Supply Chain Strategic Management For Nike Marketing Essay

Nike, Inc was founded in 1964 in the state of Oregon, US. Nike is the largest seller of athletic footwear and apparel in the world. Its main business is in the design, development and marketing of high quality footwear, apparel, and equipment and accessory products. Products are sold to retail accounts via NIKE owned stores and online sales, independent distributors and licensees in 170 countries across globe. Footwear and apparel products are manufactured outside Unites States while equipments are manufactured both in US and outside US. Nike’s products are produced in factories owned/operated by independent contractors

Nike’s footwear products dominates its market share and footwear’s are designed for aquatic activities, baseball, cheerleading, football, golf, lacrosse, outdoor activities, skateboarding, tennis, volleyball, walking, wrestling, and other athletic and recreational uses. (Nike 2010) Nike’s accessories and apparels are designed to match its footwear and performance equipment like bags, socks, sport balls, eyewear, timepieces, electronic devices, bats, gloves, protective equipment, golf clubs are also manufactured. Plastic products are produced in Nike’s self owned subsidiary, NIKE IHM, Inc. Other wholly owned subsidiaries of Nike are Cole Haan, Converse, Hurley and Umbro.

Supply Chain Process Overview:

Business related operations like marketing and contracts with the factories for product development activities is executed in Nike’s headquarters in Beaverton, Oregon. Nike’s global operations are largely categorized into four geographic segments – United States; Europe, Middle East and Africa (EMEA); Asia Pacific and Americas (includes Canada, Mexico and other Latin American countries of Chile, Brazil and Argentina). Nike has outsourced its manufacturing activities across globe since mid-1970s. And the products are developed at factories owned and managed by business partners. (SCM are ERP Implementation at Nike: From Failure to Success 2005)

United States Market:

Fig 1.1: Nike US Retail Stores

Source: Nike Annual Report

Fig 1.2: Nike Non-US Retail Stores

Source: Nike Annual Report

plastic and metal hardware, and specialized performance fabrics designed to repel rain, retain heat, or efficiently transport body moisture. NIKE’s contractors and suppliers buy raw materials in bulk. Most raw materials are available in the countries where manufacturing takes place.

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Supply Chain Framework:

The three components of SCM framework are Supply chain network structure, supply chain business processes and the supply chain management components. The three vital components of supply chain network structure are members of the supply chain, structural dimension of the network and various types of process links across the supply chain(Lambert and Cooper 2000). Key members involved in supply chain should be identified. “Primary members of a supply chain to be all those autonomous companies or strategic business units who carry out value-adding activities (operational and/or managerial) in the business processes designed to produce a specific output for a particular customer or market .In contrast, supporting members are companies that simply provide resources, knowledge, utilities, or assets for the primary members of the supply chain” (Lambert and Cooper 2000). Structural dimension of the network assist in evaluating and managing the supply chain. Horizontal structure means the number of tiers across supply chain and vertical structure means number of suppliers/customers within each tier. Any changes in structure impacts supply chain and proper analysis should be done before making modifications.

Successful SCM needs a shift from handling individual processes/functions to integrating activities across supply chain. GSCF identified eight supply chain processes – Customer service management, Customer relationship management, Demand management, Order fulfilment, Manufacturing flow management, Procurement, Product development and commercialization and Returns.

There exist 4 types of links in business functionalities. They are Managed business process links, monitored business process links, not-managed business process links, and not-member business process links. Managed process links are links that the firm

views them as vital to integrate and deal with. These are the links that exists between firm and tier1 customers/suppliers. Monitored process links are albeit not crucial, but vital to the firm and they are the links existing with other member companies. Not-Managed process links are not crucial and the firm is not directly involved in managing them but assign the job of managing the links to member factories. Non member process links are linkages between the firm and other non-members of the supply chain.

The nine management components for successful SCM of Nike would be planning and control; work structure; organization structure; product flow facility structure; information flow facility structure; management methods; power and leadership structure; risk and reward structure; and culture and attitude.

Supply Chain Process and Objectives of Nike:

Precision :

The objective is to satisfy customers through product delivery and information accuracy. Nike follows few methods to measure precision – DIFOT (Delivery in Full- on Time) and Time to provide resolution to customer queries.

The products are produced in factories based on the orders and the developed finished goods are consolidated and then distributed by air/water/road ways to NIKE Customer service centres

Fig 1.3: Nike Delivery process

Fig 1.4: Nike Apparel and Footwear Product Flow

Fig 1.5: Nike Previous Supply Chain Model and desired Simplified Model

Fig 1.6: Pictorial representation of Inventory management

Fig 1.7: Life Cycle Cost Analysis

Fig 1.8: Supply Chain Objectives of Nike

Nike’s i2 implementation failure :

Supply and demand issues need to be paid utmost attention particularly in retail industry as it has to deal with wide choices for each product category like size, color etc. The huge SKU which signifies varied inventory pictures a hurdle to supply chain management.

The manufacturing cycle before the implementation of software solutions is generally 9 months. Hence the need for demand planning system arose and Manugistics software was implemented. Due to various limitations in the software, in march 1999, Nike decided to implement software from i2 Technologies for managing its supply and demand. The desired functionality of the software was to match its supply with demand by mapping out the production of varied products at manufacturing units.

“The module should have been implemented and linked to ERP and other backend functionalities but however Nike implemented software from i2 using the legacy systems rather than implementing as part of its SAP ERP Project” (SCM and ERP Implementation at Nike: From Failure to Success 2005 )

In 2000, after the implementation of i2 software, NIKE stated that it resulted in stock pile up for slower-selling shoes and shortages for high demand shoes. Nike blamed i2 software for poor planning forecast which was actually developed to reduce production days. Investors believed Nike’s blame game and the shares of i2 dropped severely. But i2 managers claimed that Nike’s issues were not linked to software but the way the software was implemented. They did not use the standard template offered by i2 for its footwear division. But i2 accepted the blame of not being forceful in compelling Nike to stick onto their implementation methodology and the bitter truth was i2 desired to solve Nike’s complex issue of tracking every shoe model it manufactures. Nike experienced some major issue and hence i2 thought resolving those legitimate issues would really serve as value addition to i2 Technologies. Joshua Greenbaum, a consultant stated that i2 software is not known for technical failures but it is well known for its complexity and the issue here is that Nike went “go-alive” with the new software even before they were ready to go live which resulted in major chaos.

Lessons learnt by Nike : Implementation issues in supply chain can have disastrous effect in Supply chain process of an organization and hence great care should be taken while implementing software solutions for managing supply chain. If a standard template is customized as per the clients requirement then the service provider should monitor that the client adheres to implementation procedures as instructed. If a solution is being offered to address complex issues, then the system should not go-live before appropriate testing to check if all the needs of clients are better served. Premature switching has devastating effect on the organization which Nike has learned at its cost.

Fig:1.9: Nike’s latest SAP IT Solution to manage supply chain functionalities

Nike owns a system “Futures” wherein the retailers place orders 3-6 months in advance which does assist in demand and forecast planning. But the scenario is different for it Football Team Sports (FTS) category which constitutes 10% of its overall market. Its FTS line comprises about 100 varied styles and it uses a unique fabric Dri-Fit that absorbs sweat. Usually sports team places the order, expects delivery in a week’s time, demands more customized options and hence prestocked items doesn’t hold good for all customers. The challenge for FTS apparel lies in its supply chain. Nike has to seek ways to reduce current lead time like modifying demand planning/ forecast system, shifting production base from Asia to Europe and preordering undyed fabric called greige and contracts with strategic suppliers/manufacturers can result in faster delivery even amidst last minute orders. (Nike:Just Do it – But How? 2009)

Evans and Danks model :

Fig 1.10: Evans-Danks Model

Source: Evans and Danks (1998) Strategic supply chain management – Creating shareholder value by aligning supply chain strategy with business strategy. In: Gattorna, (ed.): Strategic supply chain alignment, Hampshire: Gower, pp. 18-38

Sourcing Strategy :

Global Commodity Chain (GCC) perspective provides greater insights on design, distribution and marketing activities. Nike has captured a greater place in US athletic footwear market albeit its manufacturing activities are held overseas, formulating Nike to be archetype of global sourcing strategy. Its successful execution of sourcing strategy can be best known in Nike’s effort to retain its power and authority over its highly profitable nodes of the footwear commodity chain which offers them the strategic and geographical mobility. Nike’s distribution network was broadened by forming strategic alliance with retail outlets. It shifted its manufacturing base from high cost production countries to low cost countries like Taiwan, South Korea, Asia etc. The merits of producing goods in developing nations have to be weighed against the demerits of other costs like sourcing, production flexibility, transportation and storage. Nike took advantage of global sourcing as a way to reduce cost and in 1980s relocated its plants to Taiwan, South Korea and in 1990s to China, Indonesia and Vietnam. In 2006,over a half a million workers were engaged in 700 factories in 51 countries, although the firm had around 23000 employees in its payroll.(Lechner and Boli 2004). The efficient management of sourcing strategy obtained Nike to manufacture goods as low cost and thereby its market share and profitability increased.

Nike’s Futures system is order and planning system which serves to resolve inventory and financial bottlenecks. Nike had more flexibility options like modifying design specifications by dealers which offered competitive advantage over its competitors like Adidas. Donaghu and Barff categorised and identified 3 sets of Nike’s factories – developed partners, volume producers and developing sources. Developed partners are Nike’s first/upper tire suppliers who are accountable for innovative and stylish/premier models. Volume Producers produce products in large quantities but selected products. Developing sources are recent factories that have enticed Nike due to low labor cost.

Various steps are involved in making a atheletic shoe – designing, model and pattern making, molding of soles, material cutting, stitching, lasting, finishing, final inspection and packaging which requires little skill. Hence unskilled workforce and lower wage rate are quintessential in manufacturing shoes competitively. Nike did not own a factory in Asia but had contracts with partners who manufacture apparels and footwear. Nike took the ownership of the products only after they are finished and delivered from factories.

Fig 1.11: Members within Nike’s Supply Chain Process

Fig 1.12: Nike Brand Factories across globe

Source: Nike website

Demand Flow Strategy:

Nike uses “Futures Order” system to manage its supply with demand. Nike sells its product through various channels – Nike owned stores, online, independent distributors and licensees. Nike doesn’t own a factory but outsources its manufacturing activities to subcontrators across globe. Nike’s manufacturers deploys ‘Just-in-Time’ principles to manage inventories.

Supply Chain Integration Strategy:

Information integration, Decision integration, Financial integration, Operational integration and Physical or Virtual links are the key factors of Supply chain integration.

Nike uses SAP software solutions to manage its supply chain processes. Nike never manufactures but establishes contracts with subcontractors across globe. Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company has been offering financial assistance in exports-imports of Nike’s products. It offered purchasing and financing services for Nike’s goods in Argentina, Uruguay, Canada, Chile, Brazil, India, Indonesia, the Philippines, Malaysia, South Africa, China, Korea, and Thailand, excluding products produced and sold in the same country. (Nike 10K Report, 2010) . Any disruption/failure from it would affect Nike’s power to buy goods from suppliers and to sell goods to customers.

FishBone Diagram:

Fig 1.13: FishBone Diagram for Nike

Time Compression:

Time is a critical factor in today’s supply chain. Time compression can be defined as reducing the amount of time taken for a process in a business operation ie inputs is being transformed to expected/desired outputs in a process but in a compressed period of time. To achieve time compression for the holistic supply chain, activities that does not add value to the process should be identified which is achieved by removing waste and refocusing on the process steps. The horizontal and vertical structure which forms the basis of supply chain must be properly integrated. The structural and infrastructural linkages in a supply chain depicts how efficiently resources, inventory are utilized. (Beesley 1996)

Few generic principles to identify and understand supply chain process:

The end users in a supply chain are customers who demand speed and adhere to delivery. Nike customers demand variety in products ranges and hence Nike strives to manufactures wide range of products but maintains a minimal stock so as to accommodate many varieties. Customers are not willing to pay extra cash for speedy delivery because similar services are offered by its competitors also. Many firms are just order qualifiers and not order winners.

The call for JIT inventory can be satisfied by maintaining correct proportion of stocks in stores. Positioning of resources and inventory also plays a vital role in maintaining a optimal supply chain.

Burbidge and Forrester states that the effect of demand variation in a supply chain oscillates out of control and impacts the lower level of supply chain.

Fig 1.14: Internet Driven Supply Chain Model

Wireless Technology and RFID are used by Nike at a minimum level. Efforts are taken to widely utilize it across its factories. The usage of RFID however raised some privacy concerns and hence Nike is striving hard to resolve such issues and trying to make use of the technology in the best possible way.

Globalisation does impact Nike and offers many challenges. Global sourcing and reduced tariffs in developing countries have created complicated webs in supply chain.

Infrastructures in developing economies are not well developed and hence it requires partnerships with 3PL providers who possesses better knowledge on market and in few cases Nike has to build its distribution centres. Periodically detailed research has to be done to understand infrastructure issues.

Consumer expectation varies in different countries. “One size fits all” rule doesn’t apply anymore. Customization plays a vital role in acquiring customer satisfaction. Product proliferation challenges can be tackled by being more responsive and quick in addressing the needs of the end users. Nike needs to adapt lean and agile manufacturing programs based on their volume-variety formulae.

Retailing customers demand for shorter lead times and faster inventory turns and they make attempts to push the products upstream. As a reciprocative action, Nike offers out-of-stock and replenishment programs but should strive to improvise/speed-up ‘time to market’ and reduce lead times.

Conflict exists between cost and flexibility. Manufacturing lead time is longer due to technical complexity associated with fabrics and products require complex innovation which ultimately results in cost of time and delays.

Supply Chain Integration Issues and Recommendations for Nike

The key thing to focus is to understand the nature of the demand for the products in supply chain. Functional products are those products that fulfil minimum needs’, don’t alter to a large extent over time, possesses stable and expected demand and lengthy life cycles. Innovative products are expected to have short life cycle and unpredictable demand. Innovative products’ supply chain differs from functional products’ supply chain. Two types of supply chain are Physically efficient supply chain and Market Responsive supply chain. The below table shows the attributes of two supply chain. To develop an ideal supply chain strategy, the nature of demand for products is plotted against their respective supply chain. The 2*2 matrix thus depicts if the existing supply chain matches the right demand for the products. The supply chain strategies are perfect if the functional products possess efficient supply chain and innovative products possesses responsive supply chain.

Physically Efficient Process

Market Responsive Process

Primary Purpose

Supply predictable, demand efficiently at the lowest possible cost.

Respond quickly to unpredictable demand inorder to minimize stockouts, markdowns and obsolete inventory

Manufacturing focus

Maintain high average utilization rate

Deploy excess buffer capacity

Inventory strategy

Generate high turns and minimize inventory throughout the supply chain

Deploy significant buffer stocks of parts or finished goods.

Lead Time focus

Shorten lead time as long as it doesn’t increase cost

Invest aggressively to reduce lead time

Approach to choosing suppliers

Select primarily for cost and quality

Select primarily for speed, flexibility and quality

Product design strategy

Maximize performance and minimize cost

Use modular design inorder to postpone product differentiation as long as possible.

Table 1.1: Attributes of Physically efficient and Responsive Supply Chain

Source: Fisher,M.L., “What is the Right Supply Chain for your Product? A simple framework can help you figure out the answer

Functional Products

Innovative Products

Efficient Supply Chain

Match

Nike’s atheletic shoes and casual shoes, sports equipment, apparels and accessories.

Mismatch

Nike’s shoes for diabetic patients, Zoom Air shoes for athletes, high technology sports equipment.

Responsive Supply Chain

Mismatch

Match

Table1.2: Nike’s product and supply chain positioning matrix

Nike should take efforts to shift from upper right hand cell to lower right hand cell. This can be achieved by making few of the products functional and developing a responsive supply chain for the rest of the innovative products. Nike can handle unceratinty by three ways – ‘reducing leadtime and becoming agile such that products are produced only when there is market demand; searching for new information that act as indicators and sharing a common platform and components for varied products and demand becoming predictable; hedging against outstanding ambiguity with buffers of inventory’ (Fisher )

Arcs of Integration:

Ragatz et al (1997) claims that the “effective integration of suppliers into product value/supply chains will be a key factor for some manufacturers in achieving the improvements necessary to remain competitive”.The two types of integration are : delivery integration or forward integration which involves the flow of material between suppliers, manufacturers and customers (Saunders 1997, Trent and Monczka 1998) and Information integration or backward integration that include the effective functioning of IT and flow of data between customers and suppliers (Martin 1992, Trent and Monczka 1998).

Tan et al (1998) state that when firms integrate and act as single unit, overall performance is improved across the supply chain. Manufacturers should decide in which direction (customers or towards suppliers) and to which extent (degree of integration), they should undertake upstream and downstream integration.

Fig1.15: Integration in the Supply Chain

Source: Frohlich, M.T., Westbrook, R., 2001., Arcs of Integration: an international study of supply chain strategies. Journal of Operations Management, 185-200

Fig1.16: Nike striving to move towards outward facing Arc of Integration

Source: Frohlich, M.T., Westbrook, R., 2001., Arcs of Integration: an international study of supply chain strategies. Journal of Operations Management, 185-200

C2C Cycle:

Fig 1.16: Nike’s 5 year trend of Operation Cycle

Source: Thomson One Banker

Agility is defined as a capability to meet demands of end users and to warrant that supply matches the demand. The key factor is flexibility and time to market in response to demand is crucial. Transforming the supply chain from make-to-sell to make-to-order is the desire of any organization that wants to gain competitive advantage via supply chain management. Nike’s objective is centralization and it is achieved by information sharing through the effective implementation of IT.

Nike’s claims its lead time is 6 months due to technical complexity associated with producing fabrics and products. In this competitive world, 6 months is a wide gap for any rival to gain access competitive advantage. Nike should adopt following ways to reduce lead time gap.

Postponement Strategy: Postponement or delayed configuration is a way of manufacturing products in common platforms, components or modules but the final assembly or customization does not happen until the final market destination and or customer requirement is known (Christopher 2000). Inventory levels can be maintained at a generic level which results in lower stock keeping variants and flexibility it offers in greater. Forecasting is easier at basic level than for a final product. Customizing a product locally means more variety at less cost which paves way for “mass customization”. Through Localization, postponement strategy is fully achieved which implies that the final product is finished in the local region.

The hurdle for efficient SCM is to build ‘lean strategies’ till the decoupling point and ‘agile strategies’ further than that point (Christopher 2000). Decoupling point is the point at which demand diffuse through the supply chain. “The flow of product upto the decoupling point should be forecast driven and the flow of product after the decoupling point should be demand driven” (Christopher 2000). The two decoupling points are – material decoupling point where inventory is stocked as its basic form and it should continue as far downstream as likely ; information decoupling point which should be available as far upstream as likely to which data about demand diffuses. Nike should seek ways to handle the two decoupling points thereby becoming more agile than competitors and reducing Bullwhip or Forrester effect.

In most of the processes it is the lead time of the suppliers that restricts the firm to be more agile to customers’ demand.

Order to Delivery Cycle: Order cycle time is defined as the time consumed from placement of order by customers to delivery of the product to them. The components of order to delvery cycle are order communication, order entry and processing, order picking or production, transportation, customer receiving. Each of these steps consumes time and any bottlenecks associated with any of the processes would result in increased cycle time. Optimum Production Technology categorizes any activity as ‘bottleneck’ and ‘non-bottleneck’. Nike should focus on bottlenecks to which capacity can be reduced and set-up times can be reduced. The firm should also focus on ‘non-bottlenecks’ in a similar fashion.

SCOR and DCOR model:

Supply Chain Operations Research Model is used to analyse the current position of the organization’s business processes and functions. It possesses a set of metrics to be evaluated and can be compared with the benchmark data.

Design channel Operations Research Model links business processes and functions, metrics, good practices and technology attributes into a single unified model to support communication within design chain partners and to improve the effectiveness of extended supply chain.

Sustainability:

Nike has taken steps towards sustainable business and the need of the hour is to take proactive steps by focusing on sustainable manufacturing, sustainable product development and developing a sustainable marketplace. Nike should take efforts to identify closed loop models and processes which would enhance sustainability across supply chain. Nike must follow an integrated approach in tackling supply chain by fusing lean, energy, water, waste and compliance teams into one model: sustainable manufacturing and sourcing. Sustainability is the path to forthcoming profitability. (Nike Corporate Responsibility Report 2009 )

Nike deals with many contractors and hence Nike should seek long term sourcing consolidation strategy and rationalize its supply chain functionalities. “Nike has to take steps to build a sustainable base , align with strategic manufacturers who are able to deliver high end products and are highly innovative, building relationships with contractors willing to adhere to Nike’s corporate responsibility.

Fig 1.17: Nike’s Supply Chain towards Sustainability

Source: Nike Corporate Responsibility Report

Environmental Impacts:

Waste is produced at every step of supply chain. In FY2006, Nike conducted waste mapping study and discovered that 75% of waste is generated from supply chain activities outside factories and when measured by weight, about 40% of the purchased materials end up as waste.

One-third of waste footprint is generated from retail packaging and from shipping & packaging. Nike operates 5 waste management centres in 4 countries and about 50 products are transported to material vendors so as to recycle them to materials from which Nike repurchases. Nike should focus to utilize more waste effectively to sustainable uses. The firm should seek ways to reduce waste in design stage rather than seeking ways to reduce waste in downstream supply which would decrease costs and waste materials being generated.

Fig 1.18: Percentage of Waste generated across Nike’s supply Chain Process

Source: Nike Corporate Responsibility Report

Fig 1.19: Nike’s Reuse-a-Shoe Program

Source: Nike Corporate Responsibility Report

Fig 1.20: Greenhouse gas emissions across various supply chain process of Nike

Source: Nike Corporate Responsibility Report

Supply Chain Mapping Tools:

Various supply chain mapping functionalities are available which can be utilized by Nike to determine its current position and future growth prospects.

Demand Density Mapping:

Sales Territory Mapping:

Gross Margin Map:

Customer/DC Allocation Map:

Isochrone Mapping:

Centre of gravity mapping:

Table 1.3: Supply Chain Mapping Tools

Source: Types of Supply Chain Map, 2007.

Nike should manage the business process links based on its objective such as product variety, improvising quality, lowering cost across supply chain. Number of links should be monitored and managed with great care any decision to change links should be well analysed before incorporating amendments.

Owing to high variability in customers’ expectations, Nike should focus more on demand management to gain a sustainable competitive position in the volatile market.

Nike can utilize Point-Of-Sale (POS) systems and “key” customer data to effectively manage demand and supply thereby lowering uncertainty and offering smooth flow across supply chain. Order fulfilment activities should be given high priority and customer needs should be satisfied greatly which requires proper integration with Nike’s manufacturers, distributors and logistics providers. Nike should seek to partner with fourth party logistic providers depending on the marketplace and other benefits.

Innovation is the lifeblood of Nike to stay competitive and hence new product development process needs high attention. Nike’s should identify end users’ articulated and unarticulated needs; identify strategic suppliers and forms efficient links for a smooth supply chain.

Nike should leap forward towards “Joint planning and control” approach so as to effectively operationalize its functions globally. Nike has failed to monitor its contractors’ factories who have employed underage kids and haven’t adhered to minimum wage rates. Owing to this, Nike’s brand names have been associated with child labour and Nike has to face loads of labour rights issues which defamed its brand. Nike has been really doing well in managing its supply chain integration. However if it maps and analyzes every bit of linkages across the chain and takes corrective actions, it can gain a well established position in the market and thereby reducing the cost by a large amount.

Conclusion:

The mapping of SCM process results in understanding the existing issues and paves way for defining solutions. Identifying the critical members of the supply chain, kind of functionalities to be connected and what nature/degree of integration is necessary for each link are key factors that require deep insight. The goal of SCM is to create the highest possible value not only for the specific firm but across the supply chain including end-consumers. Aligning the product supply with their appropriate supply chain is also vital for increasing sales. Amplification caused by uncertainty can be reduced