Apple Retail Stores and the Bullwhip Effect

January 17th, 2006

Apple’s greatest move: Retail Stores – 37signals

Interesting article, and while it explains how Apple executed that strategy so well, it doesn’t really explain WHY Apple decided to go retail in the first place. When you have a product line that sells well through established sales channels, why would you take on the added costs of building and running these stores? I would submit that much of the reasoning was to increase efficiency in the supply chain.

Enter the Bullwhip Effect. To make a long story short, let’s say you have a supply chain 4 players deep — manufacturers to wholesalers to distributors to retailers. Now assume the retailer sells a product the manufacturer builds, and demand at their end is constant. You’d expect the order demand at each level — retailers buying from distributors, distributors buying from wholesalers, wholesalers buying from the manufacturer — to also be constant.

Not so.

Because of various factors that I won’t go into, the order demand actually becomes more varied the closer you get to the manufacturer. (Really, it does.) That variance can wreck havoc with each stop, and hits the manufacturer the worst. The company that sees consistent demand for their products at retail have to deal with wild fluctuations in demand from the wholesaler — one month it’s 10,000 orders, the next month it’s only 800. Operationally, that’s a nightmare. You can’t just cut staff for a month when your cycle is low, and the bank wants to get paid whether or not your machines are running.

So clearly, one of the factors that plays into the bullwhip effect is that there’s no visibility of retail demand from the manufacturer’s perspective. They’re basically flying blind. In Apple’s case, the data they were getting from stores like CompUSA and MacMall wasn’t real-time; a sales summary report after-the-fact is too little, too late.

That is what makes the Retail Store so valuable to Apple. When a sale is made at the store, Apple’s manufacturing arm sees it immediately. Apple not only sees the demand at the stores, but they can also extrapolate it across all their partner retailers. And while Apple doesn’t exactly build the products, they can dictate the terms to the contracted builders in China: build this stuff with this data as the target.

That definitely explains why lots of manufacturing companies have tried to get into retail. It’s a great idea, but one you have to execute upon. And Apple hit it out of the ballpark.

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