Summary Global Sourcing at Nike Nike’s Vice President of Sourcing, Amanda Tucker played a key role in managing Nike’s global network of over 500 supplier factories that produced the company’s footwear, apparel, and sports equipment. She and her colleagues were focusing on three key supply chain challenges: sourcing from suppliers that meet compliance standards, challenging and encouraging suppliers to improve capabilities, and being responsive to consumer demand across the world. Nike sought to ensure its suppliers met its sustainability standards that addressed working conditions and environmental impacts, and that they continued to improve their performance along these dimensions. Not all suppliers, however, shared Nike’s enthusiasm for their need to invest in their own factory capabilities. Nike, Inc. Nike’s product segments included footwear (roughly 64% of sales), apparel (31%), and equipment (4%). Sales were concentrated in North America (roughly 43%), while Europe, the Middle East, and Africa accounted for 27%, Greater China for 14%, and Asia Pacific/Latin America for 15%. In the rapidly growing athleisure (athletic-styled leisure) clothing segment, smaller players such as Under Armour had also gained share. Meanwhile Adidas was a bigger threat. In 2017, nike launched the CDO (Consumer Direct Offense) strategy which was fueled by the Triple Double Strategy, which sought to: 1) double the cadence and impact of product innovation, 2) double direct connections with consumers by leading with Nike Direct and membership programs, and 3) cut product creation cycle timelines in half to increase speed to consumers. History and Strategy In 1964, Nike founder Phil Knight and his college running coach, Bill Bowerman, started a business importing Japanese footwear. In 1971, the company renamed itself Nike, after the Greek goddess of victory, and began designing its own sneakers On the product side, Nike focused on developing high-performance athletic wear, starting with its waffle sole sneaker. ”Nike designers “got to know the players at the top of the game and did everything we could to understand what they needed, both from a technological and a design perspective,” Knight said. By 2018, Nike’s product innovations included high-tech sneakers called HyperAdapt, a new foam cushioning sole technology, and an apparel line that adapted to the body’s temperature (Tech Pack). Professional athletes were central to Nike’s product development and testing efforts as well as to its marketing strategy. Such as Michael Jordan (basketball), Serena Williams (tennis), and LeBron James (basketball) “The closer the link in consumers’ minds between success and the Nike brand, the easier Nike branded products are to sell at high prices. Knight believed that shoes could be produced at lower cost, a strategy he had first outlined in a paper he wrote, “Can Japanese Sports Shoes Do to German Sports Shoes What Japanese Cameras Did to German Cameras?” Retaining control over design and marketing, Nike achieved profitable returns by outsourcing nearly all its manufacturing to lower-cost Asian suppliers. By the mid-1990s, Nike had sourced from suppliers in Japan, South Korea, Taiwan, China, Indonesia, and Vietnam. Monitoring Compliance with the Code of Conduct (1990-2010) In media reports, labor activists accused Nike of tolerating human rights abuses and exploiting underpaid workers. Knight’s response focused on Nike’s contributions to developing countries’ economies: “I think [the] criticism in the media is really based on lack of understanding of how the world and the economy works,[The] national economies where Nike has contracted factories have grown enormously.” The apparel sector did offer wages that exceeded those in agricultural and domestic-oriented industries which gave many workers, especially women, the first opportunity to participate in the formal economy, and stimulated the industrialization of many countries’ economies. In 1992, Nike produced its first supplier code of conduct that specified the company’s minimum acceptable working conditions and soon after started developing a factory monitoring system to assess suppliers’ compliance with the code. In 1998, Knight commented “I truly believe that the American consumer does not want to buy products made in abusive conditions.” In 2001, Nike published its first corporate responsibility report, which outlined Nike’s process for monitoring more than 700 supplier factories across 50 countries. “We believe disclosure of supply chains is a step toward greater efficiencies in monitoring and remediation and shared knowledge in capacity building that will elevate overall conditions in the industry,” said Hannah Jones at the time, then Nike’s corporate responsibility vice president. In an acute violation to the code of conduct, in 2008, an Australian television network reported that a Nike supplier factory in Malaysia was engaging in “human trafficking on a major scale.” In this instance, Nike found that migrant workers were subjected to substandard housing, charged employment fees, and denied access to their passports while sewing apparel for Nike and other brands. (Nike persuaded the factory to reimburse the fees and relocate workers to appropriate dormitories and required that the workers have access to their passports.) In another incident, in 2010, a Nike supplier in Honduras subcontracted an order—without Nike’s permission—to two factories that closed suddenly and failed to pay their 1,800 workers more than $2 million in legally-mandated severance. Changes in Nike’s Supply Chain Management Country Risk Index Up to that point, Nike’s Global Sourcing & Manufacturing department considered country-level conditions such as trade agreements and political risk. To more fully and objectively assess the risks of entering a new country, Nike developed a Country Risk Index that considered eight categories of risk— labor, environmental, individual safety, cargo, property, business, economy, and corruption—that could be weighed against other commercial concerns like unit cost or profitability as a whole. The Country Risk Index integrated data from public sources and yielded a rating for each country from 1 (very low risk) to 10 (very high risk) Project Rewire At the time, Global Sourcing & Manufacturing made sourcing decisions balancing the three criteria of cost, quality, and delivery speed, while the Corporate Responsibility department monitored supplier compliance with its code of conduct. Nike was not unusual in dividing responsibilities this way; scholars observed that at many brands “sourcing decisions are often decoupled from the enforcement of private regulation [such as codes of conduct], resulting in a tension between these two functions” and that it was “not uncommon to hear complaints from social compliance managers that their mission is not taken seriously by their colleagues in purchasing departments.” Project Rewire called for an internal restructuring that created Sustainable Manufacturing & Sourcing (SM&S), a new department within Global Sourcing & Manufacturing, to oversee factory compliance and capability building. The Manufacturing Index Created in 2012, the Manufacturing Index was a sourcing tool that rated suppliers on their performance in four areas—cost, quality, delivery, and sustainability, putting environmental and labor commitments on equal footing with cost, quality and delivery. For sustainability, bronze meant a supplier factory met Nike’s compliance requirements, silver meant that it made consistent improvements beyond compliance requirements, and gold recognized manufacturing standards that were viewed as world class regardless of industry. When the Manufacturing Index was first launched, the scores were averaged across the four criteria to assign an overall supplier factory rating. When placing an order, Nike would prioritize supplier factories with the highest ratings. Reorganizing Global Sourcing & Manufacturing In 2017, Nike created a new role to help oversee its entire source base: Global Sourcing & Manufacturing’s first VP of Sourcing. Amanda Tucker had joined Nike in 1999 in the then-nascent Labor Practices department to help develop the company’s code of conduct and audit protocols, and subsequently worked in Global Sourcing & Manufacturing as the general manager of footwear in Vietnam and then in Italy. Along the way, she enrolled as a full-time MBA student on a corporate scholarship where she was tasked by Nike to help develop the sustainability standards for what would become the Manufacturing Index. In her new role of VP of Sourcing, Tucker would lead the department that was responsible for ensuring Nike had enough contracted capacity to satisfy Nike’s production needs, deciding where to place orders and at what quantities. As someone who understands both sides, she can make holistic decisions. Tucker’s new responsibilities included decisions that had previously been made by the VPs of Apparel Manufacturing & Sourcing and Footwear Manufacturing & Sourcing, who going forward would instead increase their focus on developing the manufacturing and financial capabilities of suppliers to satisfy Nike’s innovation needs and quality standards in areas such as product creation, automation, chemical engineering, and manufacturing engineering. Sourcing decisions would be made jointly: Sourcing would propose volumes and locations, and Apparel Manufacturing & Sourcing and Footwear Manufacturing & Sourcing would confirm that suppliers had the capacity to deliver. Global Sourcing at Nike in 2018 Nike's supply chain expected to ship 1.3 billion units of product in fiscal year 2018. Nike worked with more than 500 supplier factories across 41 countries that employed more than 1 million people, 80% of whom were women. In 2018, Nike apparel was supplied by 328 factories, with half the volume produced in China, Vietnam and Thailand, and the remainder in 34 other countries. With fewer suppliers, Nike could focus on approaches with a long-term business view. This included selecting the optimal countries to source from; improving internal executive and operational governance mechanisms; prioritizing suppliers that invest in capability building; and increasing Nike's proximity to market. Starting in 2014, Nike began building mechanisms to engage supplier headquarters offices in its strategies and plans. Nike executives expected suppliers to make a business-wide investment in sustainability. Nike released products during four seasons: spring, summer, fall and holiday. Global Sourcing & Manufacturing determined which factories would produce which products for which seasons. Overall, it typically took 6 to 18 months to bring a new apparel or footwear style to market. Nike's Global Sourcing & Manufacturing and Categories & Product teams have different key performance indicators that include gross product margin, revenue, units, style count, and productivity. Tucker's new role helped her understand the tensions embedded in a supply chain. Sourcing is a balancing act. No one is fully happy with anything you do, Tucker said. Internally, Tucker and her team had to overcome internal resistance to adjust to Nike's goal of adding production capacity near-shore. As she worked to advance this shift, Tucker anticipated challenges in three areas: supplier compliance, supplier capability, and geographic diversity. Promoting Supplier Compliance Factories were audited at least once every 12 months by Nike and third-party auditors to assess employment, occupational health and safety, and environmental management practices. Results informed factories' sustainability scores on the Manufacturing Index. Half of Nike factories met compliance standards scoring bronze or higher on the sustainability quadrant in 2011, but this nearly doubled to 91% by the end of 2017. After 2016, factories were expected to independently remediate their non-compliances. If audits continued to surface serious or zero-tolerance issues, managers were met with by management. Donning suits, Global Sourcing & Manufacturing executives scrutinized managers' attitudes for willingness to change. Nike imposed sanctions on factories that failed to fix problems or exhibited the same violations repeatedly. Sanctions included withholding orders of models and removing "strategic supplier group" status from a supplier's growth plan. Nike intended for its sanctions to not be punitive, but rather to reduce the factory's production level to allow it to focus on remediation. You change the relationship when you allow them to remediate to stay in the source base. It’s good for workers, the supplier, and for Nike’s business. About one to three times per year, Nike removed a factory from its source base due to labor code violations. Nike provided advance notice to the factory when it intended to terminate the relationship and worked with the factory to jointly develop a ramp-down plan. Sanctions also could create tensions between Sourcing and Categories & Product, especially when they coincided with unexpectedly high demand. Nike received an anonymous phone call alleging that a footwear factory had been scheduling workers to work overtime that was not compensated at overtime levels. Nike sanctioned the factory by flattening its projected growth in Nike orders for the subsequent four seasons. In response, the supplier group commenced a review of its factory operations and began to consider standardized procedures and stronger internal controls. In addition to reduced capacity to meet demand, Nike incurred freight costs to meet the launch date. When products were delayed, Nike's retail and wholesale customers cancelled their orders, forcing Nike to discount the product in order to sell it quickly. This resulted in millions of dollars in lost profit margin for Nike. In April 2017, a factory audit revealed that a supplier of a highly specialized product violated migrant labor laws. The factory, which employed 1,000 people, was part of a long-term, strategic supplier group. Sourcing decided to sanction the entire group by freezing orders at current levels for the next three years. Finding alternative capacity was especially challenging given the scale of the demand spike. "We had a very real capacity constraint and there was an awareness that we could potentially walk away from revenue," Tucker said. Building Supplier Capability Nike has been investing in its suppliers' production and management capabilities to improve working conditions and sustainability performance. The company believes this will lead to higher quality products and enable suppliers to be better suppliers to Nike. "If a worker comes to work every day feeling valued, they're going to do the best job," says CEO Donnie O'Brien. The aim was to encourage factories to take ownership of their own production processes and improve their own efficiency and sustainability. Lean 1.0 In 2002, Nike worked with one of its leading footwear suppliers to deliver in-factory training in lean manufacturing techniques—primarily focused on the manufacturing process—in an effort to improve delivery speed and productivity. In 2009, Nike opened the Apparel Innovation and Training Center (AITC) in collaboration with one of its lead apparel suppliers inside a factory in Sri Lanka. Lean training also improved factories' compliance with Nike's code of conduct. Lean 2.0 In 2014-2015, After a series of pilots in Indonesia, the (AITC) became a training center for both apparel and footwear. Lean training improved factories' compliance with Nike's code of conduct and improved worker engagement and wellbeing. One factory reduced its manufacturing lead time by about 40%, accelerating the production of 92% of its volume. Nike's Lean 2.0 training helped suppliers increase automation in their production processes. Suppliers could participate in additional two-week or 12-week residential training programs. Nike also worked directly with eight supplier groups to help them meet their strategic goals. By 2018, the management of factories that produced 83% of Nike's total unit volume had received training. Nike paid for piloting and demonstration of positive business cases, but expected suppliers to invest their own resources to deploy the initiatives at scale within their factories. Nike also facilitated learning summits at which suppliers presented best practices. A separate initiative convened the next generation of factory owners to collaborate on projects with Nike employees. Nike's orders for Flyknit and Tech Pack were prioritized to strategic suppliers that had advanced capabilities in worker engagement. Rogers felt that suppliers who improved efficiency or productivity as a result of capability building saw financial benefits. In China, there also were few social dialogue experts with the ability to train factory leadership. Nike worked with one of its strategic footwear suppliers and paid a U.K. expert and his team to develop a playbook and bring local trainers to the factory. After struggling to find qualified service providers to work with factory line workers to reduce job stress, Nike paid to train HR teams in factories to deliver stress management activities for line workers and supervisors. These trainers were then able to provide training to other factory management and worker representatives around China. Nike now needed staff capable of engaging with supplier groups and service providers at a strategic level. Geographic Diversity The future of sport will be decided by the company that obsesses the needs of the evolving consumer, says Nike CEO Mark Parker. In 2018, Nike sought to increase its geographic diversity as part of its CDO initiative. "When a consumer goes into a store to buy a Nike product today, we had to make that product 20 months ago," says Sprunk. Decisions made that far in advance were never perfect forecasts, which meant Nike faced excessive inventory. When retailers failed to sell inventory, they often discounted those products, which threatened the brand's premium pricing strategy. In response, Nike hoped to use consumer behavior as its demand signal rather than retailers’ orders. Nike's goal was to reduce lead times for some products in part by adding new production capacity closer to consumer markets. The company considered the Country Risk Index, as well as the local factories' capabilities and capacity, pricing (including all costs to manufacture and transport product to market) and labor compliance. One of Nike's larger apparel suppliers had acquired capacity in a Central American and Caribbean country. Calling on Experience Global Sourcing & Manufacturing recalled its experience in 2013 with Bangladesh, the second-largest clothing exporter. Nike’s presence there was small with seven factories. “Our competitors were moving fast into Bangladesh and the pressure was getting bigger and bigger,” said Sprunk. Nike's Country Risk Index ranked Bangladesh among the riskiest countries, especially in the areas of labor (potential for child labor, migrant workers, forced labor, and inadequate wages) and corruption. A fire in 2012 that killed 112 workers in a factory where Nike did not source product made the picture look even grimmer. Following that incident, Nike executives organized a trip to Bangladesh to observe the situation. Nike decided it will reduce its source base in Bangladesh and only source from factories in the Export Processing Zone (EPZ). "You can remain somewhat removed from data until you actually observe the factory floor," Jones said. Added Rose, “We are a long-term player, and health and safety, compliance, quality, and innovation will always provide a foundation for long-term performance versus short-term pricing reactivity.” Six months later, one of the world's most iconic brands, Rana Plaza, collapsed, killing 1,134 factory workers. In 2014, the ILO entered Bangladesh and began working with the government, brands, and factories to improve compliance with international labor standards. Visiting the Caribbean Advantages included access to otherwise idle labor and proximity to market, as well as tariff relief through a U.S. government program. Tucker reflected on the trip after she and her colleagues visited factories and met with labor advocates and community members. There is a strong humanitarian incentive to go there because the country has so little access to international markets. The company uses a governance process that weighs the risks against the opportunities. Nike executives were concerned about the country's infrastructure and security. Conflict between factory management and unions was widespread. The product Nike would most likely source would be targeted for short lead times, reducing the buffer against disruption. Did sourcing from the Caribbean or Central America represent the right compromise in terms of lead time, cost, and country risk? Looking Ahead How should the brand integrate its existing sourcing tools with a need to source product closer to market? "My whole professional life I have aligned myself with people and organizatons that are trying to get better working conditions," Tucker said. In my new role I have a unique view across the entire supply chain. Nike understands how complex and integrated these decisions are, and also the incredible opportunity we have to drive positive change both for Nike and for the people who make our shoes and clothes."
