INNOVATION AT NIKE

“This is what you get for 400 million, huh?”

Nike President and CEO Phil Knight famously raised the question in a conference call days before announcing the company would miss
its third-quarter earnings by at least 28% due to a glitch in the new supply chain management software. The announcement would then
send Nike’s stock down 19.8%. In addition, Dallas-based supply-chain vendor i2 Technologies, which Nike assigned blame, would suffer
a 22.4% drop in stock price.

The relationship would ultimately cost Nike an estimated $100 million. Each company blamed the other for the failure, but the damage
could have been dramatically reduced if realistic expectations had been set early on and a proper software implementation plan had
been put in place. Most companies wouldn’t overcome such a disastrous supply chain glitch or “speed bump,” as Knight would call it,
but Nike would recover due to its dominant position in the retail footwear and apparel market.

In 1999, two years before Knight’s famous outburst, Nike paid i2 $10 million to centralize its supply, demand, and collaboration planning
system with a total estimated implementation cost of $40 million. Initially, i2 was the first phase of The Nike Supply Chain (NSC) project.
The plan was to implement i2 to replace the existing system and introduce enterprise resource planning (ERP) software from SAP and
customer relationship management (CRM) software from Siebel Systems.

The goal of the NSC project was to improve Nike’s existing 9-month product cycle and fractured supply chain. As the brand experienced
rapid growth and market dominance in the 1990s, it accumulated 27 separate order management systems around the globe. Each is
entirely different from the next and poorly linked to Nike’s headquarters in Beaverton, Oregon.

At the time, there wasn’t a model to follow at the scale Nike required. Competitors like Reebok struggled to find a functional supply
chain solution specific to the retail footwear and apparel industry. In an effort to solidify its position as the leader in sportswear, Nike
decided to move forward quickly with i2’s predictive demand application and its supply chain planner software.

"Once we got into this, we quickly realized that what we originally thought was going to be a two-to-three-year effort would be more
like five to seven," - Roland Wolfram, Nike’s vice president of global operations and technology.

The NCS project would be a success, and Nike would eventually accomplish all its supply chain goals. However, the process took much
longer than expected, cost the company an additional $100 million, and could have been avoided had the operators or both companies
taken a different approach to implementation.

"I think it will, in the long run, be a competitive advantage." – Phil Knight

In the end, Knight was right, but there are many valuable lessons to learn from the Nike i2 failure.

So, before we get into the case study, let’s look at precisely what happened...

Timeline of Events

1996 - 1999

Nike experienced incredible growth during this period but was at a crossroads. Strategic endorsement deals and groundbreaking
marketing campaigns gave the company a clear edge over Adidas and Reebok, its two most substantial competitors in the 80s and 90s.
However, as Nike became a world-renowned athletics brand, its supply chain became more complex and challenging to manage.

Part of Nike’s strategy that separated itself from competitors was the centralized approach. Product design, factory contracting, and
order fulfillment were coordinated from headquarters in Oregon. The process resulted in some of the most iconic designs and athlete
partnerships in sports history. However, manufacturing was much more disoriented.

During the 1970s and 80s, Nike battled to develop and control the emerging Asian sneaker supply chain. Eventually, the brand won the
market but struggled to expand because of the nine-month manufacturing cycle.
At the time, there wasn’t an established method to outsource manufacturing from Asia, making the ordering process disorganized and
inefficient across the industry. In addition, Nike’s fractured order management system contained tens of millions of product numbers
with different business rules and data formats. The brand needed a new way to measure consumer demand and manage purchasing
orders, but the state of the legacy system would make implementing new software difficult.

1999

At the beginning of 1999, Nike decided to implement the first stage of its NSC project with the existing system. i2 cost the company $10
million but estimated the entire project would cost upwards of $400 million. The project would be one of the most ambitious supply
chain overhauls by a company of Nike’s size.

i2 Technologies is a Dallas, Texas-based software company specializing in designing solutions that simplify supply and demand chain
management while maximizing efficiency and minimizing cost. Before the Nike relationship, i2 was an emerging player in logistics
software with year-over-year growth. Involvement in the Nike project would position the company as the leading name in supply chain
management software.

Nike’s vision for the i2 phase of NSC was “achieving greater flexibility in planning execution and delivery processes…looking for better
forecasting and more profitable order fulfillment." When successfully implemented, the manufacturing cycle would be reduced from
nine months the six. This would convert the supply chain to make-to-order rather than make-to-sell, an accomplishment not yet
achieved in the footwear and apparel industry.

Predicting demand required inputting historical sales numbers into i2’s software. “Crystal balling” the market had substantial support
at the time among SCM companies. While the belief that entering numbers into an algorithm and spitting out a magical prediction didn’t
age well, the methodology required reliable, uniform data sets to function.

Nike decided to implement the “Big Bang” ERP approach when switching to i2 for the supply chain management. The method consists
of going live where the business completely changes without phasing out the old system. Nike also opted for a single instance strategy
for implementation. The CIO at the time, Gordon Steele, is quoted saying, “single instance is a decision, not a discussion.” Typically,
global corporations choose a multi-instance ERP solution, using separate instances in various regions or for different product categories.

2000

By June of 2000, various problems with the new system had already become apparent. According to documents filed by Nike and i2
shareholders in class-action suits, the system used different business rules and stored data in various formats, making integration
difficult. In addition, the software needed customization beyond the 10-15% limit recommended by i2. Heavy customization slowed
down the software. For example, entries were reportedly taking over a minute to be recorded. In addition, the SCM system frequently
crashed as it struggled to handle Nike’s tens of millions of product numbers.

The issues persisted but were fixable. Unfortunately, the software was linked to core business processes, specifically factory orders, that
sent a ripple effect that would result in over and under-purchasing critical products. The demand planner would also delete ordering
data six to eight weeks after it was entered. As a result, planners couldn’t access purchasing orders that had been sent to factories.

Problems in the system caused far too many factory orders for the less popular shoes like the Air Garnett IIIs and not enough popular
shoes like the Air Jordan to meet the market's demand. Foot Locker was forced to reduce prices for the Air Garnett to $90 instead of
the projected retail price of $140 to move the product. Many shoes were also delivered late due to late production. As a result, Nike
had to ship the shoes by plane at $4-$8 a pair compared to sending them across the Pacific by boat for $0.75.

November 2000

According to Nike, all the problems with i2’s supply chain management system were resolved by the fall. Once the issues were identified,
Nike built manual workarounds. For example, programmers had to download data from i2’s demand predictor and reload it into the
supply chain planner on a weekly basis. While the software glitches were fixed and orders weren’t being duplicated or disappearing, the
damage was done. Sales for the following quarter were dramatically affected by the purchasing order errors resulting in a loss of over
$100 million in sales.

2001
Nike made the problem public on February 27, 2001. The company was forced to report quarterly earnings to stakeholders to avoid
repercussions from the SEC. As a result, the stock price dove 20%, numerous class-action lawsuits were filed, and Phil Knight famously
voiced his opinion on the implementation, "This is what you get for $400 million, huh?"

In the meeting, Nike told shareholders they expected profits from the quarter to decline from around $0.50 a share to about $0.35. In
addition, the inventory problems would persist for the next six to nine months as the overproduced products were sold off.
As for the future of NSC, the company, including its CEO and President, expressed optimism. Knight said, "We believe that we have
addressed the issues around this implementation and that over the long term, we will achieve significant financial and organizational
benefit from our global supply-chain initiative."
A spokeswoman from Nike also assured stakeholders that the problems would be resolved; she said that they were working closely
with i2 to solve the problems by creating “some technical and operational workarounds” and that the supply chain software was now
stable.
While Nike was positive about the implementation process moving forward, they placed full blame on the SCM software and i2
Technologies.

Nike stopped using i2’s demand-planning software for short-and-medium range sneaker planning; however, it still used the application
for short range and its emerging apparel business. By the Spring of 2001, Nike integrated i2 into its more extensive SAP ERP system,
focusing more on orders and invoices rather than predictive modeling.

While the failures damaged each company’s reputation in the IT industry, both companies would go on to recover from the poorly
executed software implementation. Each side has assigned blame outward, but after reviewing all the events, it's safe to say each had
a role in the breakdown of the supply chain management system.

QUESTIONS:

1. What went wrong in the process of selection which made the whole launch go wrong?

2. How one could have done things differently?