Apple’s Networking and Supply Chain Mistakes Take a Bite Out of Its Shine

In an internal company e-mail obtained by several media outlets in early August, Apple CEO Steve Jobs fessed up to the problems surrounding the company’s summer product blitz. “It was a mistake to launch MobileMe at the same time as iPhone 3G, iPhone 2.0 software and the App Store,” Jobs wrote in the e-mail, which was obtained by Macworld.

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“We all had more than enough to do,” he added, “and MobileMe could have been delayed without consequence.”

MobileMe’s initial problems during the launch on Friday, July 11, the subsequent 11-day outage that roiled Apple’s rabid customer base and another service outage on Monday, Aug. 11, have generated even more pressure and public ire on the company: That’s because of iPhone 3G out-of-stocks and activation nightmares in the U.S. and abroad during the iPhone 3G’s launch and concurrent 2.0 software upgrade.

There are more than technical issues involved in Apple’s recent customer service problems. The company’s business practices, and the way it develops and unveils products are key factors. Analysts, including Ken Dulaney, a vice president at Gartner who closely follows Apple and the iPhone, contend that Apple’s policy of limited beta testing and intense product secrecy, while helping to generate public interest also may hurt the company in the long run. “If they opened it up a bit more, I don’t think it would hurt them, and it would give them a lot better quality assurance,” he says. “They just can’t control everything, and they’re losing valuable input that they could get from lots of people.”

But Job’s mea culpa (however it eventually came out in public) was a shrewd business move atypical of most CEOs, notes Dulaney.

“It’s OK to have problems as long as you admit to them and fix them. In fact, if you admit to them and fix them, it turns out to be an effect that creates more intense loyalty than you would expect,” he says. “I’ve seen a number of issues [with Apple] that would stop other vendors in their tracks, and people are willing to give Apple a break there.”

Apple’s Supply Chain Put to the Test

In late May 2008, AMR Research proclaimed Apple’s supply chain and digital distribution channels as tops in the world. The iconic Mac, iPod and iPhone maker took the number-one spot due to “an intoxicating mix of brilliant industrial design, transcendent software interfaces and consumable goods that are purely digital,” gushed the AMR analysts in the report ranking the world’s top 25 supply chains.

The analysts saluted Apple’s efforts with the original iPhone’s introduction to the marketplace in 2007, noting that “Apple could have stumbled meeting demand or failed on quality. It did neither.”

Just about a month and a half after AMR published its report, Apple’s vaunted supply chain and networks stumbled and failed under the crush of a complex and multiproduct rollout, beginning on July 11. Apple Stores quickly ran out of the 3Gs, lines soon elongated and problems with the iPhone’s activation process through iTunes frustrated thousands at Apple stores, whose associates began sending customers home to activate their new bricks and also for those who were trying to upgrade to the 2.0 software.

“When the iTunes activation server went down on Friday morning, Apple violated the cardinal rule: first, do no harm,” noted analysts at market research CurrentAnalysis in an Apple report. “Problems with the activation process were inexcusable.”

Apple’s MobileMe e-mail launch on the same day was “fraught with problems, including large initial downtime, an extended e-mail outage including lost messages, the inability to contact the service to sync, corruption of data, time delays in syncing the computer to MobileMe and more,” reported the Macworld article. The “launch of MobileMe was not our finest hour,” Jobs wrote to the Apple troops. (For more on MobileMe and the enterprise, see “Apple’s MobileMe, Designed for Consumers, Could Be Potential Headache for IT Managers.”)

To Gartner’s Dulaney, some of Apple’s troubles were self-inflicted but, to a degree, a bit out of executives’ and supply chain planners’ control. “Apple has always made great products, and they always expect to be phenomenally successful at launch, but I think the appetite in the public for this kind of product is probably surprising,” he says. “It probably got away from them.”

Historically, notes the AMR supply chain report, Apple has had a reputation for poor supply chain performance and was, at times, unable to handle the demands of its rabid fan base, falling back on their “forgiveness for mistakes.”

But that, according to the analysts, was all supposed to have changed.

What, Apple, Worry?

Even with the highly public failings on the big launch on July 11, just three days later Apple boasted that it had sold more than 1 million 3G iPhones and customers downloaded 10 million applications from its new App Store during that first weekend. 3G iPhones were still running low or were completely out of stock in many locations in the United States and in the other 20 or so countries where the iPhone was on sale.

And while Apple might have taken a PR hit during the opening weekend considering all the setbacks, Apple reported record third-quarter earnings on July 21, which excluded any new revenues from the iPhone 3G, App Store or MobileMe (which, unlike G-Mail, users have to pay for). Apple’s stock price dipped after the launch date but has rebounded to where it was on July 11.

A month after the launch in August, App Store users had downloaded more than 60 million programs for the iPhone, and Apple has sold an average of $1 million a day in applications for a total of about $30 million in sales during the month, Jobs told the Wall Street Journal. Though Apple would not confirm, one analyst stated that Apple had sold 3 million of the 3G iPhones.

On the physical supply chain side, Apple and its provider partner AT&T are struggling to keep up with demand, which could become even direr when Apple begins selling the 3Gs in 20 new countries starting on Aug. 22. AT&T stores, for instance, haven’t been able to replenish in-store stocks since the July 11 launch and have a backlog on the devices that is running 13 to 14 days, Computerworld reported. And Apple just announced a new distribution partnership with Best Buy, beginning in early September.

To the CurrentAnalysis analysts, Avi Greengart and Kathryn Weldon, snafus like Apple’s recent troubles do not usually have any long-term repercussions, they write in their report, “but this one may have some effects, thanks to the outsized press coverage [that] Apple launches typically command.”

“Even the most ardent Appleophiles may choose to wait a week or two before purchasing new products the next time around,” note Greengart and Weldon. “This would not only spread out sales, it could actually weaken them; the initial product rush would be less of an event, the PR impact and press coverage would be muted, and thus, Apple’s brand would not enjoy quite the same status and some sales could be lost.”