Student Name: Adrian Watters

Student Number: 40086300

Submission: 23/11/15
Word Count: 3030
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Introduction

The purpose of this essay is to discuss a well-publicised supply chain problem and
investigate the key supply chain issues related to it. The essay will be focused on
NIKE and their inventory problems in the early 2000s. The key supply chain issue of
demand management will provide insight into how NIKE incurred these problems. In
addressing this, the essay will be structured as follows; firstly, a brief background of
Nike will be provided. Then, NIKEs inventory issues will be explored in great detail.
Next, the concept of demand management will be discussed. Moreover, the roles of
forecasting and inventory management will also be investigated. The essay will
conclude with a brief overview of all discussed, while also noting how NIKE reacted
in the aftermath of this supply chain disaster.

Company Background

NIKE was founded by William Bowerman and Philip Knight in 1964 & incorporated in
1971, and is headquartered in Oregon, USA. According to Reuters (2015) NIKE
specialises in the design, development, marketing and selling of athletic footwear,
apparel, equipment and accessories. The companys products are manufactured in
more than forty countries while the products are sold in nearly all countries around
the world (NIKE, 2014).

CNN (2015) notes that NIKE focuses on product offerings in seven key categories;
running, basketball, football, mens training, womens training, NIKE sportswear and
action sports. NIKE appeals to a wide range of people, as although their footwear
products are designed predominately for athletic use, a significant number of their
products are used for leisure purposes. NIKE has built a strong brand worldwide,
indeed their swoosh symbol and Just do it logo are thought to be instantly
recognisable across the globe.
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Crisis Background

In the latter stages of the 1990s NIKE realised that change was needed. NIKEs
supply chain system at the time was not able to manage the complicated operations.
The system was susceptible to a breakdown as it was under increasing pressure due
to the increase in orders and the spread of manufacturers around the world. Indeed,
NIKE needed a new system to handle the pressure of an increasing load. NIKE
decided to enter into a contract with i2 technologies in order to be meet this
increased demand. In theory the system provided by i2 was going to enable NIKE to
respond rapidly to shoe market changes by being able to plan production schedules.

However, in the early 2000s NIKE encountered major inventory problems; the
company was overproducing unpopular footwear and under producing popular
footwear. Farmer and Luening (2001) comment that NIKE placed the blame on their
new demand-forecasting and supply chain management software provided by i2.
Bosari (2012) notes that NIKE invested $400 million in the software package; and
instead of helping the company in forecasting demand and reduce production
delays, it led to an estimated $100 million in lost sales, several class action lawsuits
and a 20 percent dip in their stock market prices. As mentioned above, NIKE was
left with too many of the wrong shoes and not enough of the shoes in high demand-
this is because the projections the software made were completely off. According to
Sridharan et al (2005) NIKE was forced to reduce prices in order to sell unwanted
inventory, this further intensified the pressure on margins and profits. Moreover, it is
noted that NIKEs ordering and scheduling system caused shortages and
overstocks. NIKE had to fill back orders and dispose of excess inventory through
discount distribution channels.

In the immediate aftermath, Phil Knight NIKE CEO is reported to have said this is
what I get for our $400 million, huh? (Sullivan, 2001). Nevertheless, Sridharan et al
(2005) note that i2 technologies insist that NIKEs inventory problems were not due
to the software but rather the way in which it was installed. It appears that NIKE
rushed the installation of the software, ignored the advice of i2, failed to put checks
in place and then subsequently blamed i2.
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Demand Management

Selen and Soliman (2002:667) define demand management as:

Extending the view of operations from a single company to the whole chain.
Essentially, demand chain management is a set of practices aimed at managing and
co-ordinating the whole demand chain.

Demand management is primarily concerned with knowing what customers

want and being able to provide it when they want it. Frohlich and Westbrook (2002)
note that demand chain management involves controlling the flow of materials and
the consumption of resources so that market demand is satisfied efficiently and
effectively. Rexhausen et al (2012:270) state that demand management is:

Considered to be a firms capability to understand customers demand and

requirements and balance them against the capabilities of the supply chain.

Where demand increases and supply remains constant, price premiums

can be charged. When there is a high level of availability of products and relatively
low levels of demand, prices may decrease. In most cases, companies will be in a
position where competitors offer similar products, in which case they will want to
match supply with demand. Demand management, according to Christopher
(2010:89), involves the various tools and procedures that enable a more effective
balancing of supply and demand to be achieved through a deeper understanding of
the causes of demand volatility. Essentially, demand management is concerned with
ensuring that products are made in order to be available at the right time and place.
However, in the case of NIKE, this was not achieved. NIKE suffered a demand
management nightmare, Koch (2004) notes that the company produced thousands
more Air Garnett trainers than the market wanted while also manufacturing
thousands fewer Air Jordans than were needed.

A shift in power from the supplier towards the customer due to competition/variety
has led to a growing focus on demand chain management (Soliman and Yussef,
2001). Indeed, McCarthy (2001, cited in Soliman and Selen, 2002) supports this
view, noting that the internet has shifted the balance of power from the supplier to
the consumer- effectively- creating the demand chain. As a result, the demand chain
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focuses on the product from the point of view of the customer- what the customer
wants and needs (Joy, 2001 as cited in Soliman and Selen, 2002).

The growing need for demand management is explained by a variety of factors. One
such factor is that of improved customer service; reduced stock outs will lead to a
happier customer base as the customers are able to get what they want, when they
want it. Moreover, demand management helps to lower costs incurred as fewer stock
is held. This reduction in excessive levels of stock will also mean that products will
not go obsolete, demand management enables companies to more accurately judge
how much to produce. Demand management also helps businesses to be better
prepared. Indeed, having an estimate of what demand should be will enable the firm
to prepare the operations along the supply chain in response. According to Selen
and Soliman (2002) demand management involves using technology to focus on the
consumers actual demand behaviours. NIKE sought to be in a better place to react
to the needs of their customers by installing the i2 software system. NIKE believed
that by having a system that enables them to react to trends in a short space of time,
they would be able to better serve their customer base.

Businesses are under increasing pressure to be able to see customer demand and
align it with their supply chain. While the value of successful demand management is
highly evident, many companies are struggling to implement it in practice. One of the
main problems noted was a lack of supply chain integration. Integration of the
demand management software and sales & operations planning is of fundamental
importance; sales and operations planning process drives the execution of
manufacturing and sales activity. NIKE attempted to achieve this integration when it
installed the i2 software. Beforehand, NIKE was becoming increasingly global and as
a consequence its supply chain began to fragment. According to Koch (2004) by
1998, NIKE had 27 order management systems throughout the world, but they were
poorly linked to the headquarters in Oregon, USA. Koch (2004) comments that NIKE
sought to make its systems as centralised as its planning process. However, NIKE
hurried the implementation of the i2 software, Wilson (2001) claims that the i2 app
wasnt ready when NIKE began to input data in May 2001. Moreover, NIKE also
failed to use the templates provided by i2 for the new system, instead opting to
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customise it in order to make it work with the existing demand management system.
As a result, the system was not fully functional, according to Koch (2004) the system
was overwhelmed by the millions of product numbers NIKE used and as a
consequence, frequently crashed. These glitches led to significant issues, the
system ignored some orders and duplicated others. Moreover, Koch (2004) notes
that the demand planner deleted ordering data weeks after it was entered and
planners were unable to recall what they had asked each factory to produce. A
number of reasons are proposed for the unsuccessful implementation of the i2
system. One issue is related to a lack of performance measurement. Shea and
Gillion (2011) found that only of the companies surveyed in their study had
measures for the performance of their demand management system. It is thought
that NIKE failed to take precautionary steps, the new system was not put to test and
therefore glitches were not revealed. Moreover, i2 had no experience in developing
software systems for the apparel industry.

Businesses today are encountering a number of demand-related challenges. In a

study conducted by Shea and Gillion (2011), they found that the main problems firms
encountered had a direct financial impact on their business through the potential loss
of business (stock outs) or the inefficient use of capital (excessive inventory). Shea
and Gillion (2011:19) note that this highlights the Precarious balancing act we call
demand management, in that, these challenges are diametrically opposed. NIKE did
not achieve this balance, and as a result they were hit financially. NIKE CFO Don
Blair acknowledged that the firm overproduced materialswe did not place orders
on a timely basisso we experienced product shortages and delays that resulted in
lost sales and additional air freight charges to bring products in (Wilson, 2001).

In order to manage demand, companies can employ two processes. Firstly, the
customer order process is concerned with the known part of demand, that is, current
customer orders. Secondly, the forecasting process covers the unknown part of
demand. Indeed, the information provided by customer orders does not facilitate
sufficient information in order to plan for the future. By making forecasts companies
gain an estimate of future demand and this helps to make decisions about capacity
and resources.
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Forecasting

Herbig et al (1993:16) state that forecasting is:

Estimating a future which is outside of an organisations control and provides a

basis for managerial planning.

It is important to note that forecasts are always wrong! Firms cannot

have complete confidence that forecasts will be accurate. Indeed, forecasts often get
worse the further into the future they go. With regards to NIKE, Tim Wilson (2001)
states that the company did not anticipate the weakening of the U.S. footwear
market when it input the date. Rexhausen et al (2012) state that accurate and
reliable forecasts reduce uncertainty and help firms to optimise their inventory levels
and replenishment policies. However, Bozarth and Handfield (2013) note that
forecasting may help to reduce uncertainty, but it will not remove it. Firms need to
forecast as it is essential to have an idea of the future demand in order to
successfully balance demand and supply. In response to demand, businesses need
to organise the operations of their entire supply chains in order to meet
requirements. If they have a rough estimate of what demand might be, they are in a
much stronger position for organisation and capacity management. As a result,
forecasting is a thought to be a key driver of almost every design and planning
decision made.

Zellen (2001) comments that firms are increasingly using supply chain information
and linking it with an analysis of customer interactions, transactions, and demands
for goods in order to produce a more accurate sales and market demand forecasts.
There are a number of ways in which a firm can carry out their forecasts. Firstly,
businesses can use qualitative forecasting, which is based on human judgements,
estimates and opinions. Moreover, firms can use time-series analysis which involves
using historical data to predict future demand figures. Lastly, firms can use casual-
relationships, this method assumes that other factors (such as the economy), affect
demand patterns. According to Croxton et al (2002:61) forecasting involves
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evaluating all data available to a company; historic and current demand information
from internal and external sources.

It is thought that by incorporating technology into the forecasting process, firms will
be able to achieve better, more accurate results. Indeed, IT software is accustomed
to dealing with large amount of data and it may result in higher-quality results, for
example, avoiding human error. However, relying on IT software too much can be a
detriment to the reliability and validity of the forecasting results. A growing number of
firms are realising that computer systems alone are incapable of producing accurate
forecasts. NIKE failed to recognise that software cannot account for unexpected
shifts in economic or market conditions. Worthen (2003) notes that the past cannot
predict the future. In reality, software systems rely on historical data in order to
make forecasts on what will happen, however, there is no way for them to anticipate
major market changes. Demand forecasting is inherently limited, and NIKE failed to
acknowledge that such systems require checks and balances in order to ensure that
rational judgement is accounted for.

Inventory

Verma and Boyer (2009) note that inventory is the physical stock of any item used in
a firm. Crandall et al (2014:268) expand on this definition by stating that:

Inventory are those stocks used to support production, supporting activities and
customer service.

Inventory is both a valuable resource and a potential source of waste. This is

because firms do not want to hold more inventory than necessary. Inventory ties up
space and capital while it also poses a significant risk of obsolescence.

The aim of supply chain management is to match supply and demand. However, in
reality this objective is challenging due to the presence of uncertainty. Inventory
management is essential to the running of a company. Firms must ensure that they
strike a balance between having enough stock to satisfy demand while also
guarantee costs are minimised by not carrying excess stock. With reference to NIKE,
the demand chain failure meant that they did the opposite to this. NIKE was forced to
offload much of their unwanted stock at low prices while they could not meet the
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demand for their more popular products. Firms are increasingly under pressure to
meet the needs of the customer. The time it takes to acquire, make and deliver the
finished product to a customer is longer than the time the customer is prepared to
wait for it (Christopher, 2010). Inventory can help to reduce the time between the
logistics lead time and the customers order cycle. Businesses try to solve this
problem by forecasting the markets needs and then build inventory ahead of
demand.

The Aftermath

In recent years NIKE has significantly improved their demand management chain.
NIKEs CEO Phil Knight said that the i2 failure will in the long run, be a competitive
advantage. For most companies this would be categorically untrue, indeed, many
smaller firms would have collapsed in the aftermath of an inventory collapse of this
sort. However, NIKE not only survived, but they learned from their mistakes, and
grew into a stronger company. Despite the substantial financial impact the crisis had
on the firm, Koch (2004) notes that it proved to be somewhat of a speed bump.
NIKE continued to work with i2, it took three years for the firms profits to rebound,
however, the patience and resilience to persevere with the software eventually paid
off. As a result of NIKE being able to watch the movement of goods from raw
materials through factories to retailers lead to reduced inventory in the pipeline, and
crucially increased gross and net profits. At present, NIKE ranks number 18 on
Forbes most valuable brands list. It has 56,000 employees, and brings in around
$30 billion in sales annually (CNN, 2015).

Conclusion

As outlined in this paper, NIKE encountered a number of problems as a result of the

unsuccessful implementation of the i2 software system. However, lessons can be
learned from NIKEs i2 debacle. Indeed, other companies can benefit from the
mistakes of NIKE, software implementations cannot be rushed, it is important than
firms are patient in order to gain the benefits from the system. Moreover, when
implementing a system of this type there needs to be resolute support from the top
leadership. NIKE developed a plan in 1998 and they stuck with it; NIKEs CEO still
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supported the project even after the debacle and that is one of the key reasons for its
eventual success. Furthermore, it is vital that the system matches the existing
business processes, as customisation will always involve a huge cost, longer
development and a difficult implementation. Lastly, it is important to remain focused
and committed to the project. NIKE were complacent, they took the severity of the
implementation too lightly due to it being a smaller scale project in comparison to
their SAP ERP project

In summary, managing demand is complex and there are a number of issues firms
must overcome in order to successfully predict demand. As noted above, companies
depend upon forecasts to assess how much inventory they require. However, if the
forecasts are significantly inaccurate, they can cause a substantial knock-on effect to
all areas of the business. Indeed, production, distribution, ordering, scheduling, and
inventory are all determined based on the demand level the forecast projects.
Although it is important to plan ahead, firms must be flexible in order to react to
unexpected changes. In the case of NIKE, although the issues were resolved in a
relatively quick time, the damage had already occurred.
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