Strategy to Nike’s Global Manufacturing

An important part of Nike’s supply chain management strategy is using a number of

different global manufacturing resources to its advantage. Nike does this for many
different reasons. Most importantly, it allows them to take advantage of various
economic atmospheres across the world as well as utilize the industrial strengths of
different countries.

Key features for Manufacturing

Nike’s supply chain strategy heavily emphasizes the use of multiple sourcing partners.
As a result, Nike is always shopping for new and more productive manufacturing sites
around the world. In this shopping process, Nike is looking for, among other things,
inexpensive labor, low import taxes, and high levels of efficiency in the manufacturing
process. In order to maintain these important parts of their strategy, Nike officials are
located at all foreign factories.

Challenges to Managing a Global Supply Chain

Nike has run into a number of different challenges in its attempts to continue its global
manufacturing strategy. One of the major problems was achieving a level of cooperation
with foreign manufacturers. An obvious reason for this is the language barrier between
Nike officials and foreign workers. However some issues were more complex than this.
At times, there were significant initial costs relating to updating the technology in the
manufacturing facilities. Traveling costs by Nike officials to these foreign locations
began to add up while many countries lacked the infrastructure and accounting
capabilities to control costs.

Nike has attempted production in Europe as well as multiple locations in Asia. Nike
began producing in Europe because of the trade restrictions existing in China and the
level of difficulty to do business in China. However, European manufacturers were never
able to reach the efficiency of Asian sites, even when quotas, duties, and manufacturing
costs are considered. This is largely because of Asia’s inexpensive labor.

Overcoming Challenges of Global Optimization

Nike has been successful in overcoming these problems in several different ways. Nike is
able to utilize a small number of partners that have many positive characteristics
including infrastructure, material resources, technical knowhow, labor management and
operational experience. This allows Nike to minimize the risk of losing technology to less
reliable subcontractors. Nike has built valuable, long term relationships with these
partners. These relationships didn’t necessarily ensure the lowest costs, but in return,
Nike gained shorter lead times for delivery, increased quality, and the ability to
manufacture innovative products. Nike has also come up with a concept to diversify
production equally between facilities in five different countries. This way, Nike could
easily shift production from one country to another if political instability or trade
restrictions in a certain country caused any problems for them.

Product Design
Nike has been designing all of their products in-house since it launched its own name
branded shoes in 1971. Nike employs 400 people for the design and development of
footwear, apparel, and sports equipment located at headquarters in Beaverton, Oregon.
Globalization has led Nike to understand that different countries have other
performance desires. Such as in Japan where runners prefer shoes lighter and with a
lower profile to the traditional designs made by Nike. As a result, Nike plans on opening
a research and design department in Japan. Developing foreign markets may require
more than American based designs to satisfy public expectations resulting in Nike
having to consider designing internationally.

Performance
Nike thrives on design that is not only cosmetically pleasing, but designs that focus on
performance. Whether designers are making custom shoes for athletes or the public,
high performance is the issue. Striving to lighten, increase responsiveness, fit, support,
injury protection, and cushioning are all factors involved in the design process. Often
products are designed for such athletes as Michael Jordan that focuses on improving
success on the court. Designers will meet several times a year with Jordan to develop
the right design that eventually may be applied to all of Nikes shoes to increase
performance abroad.

Concept to Prototype
In order to proceed to a final prototype, the design must undergo numerous
interrogations. The “Concept Review” is a group of managers from various departments
who comment on the qualities of the shoe in the design phase. Critical points often
reviewed are: meeting marketing expectations, competitive pricing, profitability,
performance, applied technology and does it compete with products at the same price?
After approval, the design goes from illustration to a three dimensional sample. Creating
the sample will be done either at headquarters or one of the Asian manufacturing sites
depending on the designs complexity. Developing the upper part of the shoe includes a
designer working with the engineering group to produce what typically totals over forty
pieces. Where as the bottom of the shoe might be made of clay or wood but when put
together with the upper, will be a three dimensional representation of the drawing.
Some samples can go through up to fifteen design changes with the end result of a
sample in every color that has been planned.

Manufacturing
The manufacturing plant produces a set of samples with the real materials to be sent
back to headquarters for final approval. The approval consists not only of the samples,
but consideration of the entire seasonal product lines mix, redesigns and prices. After
approval, the plant begins to commercialize the product for mass production that
includes scaling to all the required sizes and the development of the volume production
process. After all the processes have been determined, the manufacturer orders
materials needed for production based on Nike’s forecasts.

Order/Inventory Philosophy
Nike’s order/inventory management system is based on long term future forecasts. Nike
has established a “futures” program that rewards retailers with significant discounts if
orders are placed six months in advance. Nike uses these orders as a basis for global
demand. This demand information is used to set production levels at Nike’s various
manufacturing locations worldwide. The manufacturers will produce the demanded
quantity of goods and distribute them to the retailers within one month of the expected
delivery date.

Order/Inventory Management
There are many limits and vulnerabilities with this strategy. Nike accepts all “future”
orders without considering their manufacturers production capacities and promises
delivery within one month of requested delivery date. Nike attempts to remedy this flaw
by ordering their manufacturers to produce up to 55% for the anticipated level of
goods, before any demand information is available and sometimes up to four months in
advance of receiving any orders. They then add to production when the “futures”
information becomes available. Unfortunately, if there has been an excess inventory of
products produced before the demand information is available, then Nike will have to
pay its manufacturers for the goods they produced or partly produced, even though
there is no demand for them.

Effectiveness of strategy
Nike’s current strategy for managing its ordering and inventory is not effective. Long
lead times associated with Nike’s order/inventory policies is a major vulnerability to
managing demand. Lead time for orders Nike places with its manufacturers is around
four months. In addition Nike pre-orders four months in advance because its
manufacturers cannot meet demand. Nike purposely does not meet demand on high
end shoes in hopes to encourage customers into newer models. Long lead times, poor
forecasts, and unmet demand add great variability to Nike’s supply chain.

Limitations and vulnerability

The futures program creates significant variance because it requires production to begin
ten month’s in advance due to the fact that manufacturer’s capacity cannot meet
demand in six months. Variance in the supply chain increases further when retailers are
overstocked and permitted by Nike to cancel futures. With all this variance it is likely
excess inventory will remain, and not uncommon for Nike to hold excess inventory on
freight ships, docked and waiting for the necessary demand. Additional fluctuations in
demand are increased because designers do not base designs on past sales data. If
high-top sneakers were not in demand and designers did not know due to a lack of
information, they may develop another high-top sneaker that has no demand thus
adding to the cost and overall inefficiency of the supply chain.

Alternative Order/Inventory Strategy

An alternative to this ineffective strategy would be to establish a POS information
system at all retail locations. This would help Nike create accurate short term forecasts
of demand that could be delivered to manufacturers in a timely manner. There is also a
need for Nike to establish a distribution network that will sustain a predetermined
inventory level. This will decrease the bullwhip effect that is inherent in the current
supply chain. Nike will have the ability to meet short term demand with their distribution
centers while accepting shipment from their manufacturers.

Information Systems Recommendation

It would be advantageous for Nike to establish an ERP system to support this new
strategy. This effort should be coupled with the goal if integrating their many
independent manufacturers into their ERP system. This integration would give Nike
more control over the production process and better control of information. This
information control is imperative to the future success of the organization if Nike is to
manage the supply chain from the manufacturer to the retailer efficiently. If Nike were
able to easily retrieve information from each level of the supply chain in real-time, they
would be able to cut costs, and streamline their supply chain and manufactures could
begin production based on POS data gathered by way of the ERP system from retailers.
Supply chain integration is the key to the future success of Nike.

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