An In-Depth Look at Nike’s Supply Chain Management
Written by:
Dylan Brown
and
Zack Tankersley
Sponsored by:
IS 422 Supply Chain Information Systems
Section 01
Spring 2015
Dr. Ravi Patnayakuni
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Table of Contents
Executive Summary ............................................................................................................................... 1
Nike – Company Profile and Analysis ............................................................................................. 2
Historical analysis of supply chain initiatives ............................................................................. 6
Factors that led to success in Supply Chain Management ...................................................... 8
Current Key Practices and How to Stay Ahead............................................................................ 9
Conclusion .............................................................................................................................................. 10
Graphs and Models ................................................................................................................................. 0
Executive Summary
Nike was formed in 1963 by Bill Bowerman, University of Portland track
coach, and Phil Knight, a current runner on the team, as the company Blue Ribbon
Sports. Originally, the idea was to create a way for runners to acquire high tech,
low-cost shoes from Japan. In 1967, they hired the first salesperson for the
company, who sold these shoes out of the back of his van. The company eventually
blossomed into one, if not the largest sporting apparel company in the world. We
ask questions such as: How did Nike get to where they are today? What types of
strategies did Nike use to achieve this glory? In what ways has their supply chain
developed in the past 25 years? What factors led them to have a successful supply
chain? And, what types of risks have they faced that in turn showed their resiliency?
This paper details Nike’s use of competitive strategies, manufacturing,
sustainability, and the use of their supply chain as a whole.
Within the paper, we talk about the practices Nike use throughout the supply
chain in areas such as: Marketing, Outsourcing, Manufacturing, Sustainability,
Acquisitions, Supplier Relations, Lean Practices, and Innovation. Nike has continued
to grow annually in each of these areas. We have also discussed some areas for
improvements within their supply chain, such as outsourcing issues that Nike has
encountered with labor laws throughout the world and measures they have taken to
counter these legal issues. Another area we talk about involves Nike’s competition
and ways that they try to achieve a competitive advantage within the apparel
industry.
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Nike – Company Profile and Analysis
Nike, headquartered in Beaverton, Oregon, is the largest and most successful
branding of shoes, sporting equipment, and clothing. Nike controls more than 60% of
the market and has become a popular culture icon. Nike was named after the Greek
Goddess of Victory. In 1963, University of Portland track coach, Bill Bowerman, and Phil
Knight, a current runner on the team, joined to import and provide low-cost, high tech
running shoes from Japan in order to provide alternatives to the German-dominated
athletic shoe market. They originally went by Blue Ribbon Sports. At this point
Bowerman and Knight began to sell Japanese running shoes, now known as ASICS. In
1965, Jeff Johnson, joined the company and became their first full-time salesman,
selling shoes out of the back of his van. In 1967, they incorporated and continued
business until 1970, when they changed the company name to Nike (NIKE 2015). In the
fifty years since the original inception of the company, Nike has become the most
prominent sporting apparel company the world has ever seen. This is based off of their
unique, and impressive, competitive strategy processes, their upper-echelon
sustainability sector, and their top caliber manufacturing process.
Today, Nike is possibly the most known company globally. But how did they get
there? Nike is a part of the retail/sales and manufacturing industry. They face
challenges in competitor names such as: Reebok, Adidas, Under Armor, Titleist, Taylor
Made, and (again) ASICS. With such potent competition, how does Nike ever gain a
competitive advantage? One such way they gain a competitive advantage is through
their marketing campaign. They enlist names such as Tiger Woods, LeBron James, Calvin
Johnson, Andrew McCutchen, and Cristiano Ronaldo. What do these names have in
common? They are, arguably, one of the top performing athletes in each of their
respective sports. Whether it is people trying to bolster their game or young kids trying
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to be like their role model(s), this is a genius way to attract customers. Nike’s target
market ranges from children in their early teens to adults in their late 30s. Nike
currently holds about 47% market share in the domestic footwear industry, with sales of
$3.77 billion. They have been manufacturing in the Asian region since the early 1990s
and have about 500,000 employees within the manufacturing sector of their supply
chain. They primarily use outsourcing techniques to acquire subcontractors throughout
the world. Majority of the output comes from factories located within China, Indonesia,
Vietnam, Italy, the Philippines, Taiwan, and South Korea. Subcontractors generally own
the factories used to manufacture Nike’s products, with majority of their output being
attributed to the Nike Corporation. With that being said, Nike does have 4 expatriates
per each of their 3 primary regions (China, Indonesia, and Vietnam). These employees
focus on quality of the product and quality of the working conditions within the
factories. With a manufacturing network this size; numerous violations on factory
conditions and human rights issues have been widely publicized. Primarily focusing on
outsourcing these manufacturing positions to less-developed, or developing countries
provides a significant boost in the amount of time needed to produce an item, as well as
increases profit margins based on the relatively low cost of resources in these areas
(Van Dusen 1998). In 2009, Nike launched a project they refer to as “Rewire.” This
project transformed Nike’s approach from focusing primarily on compliance to one that
gives suppliers incentives to improve their social and environmental performance. They
are now evaluated on sustainability, factors in addition to cost, on-time delivery, and
quality. This has evolved their supply chain by transitions to a more integrated
structure, delivering lean manufacturing to build skills and improve efficiency,
developing a new supplier incentive scheme, and promoting innovation to engage all
relevant stakeholders in creating the environment needed for systematic change to take
place.(Porteus 2013)
“Nike changed its organizational structure to better integrate sustainability
within traditional corporate functions.” (Porteus 2013). They use an organizational
structure in which Managers report to multiple departments. This enables them to
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prioritize business unit goals and employee development in order to incorporate
strategies and plans detailing their multiple responsibilities. Nike then uses an internal
scoring system to better measure performance standards. This helps Nike to better
integrate sustainability into business decisions much earlier in the design process. At
the factory level, the company uses an integrated model that addresses a vast range of
issues influencing sustainability, lean manufacturing, Human Resources, health and
safety, environmental compliance, energy management, and environmental
sustainability. By introducing the importance of lean manufacturing within the
company, Nike has embraced the idea of continuous improvement. In 2011, Nike
introduced the Manufacturing Index. This incentive plan increases the importance of
sustainable manufacturing practices. It provides a constant framework for measuring
performance throughout the entire supply chain, brands, and products. The
Manufacturing Index’s primary use is for monitoring, measuring, and rewarding
suppliers on quality, on-time delivery, cost, and sustainability performance. Each
category is weighted by 25% and the supplier is given a score between 0-100. This score
gives them a color-coded category such as: gold, silver, bronze, yellow, or red. Instead
of penalizing suppliers for poor performance, Nike has implemented incentives to
change supplier behavior for the better. Suppliers who achieve the minimal scores are
qualified for receiving priority considerations for orders. High performing suppliers can
access Nike leadership and training courses offered in waste and energy management,
and the implementation of lean practices. Ultimately, this helps to promote supplier
ownership of responsible practices that benefit Nike and contracted factories. This can
also be considered a “pull” model, as Nike incentivizes suppliers for quality attempts at
increasing their overall production. In terms of negative sanctions, any supplier that
performs at yellow or red levels are subject to review. If satisfactory progress doesn’t
happen, the supplier may receive drastically lower order numbers, or be considered for
removal from the supply base. (NIKE 2014) With all of this information in mind, Nike
decided to greatly reduce the number of factories from 1,000 (in 2009) to less than 800
(in 2013). This creates the capability for Nike to better manage the factories, build
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capacities, and grow the factories with aligned business and sustainability objectives.
(Stanford 2013)
Competition is consistently increasing from established and developing
companies for Nike. The company relies heavily on wholesale channel and big
wholesale customers could exert leverage to attain higher product discounts and better
credit terms. Low barriers within the retail industry definitely make for easier access for
competition. According to Porter’s five forces, Nike’s most intense area is within
“Competitive Rivalry within the Industry.” The global market for athletic footwear,
apparel, and equipment is full of hard-hitting competitors. “Bargaining Power of
Customers” is the second most valuable area from the five forces. Nike has a tendency
to cater to its customers through wholesale and direct channels, which accounted for
about 95% of Nike brand’s sales. However, bargaining power for end-customers is low
as Nike is such a renowned product. The “Threat of New Entrants” is in the middle of
the level of intensity of Porter’s five forces. Significant resources are required for
creating a brand because large investments are needed. Nike has a large magnitude of
people who are loyal to the brand, and it would be extremely difficult for a new threat
to match that. The next lowest matter is the “Threat of Substitute Products.”
Counterfeit items are common when you think of the Nike product. However, that
doesn’t mean it is necessarily vital to the companies worth. The “Bargaining Power of
Suppliers” however, is a much smaller issue. No single supplier holds significant
bargaining power because production is concentrated in specific areas. On top of that,
none of their factories contributed more than 6% of total Nike brand footwear or
apparel production. (Trefis 2013)
Financially, earnings per share have increased annually as reported by NASDAQ.
Nike has shown consistent growth and momentum in the past few quarters, which has
resulted in more than a 50% increase in its stock, year-to-date. The primary reasoning
behind this is the geological growth and larger product categories. At the end of the
Fiscal Year in 2015, they are expected to generate between $28-30 billion. (NASDAQ
2015)
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Historical analysis of supply chain initiatives
NIKE, Inc.’s supply chain initiatives from the beginning have been focused on
fulfilling the company’s overall mission of: “bringing inspiration to every athlete in the
world.” According to NIKE’s co-founder Bill Bowerman said, “If you have a body, you are
an athlete.” (NIKE.com). To fulfill these goals, NIKE has crafted many changes in its
supply chain and company as a whole throughout the company’s lifespan. Since
becoming incorporated in 1968, NIKE has made several acquisitions and key contracts to
add more aspects to its supply chain and to its product lines.
After introducing NIKE shoes for athletes in 1972, the company acquired Cole
Haan, a brand of men’s and women’s footwear, accessories, and outerwear in 1988.
This acquisition led to NIKE broadening its product line beyond sneakers. In 2013, NIKE
sold their Cole Haan unit to the private equity firm Apax Partners for $570 million.
(Lattman, 2012). In 1992, NIKE signed an agreement with The Athletic Congress. The
Athletic Congress added a track-and-field unit to NIKE’s steadily expanding supply chain.
(Geoff 2008). In 1995, NIKE acquired a hockey equipment manufacturer, Canstar Sports,
adding one of the world’s leading manufacturers of ice skates and hockey equipment to
its supply chain for $395 million. (King 1994). Shortly after the Canstar Sports
acquisition, NIKE acquired Hurley International in 2002. Hurley’s addition to NIKE, Inc.
expanded NIKE’s reach into the surf, skating, and snowboarding apparel industry.
(Earnest 2002). One year after the acquisition of Hurley, in 2003, Converse brand was
added, which added a basketball brand to their portfolio. In 2004, NIKE established
Exeter Brands Group as its wholly owned subsidiary. In the same year, NIKE entered into
a partnership with the Football Federation Australia. According their website, NIKE
reinforced their commitment to Australian football in 2012, cementing a 20-year-long
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partnership. “Nike is dedicated to the development and success of the game of football
both locally and on a global scale.” (Nike 2012).
In 2006, NIKE had several important additions to their network. NIKE opened a
store in Beijing, China – expanding their market overseas. The company also entered a
partnership agreement with Apple to launch NIKE + iPod products. Also in this year,
along with Google, NIKE launched Joga.com – an online football community. In 2007,
the company entered a definitive agreement to sell its brand, Starter, to the Iconix
Brand Group, for $60 million. Shortly after selling Starter, NIKE acquired Umbro for $582
million – adding to their soccer lines of apparel and equipment to their portfolio.
According to an article by Forbes, “Umbro fits well within that strategy, expanding the
markets and broadening the range of products it offers to exploit the growing popularity
of football. In addition to supplying uniforms to the national teams of England, Ireland,
Sweden and Norway, and several top division – or “premier league” – teams in Britain,
the company also produces official replica shirts that are sold to fans.” (Ram 2007). In
2008, the company opened its first NIKE Sportswear retail store in New York. Along with
their retail store, the company also redesigned the NIKEiD website, nikeid.com, which
offers customers the option to customize products to their preferences.
With all of these acquisitions and partnerships and contracts, NIKE has been very
successful. NIKE manufactures in 42 different countries at 693 factories, employing
1,002,829 workers. (Nike Sustainability Map). NIKE’s greatest asset is that most of the
manufacturers for the company are located in China, due to their lower costs for
manufacturing. According to an article in Business Insider, Nike has had a bad reputation
due to its use of sweatshops in its manufacturing plants. In 2002 to 2004, the company
performed around 600 factory audits to problematic factories. These audits helped deal
with some of the worse problems, but issues still remain. In 2005, NIKE became the first
in its industry to publish a complete list of factories it contracts with in a detailed 108page report that revealed conditions and payment in its factories. In this report, NIKE
acknowledged widespread issues, specifically in its south Asian factories. Since 2005,
NIKE continues to post commitments, standards, and audit data as part of its corporate
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social responsibility reports. (Nisen 2013). Overcoming these issues of unfair
manufacturing conditions will allow NIKE to progress their supply chain in a positive,
more productive manner.
Factors that led to success in Supply Chain Management
NIKE’s success with its supply chain can be dedicated to seven key factors:
1. Marketing activities – Nike sponsors athletes around the globe and multiple
teams as their brand, “Just Do it.” Along with their slogan, the Swoosh logo is
known worldwide. It is known as an expensive, high-quality, well-designed
product. NIKE’s marketing strategy has been to develop their brand by an easily
recognizable logo and slogan. The company uses famous athletes and teams,
both professional and college, to promote their quality and apparel. (Educating
2011)
2. Extensive research and development – NIKE uses extensive research and
development to design premium athletic equipment to meet consumer interest
globally. The company constantly appeals to changing markets and
demographics to compete with emerging competition. Through their wellmanaged supply chain and research and development aspects, Nike is able to
efficiently manage demand. (Educating 2011)
3. Production and manufacturing facilities – Nike has agreements and contracts
with their manufacturers to distribute products globally to their owned and
partnered retailers. Majority of their factories are located in China, Taiwan,
Indonesia, India, Vietnam, Pakistan, Thailand, Philippines, and Malaysia.
(Educating 2011)
4. Extensive distribution facilities – Nike operates retail stores under the NIKE
name, as well as manufacturing the equipment and sportswear. With nearly 700
outlets globally, it has offices in more than 45 countries outside the United
States. (Educating 2011)
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5. Wide range of relative products – Nike offers an extensive variation of
equipment, footwear, accessories, and apparel for a broad spectrum of sports
activities, including baseball, hockey, track and field, soccer, tennis, basketball,
lacrosse and cricket. (Educating 2011)
6. Capable workforce – Nike hires employees that can think, grow, and create
multiple aspects to their supply chain. The culture has flourished from
inspiration and innovation brought by the diverse workforce. The firm works
with different cultures around the globe. (Educating 2011)
7. Innovative activities – Nike involves three key stages in creating new products:
Creating new products, commercialization, selling to customers. These aspects
help drive employee’s ideas, construction, sourcing of materials, and testing for
product errors. The shoes that are manufactured are all tailored to specific
sporting activities, such as durability for skating, high-performance for
basketball, etc. (Educating 2011)
Current Key Practices and How to Stay Ahead
Manufacturers have needed to find a new approach to challenges in their supply
chains because they are constantly changing. Increasing costs for labor and logistics,
fluctuating material costs and availability, and changing consumer expectations and the
rapid pace of innovation are among factors making supply chains more complex. In
order for Nike to maintain their leading position, they need to look at the range of
innovations that they call the “manufacturing revolution”, which focuses on better
products and production processes. There are three elements to achieve Nike’s vision,
they are: sustainable manufacturing excellence, manufacturing modernizations, and
manufacturing innovations (the Manufacturing Index). The manufacturing excellence
comes in response to their Manufacturing Index program. The program has excelled at
increasing all areas of the manufacturing done for the brand. Most plants are lower
than Bronze, but higher than Red rating, which means Nike is working dilligently,
around-the-clock to improve these scores by offering quality incentives. In the past,
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Nike has “come under fire” for their working conditions in these plants, and in order to
improve their conditions, they implemented the scoring index. Nike holds about 37% of
the athletic footwear market, with the next strongest competitor being Adidas with
Rebook (recently acquired) at about 30% of the world’s athletic shoe market. Nike
understands in order to make money, you have to spend money. With that mentality,
they spend about $200 million on advertising in the U.S. each year. Just last year, net
income rose 32 percent and revenue rose by 8 percent (Leckley, 2005). So Nike’s
success is just increasing each year. According to their current business strategy,
Innovation is at the heart of business growth, and sustainability is the second highest
value. Per the Nike Mission Statement: “Bringing inspiration and innovation to every
athlete in the world.” (Nike). With Nike at the top of the chain, companies are going to
constantly pursue them in an attempt to overthrow them. Nike’s passion for
sustainability and innovation is what got them to the top spot, and that is what will
prevent anyone from passing them for years to come.
Conclusion
For years Nike has been the leading sports apparel company in the world, and now
they are competing for the title of the best Supply Chain in the world. Coming in at the
seventh best Supply Chain is no simple task. As far as competition within their industry,
Nike takes the cake. This can be attributed to their abundance of skill and intellect
within their key practices of the Supply Chain, like: Marketing, Outsourcing,
Manufacturing, Sustainability, Acquisitions, Supplier Relations, Lean Practices, and
Innovation. Top supply chains have a variety of reasons for success, but in our research,
it is essentially due to prioritizing efforts in these eight areas. Without a proper
marketing campaign their product would have never gained the public’s eye like it has.
Without exquisite research and development, the innovation aspect would be nonexistent. Without capable workers, a wide variety of products, and enough
manufacturing plants, the company would never be where they are today. Per Nike,
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“Innovation is core to Nike, and is essential to sustainability. For us the two are linked.
They feed each other, leading to new discovery, better products, and superior
performance. Sustainability at Nike is fundamentally about the products we sell and
how they are made. To become more sustainable, we must continue to transform the
most basic parts of our business: how we design products, how we interact with
suppliers, how we inspire our employees, and how we engage with others outside the
company. Many opportunities lie ahead to catalyze entire systems, by working beyond
our company to unleash, share, inspire, and scale innovation. To this end, we
participate in multi-sector efforts to drive change.”(Nike CR Report). Nike is focused on
working with long-term, strategic suppliers that demonstrate a commitment to
engaging their workers, safe working conditions, and environmental responsibility. They
expect for factories that make our products to comply with all requirements and provide
strong incentives for improving their environmental and labor performance. With these
goals and objectives, Nike believes they can remain ahead of their competitors in the
future.
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Graphs and Models
Regarding the Manufacturing Index (MI):
http://www.managementexchange.com/story/nike’s-gameplan-growth-that’sgood-all
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Value Chain foot print for waste management.
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