The IPhone's Secret Flights From China to Your Local Apple Store - Bloomberg

Simon Dawson/Bloomberg

Boxes of Apple Inc. iPhones are stacked in a London store.

As Apple CEO Tim Cook unveiled new iPhones yesterday, a complex operation had already kicked into gear behind the scenes to send millions of the handsets to store shelves worldwide.

The process starts in China, where pallets of iPhones are moved from factories in unmarked containers accompanied by a security detail. The containers are then loaded onto trucks and shipped via pre-bought airfreight space, including on old Russian military transports. The journey ends in stores where the world's biggest technology company makes constant adjustments based on demand, said people who have worked on Apple's logistics and asked not to be identified because the process is secret.

The multi-pronged operation has been built up under Cook, who oversaw Apple's supply chain before being tapped as Steve Jobs's successor in 2011. Getting iPhones seamlessly moved from factories to customers is critical for the Cupertino, California-based company, which derives more than half of its annual revenue from the flagship product. Apple also relies on a sales spike after a product's release. It sold more than 5 million units in the debut weekend for the iPhone 5 last year.

"It's like a movie premiere," said Richard Metzler, chairman of the Transportation Marketing and Communications Association and a former executive at FedEx and other logistics companies. "It all needs to arrive at the exact same time everywhere."

The task is even more challenging this year, with Apple adding new iPhone models -- including a lower-priced smartphone -- and colors. The company has signed a deal with NTT DoCoMo in Japan and is also close to adding China Mobile, which would boost Apple's customer base by hundreds of millions. Any snafu can mean lost sales or increased costs.

Steve Dowling, a spokesman for Apple, declined to comment.

Apple's worldwide logistics operation is now overseen by Michael Seifert, an Amazon.com veteran who joined the company in 2010. He reports up through the organization to Jeff Williams, Apple senior vice president of operations who runs the company's supply chain.

The logistics for a new gadget start months before it is unveiled, said the people with knowledge of the process. Apple first coordinates flights and trucks to move components from suppliers to assembly plants in China. Teams from sales, marketing, operations and finance collaborate to forecast how many devices the company expects to sell, said the people.

The internal estimate is crucial. An example of how that can go wrong is Microsoft's recent $900 million writedown because of unsold Surface tablets. Microsoft, the world's largest software maker, is now buying Nokia, adding employees with more experience building such hardware products.

"Software is a different deal altogether than an actual physical product that is going to be sold," said Metzler. "There are a lot more steps and different disciplines."

Once a forecast is made, millions of iPhones are manufactured, said the people with knowledge of the process. The handsets remain in China while Apple's software team at headquarters finishes work on the iOS software that runs on the device, said a former Apple manager who declined to be named because the process is private. Once a final version is finished, the software is loaded on the phones.

Before Apple's formal unveiling on stage, iPhones are shipped to distribution centers around the world, including Australia, China, the Czech Republic, Japan, Singapore, the U.K. and the U.S., said one of the people with knowledge of the matter. Security personnel are with the devices every step of the way, from truck depots, airports, customs and storage warehouses until the product is finally unveiled, two people said.

FedEx ships Apple handsets to the U.S. mainly using Boeing 777s, according to Satish Jindel, a logistics-industry consultant and president of SJ Consulting Group. Those planes can make the 15-hour flight from China to the main U.S. hub for freight shipments in Memphis, Tennessee, without refueling, Jindel said. The 777s can carry about 450,000 iPhones and cost about $242,000 to charter, with fuel accounting for more than half the expense.

Apple has used less conventional aircrafts to transport its gadgets in the past. Before the debut of new iPods last decade, Apple packed an old Russian transporter plane with the media players to get them to stores on time, said a person familiar with the flight.

The iPhone's high price and light weight mean Apple can still reap big margins while packing many devices into air shipments, instead of using sea cargo as was historically the case with consumer electronics, said Mike Fawkes, a former supply-chain executive at Hewlett-Packard. "If you have a product like a printer that costs $100 and is pretty big, you can't air ship that because it destroys the economics," he said.

Once the iPhone goes on sale, Apple must manage the flow of orders from people looking for a specific color, memory size and even engravings, said the people with knowledge of the matter. The iPhone 5S will come in three colors and the 5C in five. Online orders are received at factories in China, where workers customize the smartphones and put them on pallets with others destined for customers in a similar part of the world.

"People like to talk about how the key to Apple's success is their products," said Fawkes. "While I agree with that, their operational capabilities, and their ability to scale and bring new products to market efficiently, are unprecedented and a huge competitive advantage."

By monitoring sales from its retail stores, website and third-party resellers, Apple reallocates handsets based on where demand is strongest, one of the people said. IPhones coming off the assembly line in China originally destined for retail stores in Europe could be used to fill a bump in online orders, for instance. The process involves crunching a lot of data.

"The information about a shipment is as important as the physical movement," said Metzler, the former FedEx exec. "If you know where your inventory is at all times, you can make changes along the way."

Once the launch madness subsides, it's not quite time to celebrate at Apple. Following every release, the company's logistics team debriefs at the Apple headquarters to study what went wrong, two of the people said.

This story was first published in Bloomberg's Global Tech Today newsletter. To get an early jump on the top tech news from around the world, sign up for the free weekday report .

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