Largest shoe manufacturer

Q1.

a) The reasons that prompted Nike to change its approach to demand forecasting:

• Nike’s growth from being the 12th largest shoe manufacturer in 1984 to the world leader in the footwear industry by mid 1990’s increased the intricacy of its manufacturing schedules.
• The demand forecasting adopted by Nike prior to considering the new approach saw the retailers placing an order six months ahead of the delivery. Due to the six months lag in delivery Nike could not forecast whether the ordered shoes would be in demand after six months once they reach the store shelves[1].
• The existing forecasting technique failed in identifying the quantity of order to be placed with such a long lead time. And had to depend solely on their brand name and hoped that the product would sell.
• The expanding market demanded a faster delivery, thus pressurizing Nike to shorten the lead time from the standard shipping time of six months.
• The 27 order management systems that formed Nike’s supply chain crumbled under pressure to develop accurate demand forecasts, these factors lead Nike to implement a new demand forecasting.

b) Outcomes of the new demand forecasting system.

• The vigorous demands indirectly affected the new demand forecasting system, resulting in excess manufacturing of some products while developing inventory shortages for others as they struggled to cope up with the customer demands.
• Nike ended up ordering US $90 million worth of shoes which were in low demand like Air Garnett II, also a shortfall of US$80 million to US$100 million on popular models, like Air Force One.
• Nike filled the back orders that were to be supplied and disposed of excessive inventory through discount sales and ‘bargain basement prices’ through its outlet stores. This continued for about 6-9 months to neutralize the incorrect proportions in inventory and two years to overcome the financial losses.
• Nike’s share prices dropped considerably due to the losses and faulty forecasts. Costing Nike more than US$100 million in lost sales, there by lowering its stock prices by 20% and also leading it to a series of legal battles.

Q2.

a) The reasons that resulted in such a huge gap between demand and supply at Nike:

• The implementation of i2 had adverse effects for Nike, since I2 were inexperienced in providing supply-chain systems for the footwear and apparel industry.
• Nike’s higher demand data meant heavy customisation was done on i2 this clogged up the software thus by slowing it considerably to such an extent that a single screen would take 3 minutes to load[2].
• Further analysts stated that Nike was installing SAP software to help take orders from customers and get those orders through manufacturing. This led to queuing which led to the complexity in matching up of information from SAP and i22.
• Thus Nike had erroneous orders being sent to the manufacturers and was unable to recover from the errors until it was too late.

b) According to my opinion this situation could have been avoided:

• If Nike would have considered the facts of acquiring actual data from retailers like direct point-of-sale integration rather than software algorithms.
• By developing a better collaboration with the far east manufacturers to reduce the overall lead time there by converting the supply chain from make-to-sell to make-to-order.

1. Nestlé and Nike: ‘How they almost failed’ by Gene Leshinsky…February 18th, 2008
2. Long Strange Trip: Nike Finally Regains Footing: By Larry Barrett