Logistics
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NIKE SUPPLY CHAIN MANAGEMENT
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TABLE OF CONTENTS
1 INTRODUCTION ...................................................................................................................................................3
2 OVERVIEW OF NIKE ...........................................................................................................................................4
3 NIKE SUPPLY CHAIN PROCESSES ...............................................................................................................5
3.1 Nike Product Development ....................................................................................................................5
3.2 Nike’s Manufacturing flow management ........................................................................................6
3.3 Lean manufacturing ..................................................................................................................................6
4 NIKE SUPPLY CHAIN ASPECTS .....................................................................................................................7
4.1 Nike Vertical Relations.............................................................................................................................7
4.2 Horizontal Relations .................................................................................................................................8
5 NIKE SUPPLY CHAIN STRATEGY .................................................................................................................8
5.1 Outsourcing as the key procurement strategy .............................................................................8
5.2 Role of Information Systems .................................................................................................................9
5.3 Relationship with partners ....................................................................................................................9
5.4 Demand Management............................................................................................................................ 10
5.5 Customer Relationship Management ............................................................................................. 11
5.6 Disadvantages of Nike supply chain strategy ............................................................................ 11
6 DISCUSSIONS AND RECOMENDATIONS................................................................................................ 12
REFERENCES ............................................................................................................................................................... 14
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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
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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 customer’s
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 Nike’s supply chain processes, Nike’s supply
chain aspect and Nike’s supply chain strategy which is concluded by suggestions and
recommendations to the current Nike’s supply chain management.
2 OVERVIEW OF NIKE
Nike is the world’s 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
company’s products are marketed under the Nike’s 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 company’s merchandise. The company sponsors various high profile
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sportsmen and women who promote the brand by wearing Nike’s 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 Nike’s 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).
3 NIKE SUPPLY CHAIN PROCESSES
According to Flynn, Morita & Macha (2011), some of the key supply chain processes that
should be integrated into any organization’s 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), Nike’s product development process is different with
process adopted by the company’s competitors since the company always aims at
continuously improving its design which is facilitated by the company’s 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
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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 Nike’s 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 organization’s
manufacturing and distribution is done in Asia with China supplying more than 40% of
Nike’s 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), Nike’s 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
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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 Nike’s 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 company’s 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.
4 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.
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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 Nike’s 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. Nike’s horizontal relation consists of
various suppliers, distributors, retailers and manufacturers.
5 NIKE SUPPLY CHAIN STRATEGY
5.1 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 Nike’s 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
organization’s merchandise. As a result, Nike ended up relocating to low costs countries
like Thailand, China, Cambodia, Indonesia and Vietnam.
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Some activities entailed in Nike’s 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. Nike’s strong existing relationship with the suppliers can
be argued to be behind the company’s 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), Nike’s supply chain is centralized since designing of the product,
outsourcing and logistics are all undertaken from the company’s 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 company’s 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
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be involved in various product developments which go a long way in ensuring that a
working relationship is built. For firms that only produce Nike’s 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 Nike’s 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
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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 organization’s 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 company’s
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 company’s
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
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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.
6 DISCUSSIONS AND RECOMENDATIONS
A closer look at Nike’s supply chain management shows mixed results. On one hand, the
company’s 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 company’s 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 company’s 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 didn’t 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
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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 Nike’s 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 Nike’s 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.
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