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Apple manufacturing on the upswing

Apple's third straight profitable quarter shows how far the company has come in getting its manufacturing up to speed with the rest of the PC industry.

    Apple's third straight profitable quarter shows how far the company has come during the last year in getting its manufacturing processes up to speed with the rest of the PC industry.

    Excluding one-time gains, Apple today posted net income of $75 million for its third fiscal quarter, and behind the positive news is a story not always associated with Apple: improved execution. Not only does the company have a clearly defined business plan, but also it has been able to efficiently turn those plans into products that people can buy.

    But Apple's revamped business model hasn't been able to ignite sales growth. For that, the company is counting on next month's release of the low-cost iMac.

    According to Fred Anderson, Apple's chief financial officer, there were four key ingredients to this quarter's profits:

  • A simplified product line: "It's easier to forecast when you have a simpler product line," Anderson remarked. Where the company had to forecast demand for some 15 different models last year, it basically has three lines this year. Better forecasting means there are fewer unsold units at the end of the quarter, and therefore fewer that have to sold under the impetus of price cuts.

  • Use of more industry-standard parts: The company is moving toward incorporating components such as standardized disk drives, enabling Apple to more aggressively negotiate with parts suppliers on component cost, Anderson said.

  • Making manufacturing operations more efficient: Apple is expanding the number of parts suppliers who set up shop near its manufacturing locations. "What that means we take inventory when we need it," Anderson said, and the company doesn't get stuck with parts it doesn't need. "Many other companies in our industry have been out in front of Apple on this and were getting caught up there."

  • Outsourcing the manufacture of "motherboards": By getting out of the business of building the circuit boards that hold the core components of new systems, Apple can focus on quickly building and testing the machines.

    Apple said that one result of these efforts was an increase in what are called "inventory turns," to 22 from 13 times a year. This translates into Apple's holding 16 days of finished inventory in its hands. The more inventory turns, the more profit in general.

    "The industry leader is Dell, and they turn inventory 50 times a year. Most computer companies turn inventory somewhere between 10 and 20 times a year," noted Charles Smulders, an analyst covering PC distribution issues for Dataquest. "They are making good progress considering how late they recognized they need to do this," he commented.

    Despite the improvements, there are lingering questions about how Apple will grow its business. Revenues fell 19.3 percent to $1.4 billion for the third quarter, and shipments decreased year on year.

    "They have not started growing again. That's the big problem," said Dataquest's James Staten. Apple still hasn't matched its unit shipment numbers from last year, Staten said, a time when Mac clones were also being sold. In other words, the clone makers don't seem to have been "cannibalizing" Mac sales.

    In the next quarter, Apple is looking to consumer sales of its new iMac to steady and then eventually provide revenue growth.

    "The biggest challenge facing this us this [next] quarter would be the introduction of the iMacs. Our biggest challenge is to ramp up production as quickly as possible and produce as many iMacs as we can," said Apple's Anderson.