Sean O’Reilly: Vince, you were talking about the company that epitomizes great inventory
management at the beginning of the show. I'm going to go out on a limb and say it's Amazon.
Vincent Shen: I'd say this is generally a company you would discuss on the tech show
with Dylan. O'Reilly: It's not Amazon? What are you talking about?
Shen: This is one where I think their retail stores have become famous worldwide. They're
almost like a tourist destination unto themselves. I think there was a fun fact on the board
here at Fool HQ that said that more pictures are taken of the Apple store in Manhattan,
I believe the one in Midtown, than are of the ... what was it, the Empire State Building?
O'Reilly: It was the Statue of Liberty. I maintain that that's because the Statue of
Liberty is harder to get to. But, OK, it's Apple.
Shen: It is. Here's the company that has the highest sales per square foot in retail. I
think it's almost $5,000. O'Reilly: It's second only to ... do you know?
Shen: No, it's first. Who do you--
O'Reilly: Per square foot, it's second only to Tiffany's.
Shen: Tiffany's is actually number two.
O'Reilly: You're kidding me! Apple beat them out?!
Shen: Yes. O'Reilly: Wow. Sorry, Tiffany's.
Shen: In case you're not aware, for some background, before Tim Cook took over as CEO, he had a
long tenure in operations for the company. He is known for making major improvements
when he joined in 1998 that really changed the ability for Apple to not only manage the
huge demand it would have for some of its iPhones and other products, but to do so very
profitably. For example, he scrapped all of their in-house warehouses, all of their in-house
manufacturing facilities and went to the contract manufacturers that became so famous, like
Foxconn, for example. And something that allows them to do is, if you order a phone, it'll
likely be shipped directly to you from the manufacturing facilities abroad. Apple never
even has to-- O'Reilly: Do anything.
Shen: --take possession of them at any time. That's very efficient for them. A really funny
quote is, Tim Cook has several times used dairy products as an analogy for inventory,
the idea being, "Kind of like the milk in your fridge, the longer it sits, the more
likely it is to go bad." He's even gone so far as to describe inventory as "fundamentally
evil." That's probably a bit of a stretch, but he believed that inventory in hand would
shed about 1-2% of its value each week in normal conditions, maybe even more so during
a challenging retail environment. So, it's really important to be able to turn these
very quickly.
With all that in mind, the numbers here are really impressive. Instead of having billions
of dollars of parts, components, and completed product sitting around, they don't have to
deal with that nearly as much with the contract manufacturers. Trailing 12 months inventory
turnover, as of the most recently reported 2016 second quarter, 58.6 times.
O'Reilly: Wow!
Shen: Blowing out even a company that sells perishables, like a supermarket. Average inventory
balance during the period was only about $2.3 billion. Days of inventory, they can sell
through it in about six days.
O'Reilly: I just realized, when I bought my iPhone last spring, it was probably a week
old at that point! (laughs)
Shen: And I think the scale here is what's really so incredible and hard to imagine.
Billions and billions of dollars of product, and they're able to maintain a really well-oiled
machine. O'Reilly: Revenues were $50 billion ... yeah.
Shen: With those numbers, Tim Cook taking over, a lot of people complain or argue that
he's not quite the visionary in terms of design that Steve Jobs was. But he was also a huge
contributor in his time there, both in operations and as CEO, in developing this model and the
systems in place that allow Apple to be so profitable, to cut out the costs wherever
he can, and to have these numbers ... six days they can turn through their entire inventory.
O'Reilly: And this is on revenues for the fiscal year ending September 26 of last year
of $233 billion. That is just ... I can't even conceive of doing things that quickly.
Shen: Beyond some of the other sectors we talked about, that's one I really wanted to
touch on, just because it is this gold standard, I think, within retail.
O'Reilly: That's awesome!