Nike enjoys a strong brand, well-managed distribution processes and a compelling product offering. However, with new competitive entrants with better service and lead time, and even fashion brands moving into their market space, supply chain excellence has been elevated in the past few years, and is viewed as a competitive weapon.
In meeting the major object of improving customer satisfaction, this supply chain transformation is focused on the customer – meeting customer product requirements, improving customer relationships, improving requested delivery.
Supply Chain Management approach at Nike
The major way we see supply chain management meeting future needs is through virtual organizations. These will be based on intellectual capital-brands, technology, new product development, new channel strategies-with operations activities largely outsourced. The counterpart will be the emergence of powerful supply chain specialists.
We see the rise of such concepts already. Nike, selling $9 billion worth of athletic shoes annually, does so without owning any factories itself, performance, and reducing claims and cancellations to lower inventory holding costs. Focused on actual point-of-sale demand, processes are being transformed from the retail shelf backwards, to achieve a leveled flow of product throughout the supply chain. Demand planning processes are also being redesigned from the retail perspective, and “retail reality” is incorporated in product design.
Their delivery precision roadmap, includes a playbook of prioritized initiatives, with executive sponsorship, including: demand/supply matching, improving sales catalog accuracy, streamlining distribution center operations, and optimizing processes globally. They have also created a governance board that sets the strategies, prioritizes the initiatives and drives company-wide execution based upon standardized processes and platforms
Several overarching principles of Nike’s supply chain transformation include:
- focus on the vital few prioritize investments aligned with business strategy and return
- simplify end-to-end: drive out waste & complexity from the process first, then enable
- avoid customization: standardize solutions to improve processes
- copy-paste companywide: replicate best practices across business units, regions and brands
- lead the change: invest in project & transition management
- accelerate the pace: respond quickly to new business needs
- deliver business results: finish what we start through business benefits achievement
Strategy to Nike’s Global Manufacturing
An important part of Nike’s supply chain management strategy is using a number of different global manufacturing resources to its advantage. Nike does this for many different reasons. Most importantly, it allows them to take advantage of various economic atmospheres across the world as well as utilize the industrial strengths of different countries.
Key features for Manufacturing
Nike’s supply chain strategy heavily emphasizes the use of multiple sourcing partners. As a result, Nike is always shopping for new and more productive manufacturing sites around the world. In this shopping process, Nike is looking for, among other things, inexpensive labor, low import taxes, and high levels of efficiency in the manufacturing process. In order to maintain these important parts of their strategy, Nike officials are located at all foreign factories.
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Challenges to Managing a Global Supply Chain
Nike has run into a number of different challenges in its attempts to continue its global manufacturing strategy. One of the major problems was achieving a level of cooperation with foreign manufacturers. An obvious reason for this is the language barrier between Nike officials and foreign workers. However some issues were more complex than this. At times, there were significant initial costs relating to updating the technology in the manufacturing facilities. Traveling costs by Nike officials to these foreign locations began to add up while many countries lacked the infrastructure and accounting capabilities to control costs.
Nike has attempted production in Europe as well as multiple locations in Asia. Nike began producing in Europe because of the trade restrictions existing in China and the level of difficulty to do business in China. However, European manufacturers were never able to reach the efficiency of Asian sites, even when quotas, duties, and manufacturing costs are considered. This is largely because of Asia’s inexpensive labor.
Overcoming Challenges of Global Optimization
Nike has been successful in overcoming these problems in several different ways. Nike is able to utilize a small number of partners that have many positive characteristics including infrastructure, material resources, technical knowhow, labor management and operational experience. This allows Nike to minimize the risk of losing technology to less reliable subcontractors. Nike has built valuable, long term relationships with these partners. These relationships didn’t necessarily ensure the lowest costs, but in return, Nike gained shorter lead times for delivery, increased quality, and the ability to manufacture innovative products. Nike has also come up with a concept to diversify production equally between facilities in five different countries. This way, Nike could easily shift production from one country to another if political instability or trade restrictions in a certain country caused any problems for them.
Nike has been designing all of their products in-house since it launched its own name branded shoes in 1971. Nike employs 400 people for the design and development of footwear, apparel, and sports equipment located at headquarters in Beaverton, Oregon. Globalization has led Nike to understand that different countries have other performance desires. Such as in Japan where runners prefer shoes lighter and with a lower profile to the traditional designs made by Nike. As a result, Nike plans on opening a research and design department in Japan. Developing foreign markets may require more than American based designs to satisfy public expectations resulting in Nike having to consider designing internationally.
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Nike thrives on design that is not only cosmetically pleasing, but designs that focus on performance. Whether designers are making custom shoes for athletes or the public, high performance is the issue. Striving to lighten, increase responsiveness, fit, support, injury protection, and cushioning are all factors involved in the design process. Often products are designed for such athletes as Michael Jordan that focuses on improving success on the court. Designers will meet several times a year with Jordan to develop the right design that eventually may be applied to all of Nikes shoes to increase performance abroad.
Concept to Prototype
In order to proceed to a final prototype, the design must undergo numerous interrogations. The “Concept Review” is a group of managers from various departments who comment on the qualities of the shoe in the design phase. Critical points often reviewed are: meeting marketing expectations, competitive pricing, profitability, performance, applied technology and does it compete with products at the same price? After approval, the design goes from illustration to a three dimensional sample. Creating the sample will be done either at headquarters or one of the Asian manufacturing sites depending on the designs complexity. Developing the upper part of the shoe includes a designer working with the engineering group to produce what typically totals over forty pieces. Where as the bottom of the shoe might be made of clay or wood but when put together with the upper, will be a three dimensional representation of the drawing. Some samples can go through up to fifteen design changes with the end result of a sample in every color that has been planned.
The manufacturing plant produces a set of samples with the real materials to be sent back to headquarters for final approval. The approval consists not only of the samples, but consideration of the entire seasonal product lines mix, redesigns and prices. After approval, the plant begins to commercialize the product for mass production that includes scaling to all the required sizes and the development of the volume production process. After all the processes have been determined, the manufacturer orders materials needed for production based on Nike’s forecasts.
Nike’s order/inventory management system is based on long term future forecasts. Nike has established a “futures” program that rewards retailers with significant discounts if orders are placed six months in advance. Nike uses these orders as a basis for global demand. This demand information is used to set production levels at Nike’s various manufacturing locations worldwide. The manufacturers will produce the demanded quantity of goods and distribute them to the retailers within one month of the expected delivery date.
There are many limits and vulnerabilities with this strategy. Nike accepts all “future” orders without considering their manufacturers production capacities and promises delivery within one month of requested delivery date. Nike attempts to remedy this flaw by ordering their manufacturers to produce up to 55% for the anticipated level of goods, before any demand information is available and sometimes up to four months in advance of receiving any orders. They then add to production when the “futures” information becomes available. Unfortunately, if there has been an excess inventory of products produced before the demand information is available, then Nike will have to pay its manufacturers for the goods they produced or partly produced, even though there is no demand for them.
Effectiveness of strategy
Nike’s current strategy for managing its ordering and inventory is not effective. Long lead times associated with Nike’s order/inventory policies is a major vulnerability to managing demand. Lead time for orders Nike places with its manufacturers is around four months. In addition Nike pre-orders four months in advance because its manufacturers cannot meet demand. Nike purposely does not meet demand on high end shoes in hopes to encourage customers into newer models. Long lead times, poor forecasts, and unmet demand add great variability to Nike’s supply chain.
Limitations and vulnerability
The futures program creates significant variance because it requires production to begin ten month’s in advance due to the fact that manufacturer’s capacity cannot meet demand in six months. Variance in the supply chain increases further when retailers are overstocked and permitted by Nike to cancel futures. With all this variance it is likely excess inventory will remain, and not uncommon for Nike to hold excess inventory on freight ships, docked and waiting for the necessary demand. Additional fluctuations in demand are increased because designers do not base designs on past sales data. If high-top sneakers were not in demand and designers did not know due to a lack of information, they may develop another high-top sneaker that has no demand thus adding to the cost and overall inefficiency of the supply chain.
Alternative Order/Inventory Strategy
An alternative to this ineffective strategy would be to establish a POS information system at all retail locations. This would help Nike create accurate short term forecasts of demand that could be delivered to manufacturers in a timely manner. There is also a need for Nike to establish a distribution network that will sustain a predetermined inventory level. This will decrease the bullwhip effect that is inherent in the current supply chain. Nike will have the ability to meet short term demand with their distribution centers while accepting shipment from their manufacturers.
Information Systems Recommendation
It would be advantageous for Nike to establish an ERP system to support this new strategy. This effort should be coupled with the goal if integrating their many independent manufacturers into their ERP system. This integration would give Nike more control over the production process and better control of information. This information control is imperative to the future success of the organization if Nike is to manage the supply chain from the manufacturer to the retailer efficiently. If Nike were able to easily retrieve information from each level of the supply chain in real-time, they would be able to cut costs, and streamline their supply chain and manufactures could begin production based on POS data gathered by way of the ERP system from retailers. Supply chain integration is the key to the future success of Nike.
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