ME-418: Supply Chain Management

Case Study - Nike

Shivam Jha 2K16/ME/158
Vishesh Kashyap 2K16/ME/192
Sunny Choudhary 2K16/ME/173
Lucky Kumar 2K16/EC/069
 Nike:
Company And Legacy
About Nike
● Nike, Inc. is an American multinational corporation that is engaged in the design, development, manufacturing,
and worldwide marketing and sales of footwear, apparel, equipment, accessories, and services.

● Nike has helped the world’s best athletes win races, games and championships. The athletes helped Nike design
and market the products and brand that changed the face of sports.

● Nike is many things – a product designer, a consumer goods manufacturer, a brand communicator, a leader
in corporate responsibility, a portfolio of authentic and relevant brands. Behind every corner of the Nike
business is a singular focus – innovation.
The Growth Years
● In 1971 Nike came up with lighter weight training shoes that had an outsole with waffle-type nubs for traction.
They debuted their training shoes in the 1972 U.S. Track & Field Trials.

● Their first brand ambassador was Steve Prefontaine, who during his college career set seven American records
from the 2,000m to the 10,000m.

● Soon they launched the Nike Air technology in 1979. The growth that Nike experienced was tremendous during
this stage which lead them to go for Initial Public Offering by the end of 1980. By 1982 they had become the No.1
supplier for athletic/training shoes in the US.

● Their next breakthrough came when they signed up then rookie Michael Jordan in 1985 and marketed its Air
Jordan line of basketball shoes. In 1988 Nike aired the first ads in its $20 million “Just Do It” campaign, which
became a worldwide sensation.
A Global Company
From a little town in Oregon, Nike has grown into the world’s largest athletic footwear and apparel company. Starting with a shoe
and a t-shirt, Nike is today a diversified and complex global organization with:
● Products sold in 170 countries.
● More than 30,000 worldwide employees.
● A dozen brands that serve more than 30 major sports and consumer lifestyles.
● 600+ factory partners.
● Millions of consumers

From the beginning, the Nike business

model was built on partnerships – athletes,
teams, retailers, manufacturers, and
supply chain providers.
Since 2005, more than 50 percent of
Nike’s revenue has come from outside
the US. With leadership positions in
established markets like the U.S. and
Western Europe and in emerging markets
like China and Brazil, it has tremendous and
unique opportunities to grow.
 Sporting
Manufacturing
Raw Material Marketing Goods, Dept. &
& Assembly
Shoe Stores

Online Retail
Product
The Supply Chain and Catalogue
Development Of Nike

Nike Branded
Stores
 Supplier Diversity
Supplier diversity drives innovation and if done
effectively, managing diversity and working together can
lead to a competitive advantage.
Favorable impact on business by :-
1. Creating more competition in the supply chain
2. Maintaining a connection to the consumer base
3. Providing economic stimulus to the community
4. Contributing to the enhancement of the brand
Nike’s goal is to offer suppliers real procurement
opportunities as they arise, and all purchasing is done in
a competitive marketplace.
Vertical Relations
➔ Nike’s operations are vertically integrated with a
presence in every segment of the value chain from
manufacturing down to scale.
➔ Nike has worked over the years to build and achieve a
vertical integration that excites in the supply chain is
between the suppliers, manufacturers, distributors
and retailers. It makes sure that all the firms are in
close working relationship with each other.
➔ Nike even occasionally sends research and
development staff to various production factories in
order to ensure that there is smooth production of the
products such as shoes and apparel, thus effectively
avoiding any miscommunications that might threaten
relationships when they arise.
Nike Outsourcing
Outsourcing enable Nike to concentrate their efforts in their core competencies like marketing, design and new product
development, thus creating competitive advantage. Nike only designs its products and does not manufacture them. Nike hired
subcontractors in countries like China, Indonesia, Vietnam and Thailand to manufacture their products, where productions
costs are lower.

Outsourcing gives Nike the following advantages:

1. Reduced costs for consumers
2. Overhead reduction
3. Efficiency
4. Permits lower prices better
competitiveness
5. Reduces risks such as insurance
liability
6. Reduces financial obligations of
American tax laws

China and South-East Asia account for

over 70% of Nike’s total workforce. A
large bulk of this workforce consists
of line staff and temporary workers.
 Present Practices
➔ Lean manufacturing is a business system and
continuous improvement philosophy that aims to
deliver the highest-quality product while
eliminating waste, including lost time and
material. They have tried to implement lean
manufacturing in their supply chain recently
(discussed in the case later).
➔ Nike has delegated processes that allowed 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 in less time.
➔ Nike had introduced a new supply chain that used
the JIT approach to facilitate faster shipment of
products to customers in Europe and America.
Future Outlook
➔ Automation is a potentially disruptive force with
which Nike’s production and distribution models will
have to contend is automation. The high cost of labor
in the United States is the primary factor pushing
manufacturing overseas, but as robotics technology
improves, outsourcing might reduce.
➔ According to a Morgan Stanley forecasts, “Nearly 20%
of production for Nike and Adidas shoes will move to
more automated factories by 2023 due to a ‘buy now,
wear now’ shopping environment forced by the shift
to ecommerce.”
➔ International Federation of Robotics report claims that
some 1.3 million new robots will be installed in
factories over the next three years companies like Nike
might strongly consider restructuring their
manufacturing strategies.
 Labour
Issues and Policies
Production and Sales
● Nike has no in-house production capabilities or dedicated manufacturing lines. All manufacturing is outsourced to
locations mostly outside the US and Europe.

● Nike outsources production to low-cost locations such as South East Asia, Bangladesh, Mexico and Latin America

● 72% of Nike revenue is obtained from countries where less than 2% of workers are based, while 98% of labour is
based in locations which account for only 26% of sales.
Nike Sweatshops
● Nike sweatshops are based primarily in Indonesia, Thailand, Mexico and Cambodia. The defining characteristic of these
sweatshops is the deplorable working conditions and extremely high worker density.

● Countries in which these sweatshops are based account for over 50% of Nike production.

● In these factories, workers paid less than $1 per day, as compared to US minimum wage of $7.25 per hour.

● These sweatshops were also found to have a very high proportion of child laborers and workers under 16 years of age.
1991 Unrest and Boycott Nike
● Major labour unrest erupted in Indonesia in 1991. The main reasons for this unrest were low wages and standards of
living. This also brought to light unfair labour practices at Nike sweatshops.

● Nike was made the main antagonist through coverage by global media, and multiple exposes by Jeff Ballinger in 1992.

● US students started the Boycott Nike campaign in 1993, and were soon joined by over 40 university students’ unions.
This led to Nike revenues from the US market nearly stagnating in the early 1990s. A maximum growth rate of 5% was
observed, with shrinkage in 1994.
Nike’s Stance
As the Nike labour crisis evolved, Nike’s stance evolved from denial to acceptance during the course of the 1990s. Much of
this was driven by consumer backlash and antagonistic press coverage.

1992 1996 1998 1999

Nike denies After years of Weak demand leads to

Nike creates the Fair
responsibility for low-to-negligible layoffs at Nike
Labor Association,
labour conditions, growth, Nike facilities. Important
leading to the
citing not owning establishes a admission by Nike
enforcement of US
manufacturing department tasked CEO Phil Knight, “The
labour laws in its
facilities with improving Nike product has
facilities abroad
labourer’s lives become synonymous
with slave wages,
Code of Conduct
forced overtime, and
enforced.
arbitrary abuse.”
Nike Code of Conduct Standards
In the aftermath of the anti-sweatshop campaign, Nike enforced a stringent code of conduct in all its factories. This code of
conduct derived primarily from US labour laws, and was enforced all across the world in order to improve labour
conditions in Nike facilities. There were four main standards of the code of conduct.

● Voluntary employment
● No employees under 16
01 RESPECTED ● No discrimination
● Freedom of association and collective bargaining

● No harassment or abuse
● Working hours not excessive
02 FAIR ● Compensation and benefits paid on time
● Regular employment provided

● Safe workplace
● Healthy and safe non-manufacturing facilities
03 SAFE ● Safe buildings and structures and fire action plans
● Health and hygiene hazards controlled

● Water valued
● Waste minimized and appropriately handled
04 SUSTAINABLE ● Energy and carbon minimized
● Air emissions minimized and chemicals properly managed
 Case:
Nike’s Strategy to Improve
Social and Environmental Conditions
in its Global Supply Chain
Background
Nike’s approach to managing supplier responsibility has greatly evolved since the
1990s, when the media uncovered claims of child labor, underpaid workers, and
poor working conditions in several Asian countries.

In order to understand how Nike’s approach to improving social and environmental

conditions in its global supply chain has evolved through the following:

● Integrated management of sustainability and innovation

● Increased supplier incentives
● Systems innovations intended to prevent problems before they arise

They have also started a new system of rating suppliers called the Manufacturing
Index, which gives sustainability equal weighting alongside the traditional supply
chain measures of quality, cost, and delivery.

In this presentation, we have also covered about Nike’s pipeline for innovative
manufacturing and sourcing projects that have the potential to extend the company’s
sustainability model beyond compliance, to one that builds social, environmental,
and economic value.
Background
Nike is the world’s largest footwear, apparel and sporting goods company.

Just like many multinational firms, it faces innumerable complexities in managing social and environmental issues among its 700-plus
contract factories in 42 countries. The company’s approach to managing supplier responsibility greatly evolved over the last two
decades, with the company establishing a robust system of supplier monitoring, auditing, and remediation. Despite using an
expansive monitoring program, Nike has found that many factories continued to fluctuate in and out of compliance.

Key aspects of Nike’s Sustainable Supply Chain

INTEGRATION INCENTIVES INNOVATION

Nike Rewire
In 2009, Nike launched project “Rewire” and transformed its approach from focusing primarily on compliance to one that gives
supplier incentives to improve their social and environmental performance, since they are now evaluated on sustainability factors in
addition to cost, on-time delivery, and quality.

Using supplier
incentives to
improve their
Focusing primarily performance
only on
Nike’s Rewire
Compliance Strategy
Evaluation on
sustainability
factors

➔ More integrated organization structure

➔ Delivering lean manufacturing training
➔ Building workers’ skills to improve efficiency
➔ Developing a new supplier incentive scheme
➔ Promoting innovation to engage all relevant stakeholders
Integrating Sustainability with Supply Chain
To implement supply chain sustainability, Nike has taken steps that involve changes both at the company level and with its suppliers.

Organisational Changes
Within the company, Nike changed its organizational structure to better integrate
sustainability within traditional corporate functions.

● The company uses a matrix organizational structure in which managers

report to multiple departments.

● As part of this shift, Nike formed a Sustainable Business and Innovation

(SB&I) team working closely with sourcing and manufacturing, product
design, product creation, strategy, finance and marketing organizations.

● With each department accountable for sustainability performance, Nike

could better integrate sustainability into business decisions much earlier in
the design process.

● Based on business unit goals, employees develop strategies and plans

detailing their multidisciplinary responsibilities. Internal scorecards are
used to report progress towards the goals. They started using
cross-department scorecards to report Nike’s progress toward achieving
goals and targets.
Integrating Sustainability with Supply Chain
Lean Manufacturing
At the factory level, when training contract manufacturers, the company used an integrated model that addressed a
full range of issues influencing sustainability, including lean manufacturing, Human Resource Management (HRM),
health and safety, environmental compliance, energy management, and environmental sustainability.

● The principles of lean are aligned with sustainability best

practices such as reducing resource use and waste, valuing
the workforce, and reducing downtime, all managed under a
continuous improvement system.

● Nike’s practice of encouraging lean manufacturing by its

contract manufacturers embraces the philosophy of
continuous improvement, which aims to lead to increased
productivity through a more skilled and engaged workforce.

● Nike’s contract manufacturers are trained and encouraged to

implement lean principles by empowering workers to create
innovative solutions that improve productivity.

Ultimately, this has led to both increased worker satisfaction

and gains in business performance.
Integrating Sustainability with Supply Chain
Lean Manufacturing

Moreover, Nike believes respecting

and empowering workers are critical
to improving labor conditions in its
supply chain, as opposed to simply
increasing their wages.

At the end of FY 2011, 80% of

footwear, 57% of apparel and 11%
of equipment was made at Nike’s
contract factories using processes
meeting Nike’s minimum baseline
definition of lean.
The Manufacturing Index: Penalties and Incentives
❏ Rating System:
Nike developed the concept of a Manufacturing Index in which based on the scores in each category, factories
are awarded a score between 0 and 100, putting them in a gold, silver, bronze, yellow or red category.

❏ Incentive Structure:
While many companies penalize suppliers for non-compliance with their code of conduct, Nike has put into place
incentives aimed at changing supplier behaviour for the better.
Suppliers achieving the minimum acceptable level (bronze) in sustainability, cost, delivery, and quality qualify
for receiving priority consideration for orders. High performing suppliers can also access Nike leadership and
training on issues such as waste and energy management, and the implementation of lean practices.

❏ ‘Pull’ Model:
The adoption of this “pull” model incentivizes suppliers to achieve the highest performance possible in order
to benefit from the MI incentives. This pull model is different than the more commonly adopted “push” model,
where firms invest in suppliers that are frequently under-performing and not complying with minimum
standards. This ultimately helps to promote supplier ownership of responsible practices, which benefits Nike
and contract factories as well. Nike is interested in doing business with more proactive and high performing
suppliers. Contract factories may only become an approved Nike supplier if they achieve the minimum bronze
compliance standard from the outset.
The Manufacturing Index
The Manufacturing Index: Penalties and Incentives
❏ Review & Audit Method:
In terms of sanctions, suppliers performing at yellow or red levels can be subject to serious review. When issues
arise such as detection of uncontrolled hazardous waste, a supplier must create an action plan to address and
remediate the issues within a defined time period after which a follow-up audit is conducted.
If satisfactory progress isn’t made, the supplier may experience a reduction in orders or, depending on the
severity of the issue, eventually be considered for removal from the supply base. Suppliers receiving yellow or
red ratings are also required to fund third-party audits until they can achieve and maintain the minimum
bronze status.

❏ Reducing Supplier Base:

Nike selected factories to implement the MI based on strategic importance rather than willingness to
participate. In alignment with the “pull” model, Nike wants to work with suppliers that are investing in their
future and in sustainable practices. Interestingly, Nike has reduced its supplier base from over 1,000
factories in 2009 to <800 in 2013.
This allows the company to strategically manage a source base, build capacity, and grow with the contract
factories that are philosophically aligned with similar business and sustainability objectives.

❏ Benefits:
Supplier factory managers have reported that they have a far greater understanding of their business
performance expectations because of the scorecard and incentives structure. Presenting the MI in a clear
dashboard format has helped both Nike and its suppliers evaluate their performance against targets.
Innovation in Product and Process Design
In addition to business model innovations such as integrating sustainability within business departments and improving the
supplier incentive structure, Nike has also been focused on collaborative product and process design innovations
focused on environmental sustainability.
The company has targeted innovations that can prevent environmental issues and still create value for the customer.

World Cup 2010 Kits

In 2010, World Cup football shirts were made
from recycled plastic bottles and developed
using the Nike Materials Sustainability Index,
which enables product creation teams to select
environmentally better materials.
Innovation in Product and Process Design
Flyknit Technology
Several recent product design innovations have been successful. More recently, Nike’s Flyknit
technology was used to deliver a lighter shoe for runners that uses fewer materials. The shoe
uses “essentially a single thread”.

➔ With Flyknit, Nike created a seamless upper that could

be built to size – reducing waste by around 60%.

➔ Flyknit technology precisely engineers every stitch of a

shoe upper to deliver maximum performance for
athletes and produces less waste than traditional
cut-and-sew methods. Since 2012, the technology has
reduced nearly 3.5 million pounds of waste.

➔ Since the one-piece upper does not use the multiple

materials and material cuts used in traditional sports
footwear, the shoe reduces both waste and cost.
Analysis: Integration
In terms of integration, Nike’s Rewire strategy has
been driven from top leadership and resulted in a new
organization to align goals between business functions
in terms of sustainability, and the targets it sets.
In the manufacturing and sourcing team, for example,
the Manufacturing Index was integrated to evaluate its
source base including dimensions of sustainability,
quality, cost, and on-time delivery performance.
● While the company acknowledges some
challenges to its integrated, matrix organizational
structure, Nike allows for clearer integration
and collective accountability of sustainability
goals.
1 ● In addition, Nike’s hypothesis is that integrated
training programs for contract factory managers
and workers such as lean and HRM are helping to
drive systemic change.
● Lean manufacturing principles build worker
skills by giving them a voice to suggest how Nike
can improve but also has business benefits by
increasing productivity through efficiency and
quality control.
Analysis: Incentives
In terms of incentives, Nike’s innovative Manufacturing ★ Offering suppliers performance incentives
Index is a leading example of how a company can move ★ Imposing sanctions on malpractices
away from a more traditional compliance approach and a ★ Measuring performance on a supplier’s
“push” model to manage sustainability issues, to a “pull” balanced scorecard
model, which incentivizes suppliers for performance.
2 Through these practices, the suppliers get a better
This pull approach is helping to reward and develop understanding of the importance of sustainability
suppliers who are committed to growing their business and implement it in their factories as well.
using social and environmental performance as a source of
competitive advantage.
 Analysis: Innovation
Finally, innovation is helping Nike to achieve its ultimate
destination: “A truly sustainable supply chain”.
The company introduced water-based solvents which was
beneficial for the health of the worker and the environment,
along with several other eco-friendly changes that have
allowed them to overcome poor media image and also
ensure an efficient production and smoothened the entire
supply chain.
3
In order to achieve Nike’s long-term vision for
sustainability, it recognizes that collaboration with
other firms and stakeholders is vital. Solitary private
efforts are often insufficient for impactful systematic
change.
This realization reflects the company’s focus on
using innovation to proactively “design out”
problems in the supply chain in both products and
processes.
Conclusion
Nike’s approach to improving social and environmental conditions in its
global supply chain has evolved to focus on integrated management of
sustainability and innovation, increased supplier incentives, and
systems innovations intended to prevent problems before they arise.

Nike has undertaken important changes that it believes will improve

social and environmental performance in its supply chain.
Nike has embraced a long-term perspective. Improving sustainability
performance often involves heavy investment initially, with benefits
being realized over a longer term.

In summary, the company’s recent Rewire strategy shows how the company is now pursuing
a more holistic approach to improving supply chain sustainability. While the program is too
new to evaluate its impact on supplier sustainability performance, company managers are
optimistic that positive changes will take place.

If benefits from Nike’s efforts to integrate, incentivize, and innovate continue to materialize
over the next few years, more firms may begin to adopt similar principles to drive sustainable
supply chain performance to higher levels.
Thank
You