The performance difference between Apple and BlackBerry in regard to inventory

The performance difference between apple and

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The performance difference between Apple and BlackBerry in regard to inventory turnover (COGS/ Inventory) is even more striking. Cost of goods sold (COGS) captures the firm’s production cost of merchandise it has sold. Inventory is the cost of the firm’s merchandise to be sold. This ratio indicates how
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much of a firm’s capital is tied up in its inventory. Apple turned over its inventory 111 times during 2012, which implies that the company had very little capital tied up in its inventory. Apple benefited from strong demand for its products, as well as an effective management of its global supply chain. The vast majority of Apple’s manufacturing is done in China by lowcost producer Foxconn, which employs over 1.2 million people. In contrast, BlackBerry has likely higher production costs because it uses higher-cost suppliers than Apple. BlackBerry’s suppliers are located in the United States (e.g., Qualcomm and Jabil Circuit) and Luxembourg, countries with a much higher cost structure than that of Foxconn in China. In stark contrast, BlackBerry turned over its inventory only 11.5 times. In comparison to BlackBerry, Apple turned over its inventory almost 10 times faster! This big difference can be explained by a pronounced decline in demand for BlackBerry products and disappointing new product launches. Consumers continued to migrate away from BlackBerry smartphones to Apple iPhones and Android-based devices. Apple benefited from greater economies of scale (a decrease in per-unit cost as output increased) because it sold more than four times as many iPhones as BlackBerry sold smartphones in 2012 (136 million iPhones vs. 33 million BlackBerrys). Moreover, BlackBerry’s new product launches such as the Playbook (a tablet computer) flopped. At the same time, demand for the Apple iPad soared. The final set of financial ratios displayed in Exhibit MC16.1 concerns the effectiveness of a company’s receivables and payables. These are part of a company’s cash flow management; they indicate the company’s efficiency in extending credit, as well as collecting debts. Higher ratios of receivables turnover (Revenue/Accounts receivable) imply more efficient management in collecting accounts receivable and shorter durations of interest-free loans to customers (i.e., time until payments are due). In contrast, payables turnover (Revenue/Accounts payable) indicates how fast the firm is paying its creditors and how much it benefits from interest-free loans extended by its suppliers. A lower ratio indicates more efficient management in paying creditors and generating interest-free loans from suppliers. In the two dimensions of cash flow management, Apple displays a clear advantage over BlackBerry. Apple is paid much faster than BlackBerry. This might be explained by the fact that Apple’s customers are mainly individual consumers who tend to pay with cash or credit cards at the time of purchase, while BlackBerry’s most important customers are corporate IT departments and governments who request to be invoiced, and thus pay later. On the other hand, Apple is taking quite a bit longer to pay its creditors. Due to its stronger negotiating power, Apple might also be able to extend its payment periods, while BlackBerry is required to pay its creditors more quickly.
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