Supply chain sources point to high holiday expectations for iPhone 5

Apple (s aapl) is increasing its iPhone orders for the second half of 2011, according to sources within the company’s supply chain speaking to DigiTimes on Monday. Order volume has been adjusted upward by 15 percent according to the publication, bringing the sum total of iPhones ordered to more than 56 million. Of that number, around 26 million will be Apple’s next-gen iPhone 5, the sources say.

The bulk of Apple’s iPhone 5 orders will ship out in the fourth quarter of 2011, according to the report. Third quarter (ending in September) orders are around 5.5 to 6 million units, which is down from an initially planned volume of 7 million, DigiTimes says, which could suggest either that Apple is indeed targeting an October release date for iPhone 5, or maybe narrowing the list of countries that might see the new device in September. At the same time, the supply sources suggest orders for the fourth quarter will go from 14 million to 20 million units, which again supports the idea that one or more countries has been dropped from the initial launch group and shifted to those getting the device a little later.

The orders indicate Apple is very optimistic about the sales potential of its next device. Its previous record quarter saw 18.65 million iPhones sold, and that was during the second quarter of 2011, when it was already nearly a year old. There’s plenty of reason to believe Apple could topple that record, since this new device would be launching just in time for the holiday season, and also will feature completely updated specs and features, as well as Apple’s newest mobile operating system, iOS 5.

Fourth quarter orders for the iPhone 4 will reportedly dwindle to around 8 million, down from 20 million for the third quarter. It’s to be expected that Apple would cut production of its legacy devices to make way for a new models. Typically, we see the company keep the last model (the iPhone 4 in this case) as a lower-cost option, and drop the model before that (the iPhone 3GS). Some reports claim we’ll see a lower-cost line of iPhones this time around, so maybe the 3GS will survive in some capacity.

What do you think? Is Apple setting its expectations too high, or will this iPhone really be the company’s strongest seller yet?