Nike Operation Management Strategies

Nike – The legendary brand

Operations Management – Strategies

1. Introduction

Many companies measure their research and development performance, associated with their business strategy and their operations management, such as design, operation, and control of the transformation procedure. The operations system converts inputs (labor and raw materials) into the outputs (goods and services). Operations management has encompasses both services and manufacturing, enhanced efficiently managing predictability, and played a strategic role in an organization’s success.

As an international corporation, Nike has implemented the concept of operations management in its operating process. It has facilitated the concept of the LeanSigma®, which helps ‘focus on lead-time reduction to increase customer loyalty and market share’^[1]. As a manufacturing company, Nike has gained competitive advantages from Kaizen breakthrough, with the layout redesign for lean, just-in-time (JIT) system, total productive maintenance and six-sigma management. The paper will concentrate on why and how Nike has been competitively positioned in the world market. The legendary brand, Nike, seems never to stop growing.

2. Situation Analysis

2.1. Strategy

Companies might vary their strategic business procedures, since they select most suitable alternatives and solutions to solve problems overtime. As a result, there will be certain measurement criteria for the company performance, which reflect the most successful alternatives to their most essential problems.

Nike specializes in producing sport shoes, a labor-intensive manufacturing sector. As a manufacturing organization, it is easy to observe, evaluate, and improve each functional stage of Nike’s operation process. Improving productivity for the overall outputs of goods, divided by the inputs, is needed to maximize the outputs. The increasing strict quality control management combined with the demand by consumers for affordable goods has suddenly put Nike in a precarious situation. The question of how high quality products can be produced under many measurements at a price which consumers are willing to pay is addressed. This can be accomplished by applications of transformation procedure, which converts from batch to lean manufacturing at the strategic level.

Additionally, the sales turnovers have forced many companies to narrow down and concentrate on why and what consumers have actually purchased. As a transactional company, Nike concerns and cares for what its targeted consumers look for, and it finds products for consumers not consumers for products.

Operations management is defined as the integration of management principles into the decision-making procedures for the conversion of resources into usable outputs of products. The success of the lean operations management strategy will result in products that exceeds customer expectations and regulatory requirements by increasing productivity for a better process.

2.2. Product

Nike has implemented sophisticated systems and well-understood business procedures by keeping cross-functional cooperation, which consequently lead to the best inventory turnover from performance. Indeed, Nike has continuously improved its operations management. ‘By mid-1985, inventories had fallen to less than 10 million pairs of shoes from a peak of 22 million in late 1983. Profit margins rose in the second fiscal quarter to 33% from 25% a year earlier. During the period, expenses as a percentage of revenue fell for the company, which started selling shoes in 1964 and went public in December 1980.’^[2]

Nike can dictate the prices. Since consumers have set prices by understanding what they should have prepared to pay for, their payments then will depend on a large degree on how they could see differences between the perceived value and the actual value. In fact, consumers are willing to pay premiums for perceived values, but value can go beyond plain price and quality. Positioned as a transactional corporation, a successful image Nike becomes the ultimate high-volume, low cost factory, not about the assumption that there is likely the occasional anti-made-in-sweatshop products. In the past, Nike had been challenged by boycotting of goods, due to the threats that Nike has outsourced and exploited developing nations. However, currently Nike have taken advantage of their low cost of manufacturing environment and implemented operations management strategies to its manufacturing systems.

2.3. Capacity

When new operations strategy has been implemented and exhibited by different physical processes, volume measurement can be a relevant allocator. Volume can show how far equipments and machinery requirements for the operating procedures have been utilized and properly facilitated. This allocation usually provides rational consequences when the processes change.

The location of the production facility is impacted on treatment facilities, which often happen in areas where air pollution might not be a problem. However, the environment limitation also determines the quantity at which a facility can produce, and become independent of capacity or demand. These problems impact on production, which will happen long after manufacturing facilities are established and put into operation.

Nevertheless, Nike aims to apply the operations management to achieve high quality, low cost and effective delivery for better output, not just to expand its production facility. The overall result, through the Kaizen breakthrough methodologies, has been successfully. (Appendix 1) There might be a relationship between the operations performance and associated risk factors. Due to high rate of development failure during implementing new operations strategy, the risks involved in developing a system have caused a lot attention.

2.4. Process – Supply chain management

Recently, Nike has opened wider its domestic market to the outside world. More investment to renovate current market will enhance, facilitate, and maximize the distribution channels. ‘Nike was embarking on the Nike Supply Chain Project, a massive global centralisation project to integrate its ERP [Enterprise Resource Planning], supply chain, and CRM [Customer Relationship Management] software onto a single SAP platform. And a higher level of governance over the IT operations to ensure project success and visibility was necessary.’^[3]

The differences between the flexibility and fixed service have been scheduled in comparison with maximizing the large scale of alternatives. As a result, the relationship between the demand to reduce the indirect costs and the velocity along with inventory management should be closely scrutinized. ‘John Shanley, analyst at Susquehanna Financial Group, told clients Nike’s inventory levels are ‘likely somewhat bloated in several key international regions’ and that the fourth quarter ‘marked the second consecutive quarter where Nike’s inventory levels seemed out of balance with the brand’s forward orders’.’^[4]

Each company has its own mission, vision, objectives, strategies and business framework. Top management can initiate logical points and identify the company’s current conditions and situations. Alternatives in any one of the primary components in the model for top management can set off changes in other components. As a result, strategic framework, implementation and evaluation should be performed on frequent and continuous foundations, especially in technology management, human resource supervision, professional development, adaptation to cultural change, and importantly the project planning process.

High performing companies can have more informed decisions with good anticipation of both short term and long term plans and have prepared for both short and long term consequences. They have prepared for future fluctuations in the external and internal environments. ‘Training, in general, and management coaching, in particular, must be well resourced, high priority components of successful enterprise systems implementation.’ ^[5] Since Nike is probably to pursue creative products, it has implemented new technologies can be a sign of future success in the new market. Therefore, commitment available resources to different projects can help evaluate and measure the operations management performance as well.

‘Critical to success is the necessity for the team to realize that team performance is more important than any individual success or idea generated. If the team has a successful improvement idea, then all enjoy the success.’ ^[6] Additionally, measurable goals should be in the line with the objectives and the scopes of the strategies. In fact, the operations management team should be evaluated whether the goals flow harmoniously with their companies’ missions. The performance evaluation helps operations managers to fasten the companies’ missions, plans and strategic goals to the each employee’s tasks on daily basis. Moreover, preliminary evaluation will need more feedback every period, such as monthly, three months, or six-months. Assessment should be targeted to provide a path for companies to improve their operations management performance. Likewise, Nike starts with basic assessments by accomplishing assessment and proper evaluating areas. In fact, soft and periodic assessment can help Nike identify areas in order to achieve greatest return on investment and highest turnover.

2.5. Layout redesign

Layout redesign is important to transforming process. Usually, raw materials have been brought into workplace during the time not conflict with workers’ operating hours. Counterclockwise flow is also taken into consideration, since most workers are right-handed.

‘Two lean concepts introduced with LeanSigma® transformation are the functions of the supermarket and the waterspider. Similarly, these early lean manufacturers established a single day storage area very near the production cell to provide, the necessary materials to the cell as needed. The second concept these early lean adopters incorporated was the waterspider.’^[7] In fact, waterspider concept is to provide the essential materials at frequent replenishment of small quantities, opposite to infrequent replenishment of large quantities of materials. As a result, space required for storage is minimized. This concept has enhanced the just-in-time approach at Nike. Parts and raw materials are provided to the production site just as they are needed, not stockpiled to hedge against later delivery.

2.6. Allocation of costs and deductions

Traditionally, cost allocation analysis considers direct labor as cost driver for indirect costs; nevertheless, since suppliers respond increasingly to reduce their total costs, the use of direct labor as a cost driver has become inappropriate when evaluating the performance the cost allocation analysis. Determining appropriate cost drivers for indirect costs help establish new allocation rates for these cost drivers.

Additional information can be used to support the new allocation rates, different from traditional methods. With the new operations management, Nike heavily considers the cost factor. ‘As with quality, cost is a significant aspect of lean performance measurement. These three key indicators are productivity, scrap, and WIR Productivity [Warehouse, Inventory, Reporting Subsystem] is the most effective indicator of value added activities. Scrap is a quality measure that will drive overall costs up or down depending on the trend. Finally, WIP [Work-In-Process] is a lagging measure of flow and cycle time and a leading measure of customer satisfaction.’^[8] (Appendix 2)

At this time, high proportions of Nike exports are white-label goods, which have been made for Western companies. The company also wants to capture more value to acquire a brand and to create its global brands. Quality has been considered as a differentiator. Product quality and service quality will be becomes differentiators and continuously enhance Nike’s quality image worldwide. ‘Why didn’t Nike start making skate shoes 20 years ago? Nke6.0 may be nurturing the grass roots – its roster of athletes is made up entirely of what appears to be pre-pubescent rippers – but there is a whole generation of action sports addicts out there who were ignored by mainstream sport brands, so they started their own brands, creating kit that was tailor-made for their sport, keeping their ear to the underground to find out what people wanted.’^[9]

The choice of cost allocation method can impact whether the company can report a loss or profit from the unrelated business. The over-cost allocation can become the potential for maximizing the company’s economies of scale. The costs related to the operating activities can be joined among many material and operation activities. Analyzing the functional and design benefit can help allocate the cost component appropriately.

The new paradigm for cost allocation provides Nike which benefits from investment transmission to pay the costs. The decentralization of the cost allocation should take into consideration. The production cost in manufacturing companies and the allocation of joint costs in the context of external financial accounting practice, applied to cost of goods sold and for inventory.

3. Conclusion

As a transnational corporation, Nike is subject to domestic and international competition. It has tried to increase their productivity and efficiency to meet these challenges. One method applied to improve productivity has been expanded application of manufacturing processes. Concurrently, however, the increased use of materials and decrease use of operating expenses help managers reconsider their current methods of quality, cost and delivery.

In the long-term, the manufacturing industry will sustain and reward for low-cost operating organizations. Nike is making efforts to build an effective and efficient control system for commodity circulation. Applying the operations management process, Nike has tried to build effective control system for their commodity circulation, which helps emphasize on reform of the marketing and purchasing system of the important commodities. Furthermore, the rational distribution of commodity resources and the local community reserves have enriched the domestic market from international market.

Appendix 1: Quality Cost and Delivery after Operations Management^[10]

Appendix 2: Kaizen methodology even schedule^[11]

Bibliography

‘Brand Design: Miss a trick’ 2006, Design Week,London, 26 January, p.17

Brown, BC, Collins, RT & McCombs, LE 2006, ‘Transformation from Batch to Lean Manufacturing: The Performance Issues,’Engineering Management Journal, Rolla, vol.18,no.2, June, p.3.

Choy, J 2004, ‘Just do IT’, Asia Computer Weekly.Singapore, 25 October, p.1

Foster, L 2006, ‘Rising costs mean Nike disappoints’, Financial Times,London (UK), 29June, p.17

Kittredge, J 2006, ‘A New Era in Corporate Performance Management’, Cost Management, Boston, vol. 20, no. 3, p. 23.

Tharp, M 1986, ‘Nike Recoups Laurels in the Sportswear Market – Company Adopts a More Conventional Management Style,’ Wall Street Journal, New York, N.Y, 19 March, p.1.

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Footnotes

^[1] Brown, BC, Collins, RT & McCombs, LE 2006, ‘Transformation from Batch to Lean Manufacturing: The Performance Issues,’Engineering Management Journal, Rolla, vol.18,no.2, June, p.3.

^[2] Tharp, M 1986, ‘Nike Recoups Laurels in the Sportswear Market – Company Adopts a More Conventional Management Style,’ Wall Street Journal, New York, N.Y, 19 March, p.1.

^[3] Choy, J 2004, ‘Just do IT’, Asia Computer Weekly.Singapore, 25 October, p.1

^[4] Foster, L 2006, ‘Rising costs mean Nike disappoints’, Financial Times,London (UK), 29June, p.17

^[5] Kittredge, J 2006, ‘A New Era in Corporate Performance Management’, Cost Management, Boston, vol. 20, no. 3, p. 23.

^[6] Brown, Collins & McCombs 2006, p.3.

^[7] Brown, Collins & McCombs 2006, p.3.

^[8] Brown, Collins & McCombs 2006, p.3.

^[9] ‘Brand Design: Miss a trick’ 2006, Design Week,London, 26 January, p.17

^[10] Brown, Collins & McCombs 2006, p.3.

^[11] Brown, Collins & McCombs 2006, p.3.