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A Comprehensive Report on Nike’s Inventory Management Systems and Issues between Nike and i2 at the implementation of a new Information System at Nike.
Gulraiz Khan Daha (2008-2012)
BBA-Hons Roll # 16 DMS ISLAMIA UNIVERSITY BAHAWALPUR
TABLE OF CONTENTS:
EXECUTIVE SUMMARY NIKE’S INVENTORY MANAGEMENT NEED FOR A NEW SUPLLY CHAIN SYSTEM AT NIKE EXPECTATIONS FROM NEW SYSTEM FAILURE OF NEW SYSTEM REASONS BEHIND FAILURE OF NEW SYSTEM RESULTS OF BREAKDOWN OF NEW SYSTEM KEY COMPONENTS FOR NEW SYSTEM’S IMPLEMENTATION MISTAKES OF NIKE MISTAKES OF i2 FUTURE OF NIKE’S SUPPLY CHAIN ETHICAL CONSIDERATIONS FOR NIKE AND i2 RECOMMENDATIONS REFERENCES 02 03 03 04 05 06 07 08 12 13 13 14 15 15
The purpose of this report is to analyze the performance of Nike company; the largest retailor of sports shoes in the world, over the years and have a detailed view of the supply chain systems of Nike.Inventory problems at Nike are the focus of our research.Implementation of different management systems by the Nike time to time in order to effectively handle the everyday increasing demand and retaining reputation around the globe has been studied. This report has focused mainly on the issue of a new SCM software failure that affected Nike adversely.The reasons behind the failure and the effects of the breakdown have been discussed briefly.Standard procedures for the new system implementation in practice now-a-days have been elaborated.Mistakes of Nike and i2 software supplier firm have been pointed out and the critical ethical considerations missed out by Nike and i2 have been discussed and recommended.
NIKE’S INVENTORY MANAGEMENT Partnership of Knight and Bowerman in 1964 to start a business of selling sports shoes with a contribution of $500 each laid the foundation of BRS ‘Blue Ribbon Shoes’ that later came to be known as ‘Nike’, the largest brand of sports equipments today.Initially the shoes were imported from Onitsuka Company of Japan and were sold from the basement of Knight’s house and the backs of trucks and occasionally from backs of cars at local track events. In the year 1972 company marked its foray into the apparel business and introduced the ‘Futures’ booking programme.This system worked by allowing the production forecasters to ‘make to order’ and so to pre-finance while reducing the risk of over inventory.Implementation of ‘Future’ programme made Knight the first to allow retailers to pre-order inventory.This programme was a revolutionary decision in businesses and was soon seen as a standard among other businesses.Revolutonary sales increase during the first half of the 1970s, opening of production facilities in Korea and Taiwan and introduction of new models increased the product line of NIKE to a large number.Also the issuance of 2 million common stock shares in 1980 and opening of ‘Sports Research And Development Lab’ in Exeter, New Hampshire took Nike’s business and manufacturing plants to 11 countries on the globe and it employed more than 3000 people. In the mid-1980s Nike formed its own original demand management system, as it had aimed to become number one sports shoes retailor of the world.Meanwhile Nike also had increased its manufacturing units in the whole world to a large number.More than a 100 information specialists played their role in the designing and implementation of demand management system in the company.Implementation of this system had the reason to run the ‘Future’ programme that was introduced by Nike in 1970s.Also the Future programme was designed to manage the inventory at Nike more effectively.According to this system the retail partners of NIKE placed their orders with the Nike company about six months before the required date of delivery.Nike then were to forward these orders to the manufacturing units around the world.
NEED FOR A NEW SUPPLY CHAIN SYSTEM In the beginning years the system worked effective enough, however with the passage of time and its rate of gowth, Nike found out that the system was not sufficiently equipped to deal with increasingly complicated operations and everchanging scenarios.The orders were rapidly increasing in number and were becoming complex at a very fast pace, also the product line of Nike had tremendously increased in its length.Also to sustain the quality and differentiation in the product line, the product manufacturing moved towards complicated procedures and especially the popular models of Nike like Air Jordan sneaker now needed more than 130 individual stages in manufacturing to assumed quality.Rapid spread of manufacturing units and stores all around the world required Nike to contract with a number of manufacturers and in order to deal all of them simultaneously it was critical to incorporate all of them in a single system. With an increased number of manufacturers at contract and a vast scope of operations Nike had to modify the system on constant intervals of time over the years through its technical workforce.With the passage of time hundreds and thousands of adjustments were made to make the system compatible with the changing scenario of demand and order manufacturing.These continuous and varying adjustments lead the system to a serious danger of being susceptible to breakdown, and this alarming situation made Nike to think of to transfer to a whole new system that could be smartly adequate to the present situation and also had the capability to meet future requirements and handle pressure of increasing load. EXPECTATIONS FROM NEW SYSTEM Nike looked for a new system that was more suitable to the requirements that were at hand at that time.Company expected the new system to provide a streamline with its buyers and suppliers of raw materials and other requirements in order to lower the operating costs of the company.The new system was expected to be flexible enough to work in collaboration with diffrent costomer
relationship management applications employed to make order taking more effective and accurate in order to manage inventory effectively.One of the goals of Nike behind this was to reduce order-to-delivery time by nearly about 50 percent.
FAILURE OF NEW SYSTEM Nike introduced a new system in order to create a new supply chain system to effectively run the whole system from order taking to order delivery.The design of the new system was made to support the existing system for a streamline communication of company with its buyers and suppliers and resultantly lowering the overall operating costs.In order to make the new system more effective Nike combined it with CRM applications and considered it suitable in managing inventory and other systems effectively. Nike went into contract with i2 for the installation of the Main System and for the supplements and supportive CRM applications it went for SAP AG and Siebel Systems Inc.The project was finalized for a duration of five years and at an estimated cost of $400 million.i2 software did cost $40 million overall.
REASONS BEHIND FAILURE OF NEW SYSTEM
The first step that led to failure was the decision of Nike not to use the basic templates and required methodology that was developed by i2 specifically for the new system being provided.That software was capable enough to work induvidualy for managing the demand systems of Nike,But Nike decided to customize it to make it work with its existing demand management system.So the new system was customized and changes were made in the basics to accommodate the essentials of the existing system.these changes in the new systems basics resulted in the slowing down of the new systems applications and ultimately the users faced an increase in the waiting time as long as three minutes that a single screen took to get loaded. Another, non technical reason of failure was the employee turnover that occurred as a result of implementation of this new system.The major harm was caused by the resignation of the CIO that was involved in the making of decision to initiate the renovation of supply chain and all this happened before the system was installed properly.Another main reason that led to failure was the avoidance of including a third party integration in the implementation of new system.The company also faced a lot of trouble in getting the system intergrated with the running processes of the company and the simultaneous implementation of SAP software troubled a lot. The problems got a genuine start when Nike started making use of the system in sending of orders to its far manufacturers in the Far East when the system was immature.Because the system was not properly developed so its use before maturity led to estimate the demand quite wrongly.To its worst Nike over estimated the demand for the shoes that were in least demand and under estimated the demand of those shoes that were in high demand at that time.These wrong estimates were compiled in company data form and the system sent that flawed data to its manufacturers around the globe and mainly in the Far East that resulted some manufacturers to receive double orders for same shoes
and insufficient orders for high demand popular shoes.At that time officers of i2 were not of the view to start use of the software because of its immaturity. A few months later it was found that the Nike company is manufacturing expectional greater number of certain specific shoe models and extremely low number of others.Due to this the Nike company put itself far away from a position to even meet demand of its retailers for some shoe models that were in high demand.But to their good luck the staff members of Nike company and i2 tracked down the problematic element and in a very short time they had developed effective ways to get around those problems.Ways that were developed involved the changing of existing operational procedures or alternatively to take the huge step of writing the new software that would better meet the requirements at hand.Whatever the circumstances had been,however, with the passage of time the problems were completely identified and rectified.But to Nike’s bad luck, much time had been passed and because of being late in eliminating the flaws intensively serious problems of inventory handling were at hand. Reasons for the failure were different as identified by different analysts; as one of the reason identified that two of the firms Nike and i2 they both made the same mistake of avoiding and not taking the precautionary measures that were critically appropriate with recpect to the project.New system was never put to a test before its implementation,and also by doing that it is supposed that the glitches would have been revealed much earlier and in advance of the implication.Another group of analysts stated that failure at Nike was mainly because of it went into new system implementation contract with i2, a company that had previously no experience in developing software systems for the apparel industry.
RESULTS OF BREAKDOWN OF NEW SYSTEM
The breakdown of the new system harmed Nike adversely.The effect of failure of the new system was so intense that it flowed throughout the company and each department of the company faced a serious danger of loss.The 1st problem that arised due to poor demand estimation was to manage the inventory at various far
located manufacturing plants of Nike.Also Nike was in deep trouble for not being able to cater with the demand patterns of various models of shoes,and this was because of wrong demand estimation that led to the less manufacturing of high demand models of shoes and increased production of low demanded shoe models.At that time the rivals of Nike took full advantage of the situation and snatched away a healthy percentage of Nike’s market share.Hence Nike lost its share in the market with a high percentage and that hurted its market reputation to a great extent. Profits were lost by Nike in the way of selling the wrongly produced extra models of much less demanding shoes in bulk at low prices.In order to manage the inventory Nike had to sell those low demanding shoes at even less than half of the market price.Opposite was the case with the high demanded models of Nike’s shoes.In order to timely fulfill the market demand and to save the market share to highest possible percentage Nike had to get those shoes manufactured in less than the ordinary time by increasing the workforce and machinery; and Nike also had to deliver those models to the retailors in time by paying more than to use the air services,so all these costs led Nike to a huge decline in profits.Nike also lost the relationships with some important retailors alongwith its reputation,due to negative publicity. Conversion of an organization’s operations from an existing system to a new and upgraded system is not an easy task in any respect.There are a large number of factors that can mislead the functioning of the new system and distract the whole system.In order to avoid from these factors an organization must be in a position to consider upon and follow some basic project components that have been proved through continuous research as critical for the successful attainment of goals associated with the implementation of the new system.
KEY COMPONENTS FOR NEW SYSTEM’S IMPLEMENTATION ORGANIZATION’S TOP MANAGEMENT SUPPORT
Every project requires finance and the top management of any organization is critically involved in the provision of financial support for any project to be implemented.In some cases some top executives have their interest only in justification of the finanacial resources and what the project pays them in return.But what’s necessary is to provide them with the details of what the project is actually going to yield and what benefits they will get from a system change in their business; also key to a successful new system implementation lies in convincing the top executives. Any system finds its success in the belief of the team of executives who hold the belief that the new system being implemented would definitely provide them along with a new competitive advantage and that the implementation of that system would make them capable enough to better service their customers.The existence of executives belief as such makes the sponsors those who are executives,win the project’s success as the project targets and hits its decided spot.Executives can deliberately provide additional funds and resources in order to speed up the procedures; the slow ones, resolve conflicts among the team members and may also reinforce desired outcomes and expectations through meetings.Executives may also transfer the feel of excitement among other team members which they themselves feel about the outcomes and energetic results of the new system.
An important aspect in the implementation of a new system is that the groups or teams from different departments must be represented in a broad manner that ensures the sense of being accounted for to all the perspectives that are involved in the designing and implementation of the project.The requirement is to get the project be leaded by the operations
department in specific.For successful implementation of a project the system should always be led by the people or members of the department that are to eventually exercise the system in their department to make their job performance better and improve over time. One may find two groups who may vie for getting the leadership of the project; say Finance department and the Information Technology IT department, But whatever it be; the major affect of the changes being made would directly be upon those people who will use the system on a daily basis practice.If the project is to be leaded by the operations department, it would result in an increase in the ownership and the chances for success would multiplically increase; reducing risks of performance failure.
TESTING Proper functioning of a new system can be ensured through advance testing of the system as per designed; this inspection and pre-implementation performance test must be thorough and a detailed one.There must be a plan for testing and this plan should be finalized as soon as the designing job is completed and the resources allocated for the testing phenomenon should be timely focused on the assessment of the principal functionality of the new system being implemented.The testing procedures are time sensitive and a common error that happens again and again is the focusing on complex working components and diverse functionality that does not require more than a small percentage of time; such mistakes shoud be avoided. Also the end users of the new system should be allowed to perform the main functional testing because doing so would equip them with problem identifying and rectifying skills and in technological language we may say that they would become
efficient troubles shooters and alongwith it they would become the advocates of the new system. Now finally comes the time when software is to be run by loading it on the technical equipment (machines) which is ultimately to use the new system software in the production of company’s products; overall testing requires this trial run. Trial run is mainly helpful in resolving the problems or issues regarding communications systems; in order to make the system error free at the actual working day.A test environment helps resolve issues before final launch to avoid system failure. Identify the root cause and direction of all the arising issues and have their rectification measures available at time when needed. To be precise in your testing of the new system software you have to set the standards for the passing criteria of test by different processes and machines.you can have the example as in any assumed system one may quote that 95% of A+ status test has been passed by the system communication component. TRAINING
The new system after it has passed the stage of operational testing, its time to go for final training of the ultimate users.Starting from overview class training the users get to final hand-on practice.Actual hand-on practice is meant to be critical right before the final system run because the training at that time lasts enough.Purpose of training is to focus the daily basis functionality of the system for a friendly and effective use by the users.Technical staff; truouble shooters keep the system in focus right from start up in order to meet any trouble arised due to any error left in the testing phase.The system is made to run smoothly and get error free before launch because identification and rectification of errors at working days on
daily basis could increase the frustration and risk throughout the whole system.
New system was introduced with a view to improve the existing functional performance of overall firm.To effectively idendify the problems a comparison of benefits can prove useful.Therefore baseline metrics are advised to be validated before the new system implementation.Pointing out of certain specific metrics that might not be paying back can be helpful in corrective strategy.Valid baseline provides exact success levels. Success of a project is hidden in the effective and equally efficient performance on the above key components.
MISTAKES OF NIKE
The potential mistakes at the Nike’s end involved the conversion of supply chain systems to thoroughly customized one.Nike didn’t consider the potential of its existing systems on which the supply chain was being managed; rather it tried to get its working be highly customized within the available resources.Another factor leading towards the failure was the decision of Nike to implement the new system in connection with the existing ones; that created difficulties for the software to implement its working properly.Also the implementation of multiple systems like CRM applications and New System software simultaneously and running them side by side through the same workforce proved disastrous in order taking and then led to the severe problems of inventory management. Problems were invited by the Nike itself when it refused to implement the basic methodology and critical templates that were developed by i2. The repeat
condition of Nike to customize the new system in accordance to the existing demand customization system put a heap of technological problems in front of the users.With the implementation of the system Nike faced the problem of high employee turnover that effected the new project adversely.Analysts believe that the resignation of Nike’s CIO for initiating the supply chain renovation decisions left Nike in a deep trouble.Absence of third party integration and use of immature new system were the huge maistakes commited by Nike.
MISTAKES OF i2
Mistake at the i2’s end was the provision of software to an apparel industry’s organization inspite of being in-exerienced in that particular industry.Second major mistake that rested at the Nike’s end was moving at a relatively fast pace with respect to the project’s requirement.Non testing of the proposed system before its implementation was also a critical mistake that astounded analysts all over the world.Being a software provider i2 would have taken the necessary cautionary measures but they didn’t went for any and invited the trouble for both the firms.
FUTURE OF NIKE’S SUPPLY CHAIN
After observing the Nike’s recovery from the problems caused by the usage of immature new system and several others, and the astounding reduction in the speculation based orders and reduction in order placement time alongwith the ever increasing profits analysts claim the new system of Nike a successful one as it moved towards completion and maturity.To date Nike is efficiently managing its supply chain and inventory systems and is earning profits and reputation for itself and analysts see it as a more profitable and effective supply chain system in the future.
ETHICAL CONSIDERATIONS THAT SHOULD HAVE BEEN TAKEN INTO ACCOUNT BY NIKE AND i2 COMPANIES
Every person related to business industry knows about the failure of project implemented by Nike through the i2 company at initial stages.As the reasons to failure were obvious and were identified and controlled by both the firms; the signs left by consequences could have also been set to forgotten by controlling factors at hand.According to a number of analysts the monetary losses have been recovered by the time But the negative impressions and adversely affected reputation of both Nike and i2 developed as a result of counter attacks for blaming for the failure by the two firms has not yet lost its face.This was the severe unethical business conduct by both Nike and i2. If both the companies had timely understood their ethical duties and had tried to follow it, there would not have been such reputation loss.Nike should have accepted the basic templates and had waited for the system to get mature before getting it spread throughout its supply chain.Also Nike had to support i2 in system implementation rather than going conditionally.And if Nike had waited and watched the system improving it would not have spoken ill of the i2 company in front of media.As it was at the end of both the companies to follow the ethics, so i2 as a renowned software provider should have provided sufficient training to the users at Nike in order to run the new system smoothly and to decrease the chance of failure.Also being inexperienced in working with the apparel industry i2 should have taken a third party, an experienced one, in integration so that someone is to look over the system as a neutral party to contract.i2 should also have taken effective cautionary measures in order to tackle any problem if arised.Also i2 should not have spoken ill of the Nike’s management in media and should not have hurt its reputation being its project partner. One thing that really would have been practiced was to solve the problems by siiting and not consulting the court at the cost of reputation.
Having a detailed view of the issues, in the light our knowledge, we recommend that existing systems should be set to conversion to new ones carefully and no haste should me made.Customers should be involved in the conversion decisions as systems are for them mainly.Nature of the businesses should be critically discussed and pre-implementation testing must be conducted to minimize chances of failure.Standards should be followed and ethical considerations should be followed like rules.
Shirisha Rigani’s Case Study ICFAI (Centre for Management Research) A new SCM project has Nike running for its life (David Shook) Nike’s Moon flight to success (Article) Five steps to implement new systems (ICMR) Business’s Ethical Considerations (Article India Times)
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