NIKE SUPPLY CHAIN MANAGEMENT INSERT NAME HERE INSERT UNIVERSITY/COLLEGE NAME HERE INSERT SUBMISSION DATE HERE

2 TABLE OF CONTENTS 1 2 3 INTRODUCTION ...................................................................................................................................................3 OVERVIEW OF NIKE ...........................................................................................................................................4 NIKE SUPPLY CHAIN PROCESSES ...............................................................................................................5 3.1 3.2 3.3 4 Nike Product Development....................................................................................................................5 Nikes Manufacturing flow management ........................................................................................6 Lean manufacturing ..................................................................................................................................6

NIKE SUPPLY CHAIN ASPECTS .....................................................................................................................7 4.1 4.2 Nike Vertical Relations.............................................................................................................................7 Horizontal Relations .................................................................................................................................8

NIKE SUPPLY CHAIN STRATEGY .................................................................................................................8 5.1 5.2 5.3 5.4 5.5 5.6 Outsourcing as the key procurement strategy .............................................................................8 Role of Information Systems .................................................................................................................9 Relationship with partners ....................................................................................................................9 Demand Management............................................................................................................................ 10 Customer Relationship Management............................................................................................. 11 Disadvantages of Nike supply chain strategy ............................................................................ 11

DISCUSSIONS AND RECOMENDATIONS................................................................................................ 12

REFERENCES ............................................................................................................................................................... 14

3 1 INTRODUCTION

With current unpredictable environments within which organizations operate in, organizations are been forced to adopt various strategies that ensure their survival in the industries that they serve. Intense competition in present market place, the preamble of products with shorter product life as well as shorter life cycles as well as high customer expectations has left organizations with no options but to invest and concentrate their efforts in supply chains. Moreover, technological advancement as well as advancement in transport has encouraged organizations to invest in supply chains as well as establish efficient ways of managing the supply chains.

As noted by Coyle, Langley, Gibson & Bardi (2008), a normal supply chain usually entails procurement of raw materials which is normally followed by production of products at one or various factories in different locations. Once raw materials have been used to produce the products, the finished products are then normally sent to various warehouses from where the products are distributed to the retailers or in some cases to the customers. Coyle, Langley, Gibson & Bardi (2008) discusses that in order for organizations to minimize costs while at the same time improving the level of services offered, there exists the need for effective supply chain management.

According to Levi, Kaminsky & Simchi (2004), supply chain which is also at times referred to as logistics network is made up of suppliers, manufacturing centers, warehouses, distribution centers, retail stores, raw materials, work in process inventory and finished products that typically flow between the facilities. Supply chain management on the other hand as defined by Levi, Kaminsky & Simchi (2004), is a set of approaches used to successfully combine suppliers, producers, warehouses and retail stores to ensure that the right quantities of products are distributed to the accurate locations during the right time with the aim of minimizing system wide costs while at the same time meeting the needs of service level requirements. The Institute for Supply Management (2012) defines supply chain management as the design and management of seamless, value added processes across organizational boundaries with the objective of meeting the real needs of the end customer. From the two definitions, some observations can be made. It is evident that

4 supply chain management entails any aspect that plays a significant role in determining the cost of the finished product as well as ensuring that the finished product meets customers needs. In addition, it can be argued that supply chain management aims at ensuring efficiency across the entire chain.

According to Levi, Kaminsky & Simchi (2004), supply chain management is usually a difficult undertaking for any organization since it is often hard for an organization to design and manage supply chains from one location since various aspects of the supply chain are conducted in different locations. In addition, Levi, Kaminsky & Simchi (2004), discusses that the fact that there exists uncertainty in almost every aspect of the supply chain also makes supply chain management a difficult undertaking.

This report aims at critically evaluating the supply chain management of Nike with recommendations been made at the end of the report. The report starts with background information of Nike, which is followed by Nikes supply chain processes, Nikes supply chain aspect and Nikes supply chain strategy which is concluded by suggestions and recommendations to the current Nikes supply chain management.

OVERVIEW OF NIKE

Nike is the worlds largest seller of footwear, sportswear, clothing and sports equipment supplier that is headquartered in Oregon in the United States. Nike was started in January 1964 by Bill Bowerman and Phil Knight though in that particular time, the company was known as Blue Ribbon Sports. Blue Ribbon Sports name was to later on in May 1978 change to Nike which was derived from the Greek goddess of victory. Majority of the companys products are marketed under the Nikes brand even though there are other products like Converse, Cole Haan, Hurley International and many more that are not marketed under the Nike brand though they are owned by Nike. Apart from manufacture of sports equipment and sportswear, Nike also operates its own retail stores name Nike Town that only sells the companys merchandise. The company sponsors various high profile

5 sportsmen and women who promote the brand by wearing Nikes clothes that contains the popular just do it as well as the Swoosh logo (Nike 2012).

Throughout the years, Nike has been receiving heavy criticism from human rights campaigners for violating basic human rights of various workers who produce the merchandise working for Nike contractors in factories based in Vietnam, China, Mexico, Cambodia and Indonesia. An investigation by BBC reporter Kenyon (2001) established that Nike suppliers based in Cambodia did not adhere to Nikes guideline since they employed children who worked under inhuman conditions. According to Kenyon (2001), Nike was aware of the situation but did not actually bother responding to the matter a claim that Nike vehemently denied. During the last few years, Nike has invested more on corporate social responsibility programs with the aim of repairing the damaged brand name which can be argued to be successful since the company has been reporting positive financial figures (Nike, 2012).

NIKE SUPPLY CHAIN PROCESSES

According to Flynn, Morita & Macha (2011), some of the key supply chain processes that should be integrated into any organizations supply chain management should include customer relationship management, demand management, order fulfillment, manufacturing flow management, procurement, commercialization, product development and returns. 3.1 Nike Product Development

According to IBM & Stanford (2006), Nikes product development process is different with process adopted by the companys competitors since the company always aims at continuously improving its design which is facilitated by the companys strategy of always improving the established relationship with the suppliers so that they can improve their production processes.

According to Mongelluzzo (2002), in order for Nike to get new shoes to the market, the whole process can take between fifteen to eighteen months from the time a product is

6 designed to final distribution to the retailer. In addition, projections from merchandisers as well as Nike are also required so that the production volumes are established. Normal Nike shoes usually have a market life of between three to six months before the products can be replaced by other models. 3.2 Nikes Manufacturing flow management

The shoe manufacturing industry as explained by Mongelluzzo (2002) is characterized by vertical disintegration as well as high levels of subcontracting. Organizations like Nike, Adidas, Speedo and other shoe and sportswear manufacturer no longer produce goods but instead outsource all the production functions to partners located overseas and particularly in China. As explained by Sahlin (2007), the main advantage of outsourcing is that organizations are able to concentrate their efforts in their core competencies like marketing, designing and new product development thus creating competitive advantage. On the other hand, the main disadvantage of outsourcing to the organizations as explained by Sahlin (2007) is that the organizations normally experience longer lead times for delivery as the products have to be shipped from overseas. According to Van Dusen (1998), benefits derived from outsourcing are usually countered by increasing difficulty of the organizations to monitor the product as well as the working conditions of the workers in the manufacturing factories.

In reference to Nike, Mongelluzzo (2002) contends that most of the organizations manufacturing and distribution is done in Asia with China supplying more than 40% of Nikes US market. In order to ensure that the partners they choose are going to be effective, Nike places emphasis on making sure that the right partners are appointed. According to Donaghu & Barff (1990), Nikes production system is divided into three main categories that are made up of developed partners, volume producers and developed sources. 3.3 Lean manufacturing

As explained by Gernaat (2006), the fashion industry normally experiences short product life cycle, high demands and high levels of impulse buying. The stated characteristics call for short lead times as well as flexible supply chains. On the other hand, global outsourcing as earlier established usually leads to longer lead times as products have to be shipped

7 through ocean freight which usually takes a lot of time. Nike as explained by Donaghu & Barff (1990) adopts subcontracting processes that allows for high dynamic and fluid markets and flexible production system that is demand driven and allows for transfer of production from one country to another. Few years ago as noted by Herzog (2003), Nike introduced a new supply chain that used the just in time approach to facilitate faster shipment of products to customers in Europe and America. From the discussions it is evident that Nikes distribution set up plays a significant role in the success of the company. It can be argued that the distribution is in charge of balancing supply and demand throughout the year, protecting the companys operations against any uncertainties as the products can be kept for some time in the warehouse as well as making sure that economies of scales are used to the full since the company can ship large volume of products through the ocean.

NIKE SUPPLY CHAIN ASPECTS

Supply chain relationships can be defined as the relationships between supply chain partners and the business links in the supply chain. According to Li (2007), stronger relationship between the supply partners usually results to stronger business links. Li (2007) contends that value exchanges between the supply chain partners usually results to value creation to the entire supply chain. The two main types of relationships in any supply chain as noted by Li (2007) are vertical relations and horizontal relations. As has already been established, Nike has extremely strong supply chain relationships which are significant to the success of the company. 4.1 Nike Vertical Relations

Vertical relations as expounded by Levi, Kaminsky & Simchi (2004) normally entail relationship existing between firms that are in the supply chain for example distributors, retailers and manufacturers. According to Barrat (2004), the scope of vertical integration ranges from the production of the product to the replenishment of the product in the retailers or distributors shelves.

8 In reference to Nike, the vertical integration that exists in the supply chain is between the suppliers, manufacturers, distributors and retailers. Every partner has a hugely significant role to play in the relationship since any partner pulling out would normally mean that the supply chain cannot be completed. Nike (2012) state that the company takes all partners seriously and tries at all times to make sure that all the firms are in a close working relationship. 4.2 Horizontal Relations

Horizontal relations on the other hand include business relations between firms that have parallel positions in the logistics process. In this type of relations, different firms collaborate with in order to achieve a set main objective which will be different depending on the type of task at hand. In Nikes case, the company places much emphasis on this type of relations since they are the ones that make the company remain competitive in the competitive market that the company operates in. Nikes horizontal relation consists of various suppliers, distributors, retailers and manufacturers.

5 5.1

NIKE SUPPLY CHAIN STRATEGY Outsourcing as the key procurement strategy

As already established, Nike outsources majority of its manufacturing function to overseas factories. The strategy to outsource was implemented once Nikes management team established that they could get Nike shoes produced in Japan for lower costs than they were paying for in the United States. However, in the 1970s, production costs in Japan increased which left Nike with no option but to look for other cheaper alternatives. As a result, Nike shifted its manufacturing to firms in Korea and Taiwan. However, Korea and Taiwan later on experienced strong economic growth which resulted to high production costs thus leaving Nike with no options but to look for other cheaper manufacturers of the organizations merchandise. As a result, Nike ended up relocating to low costs countries like Thailand, China, Cambodia, Indonesia and Vietnam.

9 Some activities entailed in Nikes supply chain strategy can be argued to entail acquisition of the raw materials, manufacturer of the products, suppliers of parts, warehousing and distributors from where customers can be able to buy Nike merchandise from. The strategy adopted by the company can be argued to have some benefits that permit Nike to concentrate on the core competencies as the tedious and much involving production part is left to the outsourcing partners. Nikes strong existing relationship with the suppliers can be argued to be behind the companys success since high quality products can be produced at low costs within the stipulated time frame. 5.2 Role of Information Systems

According to Koch (2004), Nikes supply chain is centralized since designing of the product, outsourcing and logistics are all undertaken from the companys headquarters in Beaverton, Oregon. In order to ensure that the supply chain is effective, MSI (2004) states that Nike uses a single instance of SAP R3 which is a single planning engine that centralizes demand management in order to ensure efficient collaboration with the suppliers. In addition, Koch (2004) noted that Nike was in the process of integrating all its information with supply chain management as well as customer relationship management been integrated into a single shared platform. The single shared platform according to Koch (2004) was expected to improve the overall operation of the company since among others; there would be improved financial visibility, accurate projections and forecasting and better reallocation of the companys resources. As a result of the single shared platform, Mongelluzzo (2002) explains that Nike would be able to achieve the key objective of the supply chain strategy which is having up to date information which will in turn play a key role in ensuring that the supply chain is more efficient at all times. 5.3 Relationship with partners

As far as the relationship with the suppliers is concerned, Donaghu & Barff (1990) points that Nike places much emphasis that will result to a strong relationship. Among other practices, Donaghu & Barff (1990) highlights that Nike occasionally sends Research and Development staff to various production factories in order to ensure that there is smooth production of the products thus avoiding any miscommunications that might threaten relationships when they arise. In addition, Nike also encourages the manufacturing firms to

10 be involved in various product developments which go a long way in ensuring that a working relationship is built. For firms that only produce Nikes products, Donaghu & Barff (1990) notes that Nike always aims at stabilizing production for the factories by giving then monthly orders in advance. 5.4 Demand Management

According to Gernaat (2004), forecasting in the fashion industry is usually a complex undertaking due to the fact that the industry is characterized by short product life cycles, high demand and different varieties of product lines. Berger & Piller (2003) on the other hand explains that most of companies in the fashion industry attempts to meet various demands of customers by having various product lines. As a result, managing customer demand tends to be difficult as organizations have to avoid having large volumes of unsold stock. According to Porter, Harris & Yeung (2002), Nike manages demand for its products by use of futures program that requires retailers who stock Nikes products to order 80% of their inventory six months in advance in order to be guaranteed delivery. According to Nikebiz (2007), the futures ordering system permits Nike to lower levels of inventory held, time spent in fulfilling retailers orders as well as the non delivery risk. The system according to Nikebiz (2007) was instrumental to the success of Nike in the 1990s as majority of the retailers were eager to claim discounts awarded as a result of following the concept. However, Koch (2004) noted that the futures system was under threat since retailers were no longer interested in ordering six months in advance since consumer tastes and preferences might change before deliveries were made. In addition, Koch (2004) discusses Nike as been behind its rivals in integrating its point of sale systems with the production since rivals such as Adidas has a system that notified the producing firms of any stock sold which required immediate replacement. According to Adidas (2012) which is a serious competitor with Nike, the company in the year 2006 developed its supply chain to include five main aspects that were meant to meet customer needs efficiently. The development placed much emphasis on concept to shelf that incorporated marketing, sales and operation functions where evergreen model that ensured that there were short lead time as well as never out of stock capabilities for the brand. In addition, the company aimed

11 at changing products that were usually turned around in 18 months to be turned around in 5 months. 5.5 Customer Relationship Management

According to Coyle, Langley, Gibson & Bardi (2008), a successful global supply chain has to add value to the ultimate customer in reference to price of the product as well as other related service that the supply chain provides. As already discussed, Information Technology can play a significant role in ensuring that a customer service that provides the organization with the opportunity to gain a competitive advantage is utilized. IT advancement means that information can be shared real time between other supply chain partners which in turn will ensure that they supply chain is efficient. However, it is also necessary to note that even though efficiency in the supply chain can be achieved by use of IT, it is also vital to note that IT can also expose organizations to negative effects as Nike lost $ 100 million in revenue as a result of software bug in the organizations supply planning software as reported by Supply Chain Digest (2006). 5.6 Disadvantages of Nike supply chain strategy

Some of the disadvantages on Nike supply chain can be argued to entail the fact that the company has no control of the inventory since it has too many suppliers. As a result, in situations where some suppliers cannot play their part in the supply chain, production can be brought to a stand still which will in turn have a negative impact to the companys operations. As noted by Lim & Phillips (2008), the fact that Nike does not own any factory where manufacturing takes place and instead strategizes on outsourcing production to suppliers in least developed countries, this strategy usually encourages low wages and sweat shop conditions as suppliers compete on costs charged. As a result, the companys image is public as it is later faced with issues of human rights violations and child labor among others.

Locke, Kochan, Romis & Qin (2007) discusses that Nike Supply chain has been heavily criticized throughout the years for having the products made in inhuman working conditions where the workers are also underpaid. In addition, Nike has also been criticized

12 for use of child labor in production of its merchandise. In response to the criticism received, Nike (2012) states that the company developed new code of conduct that the company specified that all partners have to adhere to failure to which all contracts will be cancelled. As a result, all the suppliers are now expected comply with the set code of conduct. In addition Nike frequently conducts trainings with the suppliers on how they can ensure that they always adhere to the set code of standard.

DISCUSSIONS AND RECOMENDATIONS

A closer look at Nikes supply chain management shows mixed results. On one hand, the companys supply chain can be said to be successful as Nike has continued to be successful throughout the years where as on the other hand, the companys supply chain can be argued to be in disarray. Initially, Nike had an effective supply chain management where the company never produced anything but rather outsourced the production to suppliers in other overseas countries where production costs were cheaper. The future program which categorized the companys operations into five different geographic regions and aimed towards efficient operations and effective systems was ineffective and inadequate during the 1990s. Some of the major issues with the futures program were that it was difficult to forecast as well as manage the ever changing trends. As a result, Nike launched NSC project in the year 2000 a project that was aimed at integrating ERP, Supply chain and customer relationship management software into a single platform. However, the project proved to be a tremendous catastrophe as Nike blamed i2 Technologies who were the developer of the software for vast sales and earnings shortfall since the software never played its main role which was to ensure that Nike produced shoes that customers wanted which was the reverse as Nike produced volumes of shoes that customers didnt want while and few pairs of the best selling models. As a result, Nike lost an approximated $ 100 million. However, as a result, the company understood the significance of forecasting and supply chain management in its operations. Infact, it can be argued that it was from this experience that Nike understood the need for making shoes according to customer orders rather than the need to make volumes for the stock as was the case in the future program. In addition, it can be argued that Nike learnt that projections and forecasting played

13 significant roles in reduction of time supplying took. As a result, Nike improved the supply chain management by implementing competent systems where much emphasis was placed on continuous feedback system. From Nikes experience, it can be argued that the reverse effect of supply chain management can be witnessed if the implementation is not well carried out in the best way by any organization. Implementation of supply chain management is a difficult undertaking that must be undertaken in the best way possible. It is also crucial that organizations evaluate the advantages and disadvantages of any systems prior to implementing them where as pilot schemes would also illustrate a more clearer picture of what the systems might result to.

In response to the heavy criticism that Nike regularly receives from human rights activists and environmental campaigners, the company needs to increase corporate social responsibility initiatives. An increase in social corporate responsibility will help the company to present itself as a company that considers the environment within which it operates in resulting to positive company image which will at the long run result to increased sales. As far as the issue of child labor and sweat shirt shop conditions are concerned, the company should develop clear rules and guideline and inform various contractors who manufacture the products for Nike that their contracts will be terminated if they do not adhere to the specified rules and guidelines.

Even though Nikes supply chain management appears to be back on track and effective, the company cannot afford to rest and should thus continue developing new strategies while at the same time monitoring strategies adopted by the competitors in order to make sure that Nike always remains the markets leader in the sector that it serves.

14 REFERENCES Adidas, 2012. Adidas official website. [Online] Available at: <www.adidas.com > [Accessed on 14 May 2012] Barrat M, 2004. Understanding the meaning of collaboration in the supply chain.[Online] Available at: <www.emeraldinsight.com/journals.htm?articleid=85831158&show=html > [Accessed on 14 May 2012] Berger C., Piller F., 2003. Customers as Co-Designers. IEE Manufacturing Engineer, Aug/Sep 2003, PP 42 45. Coyle J. J., Langley J. C., Gibson B., 2008. Supply Chain Management: A Logistics Perspective (8th Ed). USA: Cengage Learning. Donaghu M., Barff R., 1990. Nike Just did it: International Subcontracting and Flexibility in Athletic Footwear Production. Regional Studies. 24:6 PP. 537 552. Flynn B., Morita M., Macha J., 2011. Managing Global Supply Chain Relationships: Operations, Strategies and Practices. USA: Business Science Reference. Herzog B., 2003. Rising with a Swoosh. The Oregonian, 21st September 2003. IBM & Stanford University, 2006. Supply Chain transformation is becoming a critical element for driving business results. [Online] Available at: <http://www-935.ibm.com/services/us/gbs/bus/pdf/bcw00617scm_executive_summit_2006_insights.pdf> [Accessed on 13 May 2012] Kenyon P., 2001. Gap and Nike: No Sweat? [Online] Available at: <http://news.bbc.co.uk/2/hi/programmes/panorama/970385.stm> [Accessed on 11 May 2012] Koch C., 2004. Nike Rebounds: How (and Why) Nike Recovered from its Supply Chain Disaster. [Online] Available at: <www.cio.com/article/32334/Nike_Rebounds_How_abd_Why_Nike_Recovered_fro m_Its_Supply_Chain_Disaster >[Accessed on 10 May 2012] Levi S. D., Kaminsky p., Simchi L. E., 2004. Managing the Supply Chain: The definitive guide for the business professional. US: McGraw-Hill Proffessional. Li L., 2007. Supply Chain Management: Concepts, Techniques and practices: Enhancing value through collaboration. London: World Scientific Publishing Co.

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Locke R., Kochan T., Romis M., Qin F., 2007. Beyond Corporate Code of Conduct: Work organization and labor standards at Nike suppliers. International labor review, 146 (1/2), PP21 40. Mongelluzzo B., 2002. Nikes Logistics hierarchy. Joc Weekly, Vol 3, Issue 12 P. 24. MSI, 2004. MSIs Executives Series Highlights Nike Supply Chain Innovation. PR Newswire, 10th March 2004. Nike 2012. Nike Official website. [Online] Available at: <www.nike.com> [Accessed on 10 May 2012] Sahlin L., 2007. Navigating Todays Supply Chain Challenges. Prologis Supply Chain Review, Winter 2007. Supply Chain Digest, 2006. The 11 greatest Supply Chain Disasters. January 2006. The Institute for Supply Management, 2012. Supply Chain Management Definition. [Online] Available at:< www.ism.ws > [Accessed on 12 May 2012] Van Dusen S., 1998. The Manufacturing Practices of the Footwear Industry: Nike Vs. the Competition. [Online] Available at: http://www.unc.edu/~andrewsr/ints092/vandu.html [Accessed on 11 May 2012]