The network between a company and its suppliers is called the supply chain. The suppliers are often public companies that investors consider either based on the companies they supply or, more often, on the role they play in an industry.
Investing in the supply chain is another way of choosing stocks to buy based on research and analysis. It requires an understanding of how the supply chain is managed because efficiency in supply chain management produces lower costs, faster production and, importantly, more profits.
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The parts of the supply chain include essentially every business that comes in contact with a product or manufacturer. This includes companies that supply parts and raw materials and companies that distribute the finished product to the end customer.
Attention paid to the supply chain and how it is managed accomplishes a lot for investors. The supply chain is so critical to a company’s success that every company touched in a supply chain plays a key role. One bad apple and the entire chain fails – unless remedied.
Apple Inc.’s (NASDAQ:AAPLB) supply chain is an example of one Apple investors watch for ways to multiply their confidence in this profitable company. There is no guarantee, of course, that a supplier to Apple will be successful but when a new product has been launched – in this case the iPhone X – investors anticipate good news for suppliers provided the product is successful.
Suppliers of parts and materials for the iPhone X include Analog Devices, Inc. (NASDAQ:ADIB) which reported a nearly 54% rise in quarterly revenue Tuesday. According to the company the increase was helped by demand for industrial, autonomous cars and connected devices market. The fact the company is an Apple supplier may be less important than the other factors. Other Apple suppliers including Skyworks Solutions, Inc. (NASDAQ:SWKSC) and Cirrus Logic, Inc. (NASDAQ:CRUSC) are like Analog Devices in the sense they are blue chip stocks with a variety of operations.
Then There’s Warren Buffett
Taking a look at Berkshire Hathaway’s Warren Buffett and his acquisitions helps cement the importance of considering the supply chain when buying stock. The well-known value investor considers the supply chain when he buys companies or stock.
In September, for example, Buffett touted Best Buy (NYSE:BBYA) as a stock poised to thrive in a “post-Amazon” era, partly due to its supply chain investment. His 2016 acquisition of Precision Castparts, a maker of cast parts used in the airline industry was widely perceived to be based on the supply chain connection to Airbus and Boeing Co. (NYSE:BAC).