On May 30, 2007, at the D5 conference in southern California, Wall Street Journal technology columnist Walt Mossberg asked Apple CEO Steve Jobs a simple question. “Five years out,” Mossberg said, “what are the core functions of the device formerly known as the cell phone?”

Jobs, dressed in his now-iconic frameless round glasses, black mock turtleneck, blue jeans, and white sneakers, rubbed his nose. He looked down at the floor. An Internet search of the phrase “Steve Jobs visionary” returns 137,000 results, but the man himself was silent. Finally, Jobs answered. “I don’t know,” he said.

One month later the Apple iPhone debuted. In thirty hours, the company sold 270,000 units, a pace of 150 per minute, each priced before contract fees at $499-$599. By early September, sales had crossed the one million mark—an adoption rate roughly ten times faster than that for the original iPod. Apple then cut the iPhone’s price by $200; its sales pace doubled.

By year’s end, corporate analysts predicted, global consumers would have purchased three million iPhones—with another seven million to go in 2008. In any case, the company closed its fiscal fourth quarter with record revenue and profits: $6.22 billion and $904 million, respectively.

If he couldn’t predict the future, how did Steve Jobs do so well now?

Apple succeeds—and the iPhone’s introduction is its logistics landmark—because the company understands what a global supply chain can and cannot do.

What a world-class supply chain can do is deliver enormous profits for savvy twenty-first century “producers.” In the twentieth century, everywhere but Hollywood, producer meant grower, supplier, or manufacturer. Now it means the team responsible for the financial, managerial and logistical aspects of that growing, supplying, and manufacturing.

Take the example of the original $299 video iPod. According to a study sponsored by the Sloan Foundation, the entertainment device contained 451 parts from some seven countries and several dozen companies. Tokyo-based Toshiba, for instance, made the machine’s single most expensive component, its $73 hard drive, while Chinese, Taiwanese, and Philippine assembly-line workers were paid about $5 per machine to connect this piece to others like the $20 display module and processor and controller chips, $8 and $5, respectively. Apple’s estimated gross profit? $80.

“This $80 profit is greater than the price of any single input, so it is definitely greater than the value added for any of its partners,” reports the research team. Their conclusion: “[Producers] can create value by transforming the innovations of others into products that consumers find useful and usable.”

In this way the significance of the iPhone transcends business school logistics. A great supply chain can create $80-profit-margin products, but it takes great products to make those $80 accumulate in three months to $904 million. Without consumer demand, the most efficient, well-aligned supply chain in the world will be found wanting. Taiwan’s Hon Hai, Quanta, and Catcher Technology—all iPhone vendors—have every incentive to produce for Bill Gates, not Steve Jobs in return for an additional few dollars per part supplied; doing so could double profits. But Microsoft last year likely sold fewer than one million of its competing Zune portable media players, while last financial quarter alone Apple sold some 12 million iPods and iPhones.

In the end, what prevents today’s supply chain partner from becoming tomorrow’s competitor is not predicting or even inventing the future—it’s packaging it. Six months before the iPhone’s introduction a British technology columnist reviewed a half dozen existing Asian touch-screen phones or phone prototypes. Chances are you have not heard of—and never will hear of—any of them.

“We’re getting to the point where everything is a computer in a different form factor,” Steve Jobs told Walt Mossberg after shrugging off his utter failure to prognosticate. “So what?…It doesn’t matter. It’s what is it, how do you use it, how does the consumer approach it, and so who cares what’s inside it anymore?”  wt

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