, although a disruptive event can still affect raw materials shipments.
Considering the aforementioned factors, does increasing production in the US look like a good strategy for new and existing products?

Chapter III: Analysis: A Closer Look into Apple
Labor Costs and Productivity Over the past 20 years, China has emerged as the biggest player of offshore manufacturing due to its relatively low costs. Figure 1 shows the average hourly labor rate in US dollars for manufacturing employees in China from 2002 through 2009 (International Labor Comparisons, 2013). Nevertheless, Apple Inc. must take into consideration that China’s labor market has been experiencing a rise in costs, with a 10% - 15% annual increase. Chinese manufacturing labor costs have increased 190% from 2002 to 2009. During the same period, US manufacturing labor costs have only increased 24% (Figure 2). US corporations have also managed to benefit from productivity gains per employee, spurred by the higher labor costs per employee. As a result, labor cost comparisons may no longer be the domineering factor in determining the location of a manufacturing facility (Welsh, 2013). Strategically, these US productivity gains can be used to offset labor cost savings in China. Figure 1: Average Hourly Compensation Costs in Manufacturing, U.S. Dollars, 2002-2009 Country | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | China | 0.60 | 0.68 | 0.74 | 0.83 | 0.95 | 1.21 | 1.59 | 1.74 |

Figure 2: Average Hourly Compensation Costs in Manufacturing, U.S. Dollars, 2002-2009 Country | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | United States | 27.36 | 28.57 | 29.31 | 30.14 | 30.48 | 32.07 | 32.78 | 34.19 | One of the forces driving US productivity gains is automation of production processes. Assembly automation uses well-engineered process controls and series of robotic equipment, which are arranged according to a fixed sequence of assembly tasks. If designed and engineered correctly, assembly automation can improve quality, reduce risk and increase throughput (Assembly Automation, 2013). In comparison to robotics, human labor is more variable by nature and thus has more opportunities for errors (Jacobs, 2011, p. 292). The lower the opportunities for error, the higher probability the quality of the product will increase. Apple and its subcontractors can allocate more capital expenditures to US-based assembly automation with the goal of building production capacity with high productivity and low opportunities for variation. If production in the US were going to be economically viable, the productivity gains of a highly robotic production process would have to offset the increased labor costs.

Geopolitical and Other Risks
For multinational companies (MNCs), matching global demand and supply forces is a daunting task, especially in light of omnipresent US-China trade relation tensions. There is significant political risk involved with doing business in China. There is not a strong, transparent legal system, so legal system will often be biased in favor of Chinese national companies. The Chinese government also has more power to quickly enact protectionist policy that can hurt foreign companies, with less checks and balances than a typical western industrialized nation. There is also significant intellectual property risk by having so much of the supply chain and assembly occurring in China. A weak legal system and a government trying to spur economic growth means there is higher risk of intellectual property getting into the hands of unauthorized entities.
If Apple were to set up more US based manufacturing of high-end products to the US, they would be less exposed to natural disasters and geopolitical risks. Either of these could trap Apple products in China and leave Apple in a position where it is unable to transport finished products from China to the US, where the US alone accounts for 60% of the projected demand for Mac Pros. We would expect the demand for a future high-end Apple television would a have a similar customer demographic. For example, if the US and China get into retaliatory trade embargos with each other on certain products, China could decide to limit export of consumer electronics, or the products of any individual company, from China. This would devastate the company or industry the product is in if all the supply and manufacturing is done in China. The Chinese government has relatively little political restrictions on it, so it is a real possibility. It would be cheaper for Apple and its subcontractors to maintain safety stock inventory (Jacobs, 2011, p. 538) of components in the US than for Apple to keep hoards of more expensive and pre-spec’d, finished Mac Pros in the US.
Apple would instantly lose the ability to supply more than 60% of the market for Mac Pros, since developed nations are the primary consumers of such a high-end product. By producing in the US, Apple has a larger capability outside of the control of China that can continue to support other western developed nations with high-end products such as Mac Pros and Apple televisions. This example of geopolitical risk can affect all products of Apple, but in the case of its cash cow, the iPhone, Apple can develop a large market in China to sell to due to its lower price. Apple needs to consider this risk, and should look into the capability to produce iPhones outside of China to diversify its risks. Developing a robotic production capability for lower priced products could be pursued after Apple and subcontractors build an advanced robotics manufacturing foundation with the higher priced lower quantity products first.

Supply Chain Timeframes
A factor that changes with the production of some products to the US from China is the logistics of delivery of finished goods from China to the US, where the majority of the demand for Apple’s high-end products is. There are five main overarching elements of the supply chain in China before finished goods are delivered to the customer. The first element is component sourcing and delivery (element 1), followed by assembly of the components into a finished product (element 2). Once the product is produced, it is normally shipped via air cargo transportation (element 3). When the cargo ship arrives at the west coast port, it will be trucked to Apple’s warehouse in Elk Grove (element 4) before shipping out to retail stores and customers for purchase (element 5).
Exhibit A: Visual Depiction of the Apple Supply Chain

Compared to the above supply chain for China to US production, the supply chain with a US-based factory can shorten the five main elements to three by eliminating the need for air cargo transportation from China and the Elk Grove warehouse inventory and distribution center. One of the advantages is the shorter lead-time from a US-based factory to Apple’s retail stores, and other sales channels, versus the longer time from a Chinese factory. Figure 3 shows that the air cargo shipment of Mac Pros to the US from China would cost Apple $16M a year in direct costs as well as several days lead time. The example assumes all US Mac Pro shipments are made via air cargo, which we were unable to confirm. Shorter lead time benefits Apple by having less financial working capital requirements, less finished goods inventory, reduced time to market for incremental improvements, and the ability to quickly stop production and limit the write-off of products due to quality problems.
To compete more effectively, a growing number of manufacturers are considering shifting operations closer to customers in order to provide better service, reduce total costs, and enable accelerated growth (Harrington, 2011). Minimized supply chain steps and changes for interruptions enhance Apple’s competitive advantage through increased supply chain flexibility. Apple should have Mac Pro’s labor-intensive parts manufactured in China and assemble them in the US for optimized costs, increased quality control, and efficient logistics. Figure 3: Air Charter Shipping Costs Estimate | | | | | | | | | | | Price of 777 Charter Flight from China to US | $242,000 | | | iPhones per 777 Air Charter | 450,000 | | | China to US Air Shipment Cost per iPhone | $0.54 | | | | | | | Est. Box Size of Mac Pro (inches cubed) | 1,500 | | | Box Size of iPhone (inches cubed) | 30.2 | | | | | | | Est. Mac Pros per 777 Air Charter | 9,056.3 | | | China to US Air Shipment Cost per Mac Pro | $26.72 | | | | | | | | | | | http://www.bloomberg.com/news/2013-09-11/the-iphone-s-secret-flights-from-china-to-your-local-apple-store.html | | | | | | | | | Projected Mac Pro Demand per Year | 1,000,000 | | | Projected Mac Pro Demand in US (60%) | 600,000 | | | Cost to 777 Air Charter Mac Pros to US per Year | $16,033,126 | | |

The Bullwhip Effect
Manufacturing Mac Pro in the US can minimize the bullwhip effect with fewer major elements in the Mac Pro supply chain, for Apple specifically. The bullwhip effect occurs when fluctuations in demand or special pricing is offered annually. This causes the supply chain to have periods of highly increased demand, which they build up and carry inventory for. Each stage of the supply chain carries additional inventory that what is needed one stage lower; therefore multiplied several times, there is a large inventory bulge of unneeded inventory is the supply chain. See Exhibit B below.
Exhibit B

From the perspective of Apple, some of the burden of the bullwhip effect is transferred from Apple to its subcontractors because some of the subcontractor will still have to ship components to the US production site. One factor lessening the bullwhip effect is less inventory of finished Mac Pros is needed due to production in the US, where most units will be sold. Compared with production in China, there are less Mac Pros caught up in Customs, less risk of stolen inventory in foreign countries, less Mac Pros spending time in air cargo planes. Apple also rarely puts its products on sale; therefore demand variability is reduced, helping to minimize bullwhip effect caused by customers/distributors forward buying (Jacobs, 2011, p. 377).

Chapter IV: Recommendations
Short Term Recommendations The new Mac Pro computer is being assembled in the US, signaling that Apple was able to work out a supply chain that is reliable and profitable. We recommend Apple continue to research production opportunities in the US. In the short to intermediate time horizon, Apple has a product in development that would be ideal for US assembly – the long rumored Apple television. The following will discuss why Apple should produce its television in the US and how it can help Apple position itself for the long run. As discussed in the analysis of labor costs, Chinese manufacturing labor costs have increased 190% from 2002 to 2009. During the same period, US manufacturing labor costs have only increased 24%. The Chinese Yuan has appreciated in value by 27% over the past 9 years, and 8.1% in the last 3 years, as shown in Exhibit C. This currency risk directly reduces Apple’s profit margins by increasing costs of goods sold. In general, financial markets believe the Chinese labor costs and Yuan will continue to increase. These increases in costs of manufacturing in China make manufacturing in the US more appealing.

Exhibit C

Chart retrieved from http://finance.yahoo.com.

Like the new Mac Pro computer, an Apple television would be a high-end product, allowing for higher prices and profit margins. The “Assembled in USA” designation is a powerful marketing tool, supporting a relatively high price. A higher profit margin provided by a high-end price would allow Apple to cover high production costs as US production expands. Falling market prices in time will coincide with cost reductions as the production process becomes more cost efficient due to the learning curve of producing in the US. Over time, Six Sigma teams of engineers can make the robotic manufacturing process more efficient, moving the plant up the learning curve. Since 60% of Mac Pro demand is projected to be in the US, we would also project a high percentage of Apple television demand to be in the US, thus the US would be an optimal centroid production location (Jacobs, 2011, p. 406).
Apple and one of its largest contractors, Foxconn, have begun research and development relationships with Carnegie Mellon University, a leading robotics research institution (Hughes, 2013). Apple and its subcontractors need to invest time and money heavily in that relationship with the goal of developing the capability to make a television assembly line a highly robotic process. A highly robotic assembly line reduces the impact of the manufacturing labor rate delta between China and the US. Apple is rumored to have been developing the Apple television for many years. Therefore, we believe Apple and its manufacturing contractors should be engineering the manufacturing process now for an assembly line that is ready for production within 2 years. Apple risks falling too far behind companies like Samsung in the high-end smart television market if they delay.
A production line high in robotics is able to create high quality products due to the precision of robots and the high repeatability of their processes. A high level of exact repeatability reduces human variation and thus reduces defect opportunities. The rapid rise of quality of Hyundai is an example of robotic quality when combined with strong Six Sigma practices. Labor at a highly robotic plant can be more focused on highly skilled engineers supporting the robotic processes and working on Six Sigma teams instead of low skilled assembly labor.
The Six Sigma teams will need to follow the DMAIC cycle to actively seek and eliminate potential opportunities for defects to arise (Jacobs, 2011, p. 292). Since there is little manufacturing labor, the Six Sigma teams will be able to modify production processes to eliminate defect opportunities without being influenced by the fear of being the cause of workforce layoffs. The main purpose of these engineers is to observe, analyze and improve production processes. One goal of these improvements would be to create a more lean manufacturing process and add further precision to lean logistics since human variation and opportunities for defects are reduced (Jacobs, 2011, p. 423). A second goal of the engineers is to encourage a lean production environment where production processes are made as simple, straightforward, as with the least amount of waste as possible - including bureaucratic inefficiencies. Possible areas of study would be to make sure the factory is laid out in work centers when human labor is involved and to ensure the flow of product through operations is as continuous as possible. A predictable and reliable production process better allows for smaller inventories and the pursuit of just-in-time manufacturing. Apple should take advantage of the location of a US plant with appropriate inbound component sampling. A US based inbound component counterfeit and quality control process will likely be more reliable than a foreign process that has less oversight.

Long-Term Recommendations Producing in the US sounds great, but to produce great results, Apple and its subcontractors will need to hire employees that possess the right set of technical skills to produce the product or operate/maintain the machinery being used. There will be less assembly labor in the US than in China, therefore a smaller percentage of employees will be low skilled. Due to the importance of highly productive robotics to the economics of the US production venture, a relatively high percentage of employees will need to be higher skilled engineers. Apple must also Invest build their plants near transportation hubs where their products can easily connected with transportation methods such as major highways and airports.
Foxconn and Carnegie Mellon University entered into a partnership to research the use of more advanced robotics in manufacturing. The partnership, along with the experience assembling the Mac Pro in the US, will lead to more efficient and productive robotic manufacturing. In the long run, Apple and its subcontractors will thus have a solid foundation using robots to produce in the US. The next step should be to bring lower-end, lower margin products to the US for production. A production site in North America can easily distribute to South America and by having a production site in China they can easily distribute within Asia and to Europe. Having more than one production site for a product like the iPhone, which makes up the biggest portion of Apple’s revenues, is crucial to offset the geopolitical risks inherent in China.
Additionally, both Apple and Foxconn would generate goodwill in the eyes of the public since many consumers about the infringement on human rights at the Chinese factories. The Mac Pro plant will be in Fort Worth, Texas, and it will bring additional capital to the city and to the state. If Apple continues to produce more products in the US, then a support system of suppliers could begin to locate themselves in the same area. An example of this phenomenon is when Toyota decided to build the Toyota Tundra pickup in Texas. Not only Toyota moved, a lot of suppliers also set up facilities nearby in order to support Toyota’s just-in-time production system. “The deal ushered in more than $2.7 billion in direct and indirect capital investment, and about 5,700 jobs from Toyota and its suppliers” (Morton, 2013). The same phenomenon may occur with Apple if the volumes are large enough, aiding Apple and its subcontractor in creating a lean, just-in-time production system. The last major recommendation we have for Apple and its US production subcontractors is to take a page out of Hyundai’s meteoric rise to becoming a high-quality manufacturer. There needs to be an aggressive push for lean manufacturing and Six Sigma quality programs. Hyundai used both a relatively high (for the automotive industry) use of robotic processes and aggressive Six Sigma to build cars that became more reliable than Toyotas. “In 2000, Hyundai adopted the Six Sigma management discipline. The process uses intense statistical analysis to identify flaws in a manufacturing process. Quality specialists rate processes from one sigma (31% of products are flawless) to six sigma (almost 100%)” (Daly & Moxley, 2012). Hyundai’s use of Six-Sigma is a true testament that if an organization is truly devoted to increasing productivity levels, consumer concerns, empowering employees to make decisions, and reducing waste, they can succeed (Jacobs, 2011, p. 296). Although there maybe hesitation in the ranks of Apple about more production back to the U.S., with the tools presented they have the opportunity to be leaders in a US manufacturing renaissance.
Chapter V: Summary
Apple has faced scrutiny over its outsourced manufacturing to China due to the public perception of outsourcing US jobs and human rights concerns. It is also exposing itself to currency risk, inflation risk and geopolitical risk. This paper presented the argument that by pursuing a strategy of producing more products in the US, Apple can benefit from increased price stability, higher quality products, decreased time to market, and gain a powerful new marketing tool.
In the short term, we recommend Apple produce its rumored Apple television in the US. The Apple television would be a high-end, high priced product. The high price point allows for higher margins that Apple can use to fund initially high US based production costs. It is also recommended that Apple and its contractors invest time and money into advanced robotics manufacturing technology, design a highly robotic production line for the Apple television that keeps labor costs down, and aggressively implement Six Sigma techniques at the production line locations.
In the long run, Apple and its contractors need to build up an excellent knowledge base on robotic manufacturing from their partnership with Carnegie Mellon University and experiences producing the Mac Pro and Apple television. This robotic manufacturing expertise can then become the foundation for expanding US production for high-end high-margin products, as well as other mid to low-end products for the purpose of reducing exposure to geopolitical risk. That said, we recommend Apple continue to produce lower-end, lower margin products in China due to low costs of production and to maintain centroid logic with regard to production locations. China is currently the second largest market for Apple products and still growing, therefore having a large number of low to mid-level products produced locally is efficient logistically and financially.
It is recommended Apple produce even more of their higher-end products in the US because higher prices and higher margins are experience with these products. The US is the largest market for high-end products, therefore logistically and financially it makes sense to produce them in the US. Centroid production location logic would be maintained and the high use of robotics manufacturing technology can create cutting edge products with extremely high quality, which is expected at high price points. As the volume of production in the US increases, suppliers may increasingly set up facilities nearby in the US and Apple’s exposure to currency risk and geopolitical risk would be reduced.
In summary, our short term recommendations are to produce the Apple television in the US and invest heavily in robotics manufacturing technology. In the long run, Apple should continue to move mid to higher-end product manufacturing to the US while still continuing to make lower and some mid-level products primarily in China. This strategy, coupled with aggressive Six Sigma techniques, would help Apple reduce its currency risk, produce higher quality products, maintain quick-to-market capabilities in its two largest markets, and gain a powerful “Assembled in USA” marketing tool.

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