Nike Supply Chain (NSC) Project.

University Degree Business and Administrative studies

Nike Supply Chain (NSC) Project

Nathaniel H Johnsen

OPMGT 301Executive Summary

Nike is the premiere seller of athletic footwear and apparel in the world. In the late 1990’s, the company announced plans to create an IT supply chain management solution it named the NIKE Supply Chain (NSC) Project. The goals of the project were to improve the company’s ability to respond to changes in the dynamic footwear and apparel industry, better serve its customer base, reduce the inventory levels and associated costs, reduce risk, and improve overall information along the supply chain.

Although the goals of the project were straightforward, setting out to accomplish those goals was not. The team faced a variety of daunting challenges, from the complexity and size of the supply chain, to the inexperience of the software vendors in the footwear industry, to the vast array of products that Nike has to offer.

In order to deal with the complexity of the project rollout, Nike utilized multidisciplinary teams of consultants from a variety of software companies. The project team also divided the NSC Project into logically geographical segments, and determined that Canada was to be used as the test ground for the rest of the world. The solution was built from a combination of the world’s leading supply chain software companies. Software from Siebel, i2, Rentrak, and Global Logistics Village were integrated into foundation software from SAP. The solution was then integrated into the existing ERP and legacy systems residing at Nike.

The initial rollout of the project was a disaster. Nike announced in May 2001 that sales for the quarter were $100 million less than expected due to problems in the supply chain solution. However, three years later Nike dramatically rebounded. The company moved from a $49 million loss to a $261 million profit. Gross margin improved by almost 2%., 75% of which was attributed to the NSC project.

Introduction

Nike is the world’s premiere athletic footwear and apparel company and holds the position of the “800-pound gorilla” amongst its main competitors. In 2003 the company’s sales toped $10 billion worldwide, and controlled over 20% of the USA footwear market share (Hoovers). The profitability of the company has long been enhanced by the excellent margins that the company maintains by charging a high premium for the “cool” factor of their products. With such a dominate market share, Nike began to look to cost-cutting methods in order to continue the growth of the past several decades. Like many companies in the late nineties, Nike turned to Supply Chain Management software to improve its bottom line. The project came to be known internally as the Nike Supply Chain (NSC) project. The intention to create the digital management of its supply chain was announced in late 1999.

About Nike

Nike was founded in 1962 as Blue Ribbon Sports by current CEO Phil Knight and the late Bill Bowerman (formally Knight’s track coach at the University of Oregon). They started the company by selling athletic shoes at track meets out of the back of their truck. In 1972, the company became Nike (named after the Greek goddess of victory). At the 1972 Olympics, the swoosh became an icon when several winning distance runners wore Nike shoes. In 1974, the waffle sole was invented when Bill Bowerman put rubber onto a waffle iron looking for a shoe with better traction and less weight. The resulting “Waffle Racer” took off, and Nike commanded over 50% of the US running market by 1979 (Hoovers). The eighties saw the rise of the “Just Do It” ad campaign, Air Jordans, Cross Trainers, and the purchase of Cole Haan dress shoes. Today, Nike is the largest seller of athletic shoes in the world. CEO and co-founder Phil Knight still owns more than 80% of the firm.

Nike’s Supply Chain

Nike’s supply chain provides a clear view of the extent of the global nature of the company. Nike’s headquarters are in Beaverton, Oregon; however, virtually all of its production takes place outside of the United States. In addition, consumer sales outside of the United States exceeded sales in the United States in 2003 with only 43% of the company’s sales coming from the US.

Nike’s supply chain upstream begins with the materials used in the production of its products. The materials used in the production of Nike shoes are rubber, plastic compounds, foam, cushioning materials, nylon, leather, canvas, and polyurethane films. Materials used in production of Nike apparel are natural and synthetic fabrics and threads, plastic and metal hardware, and specialized performance fabrics. Many of these materials are available in the locations at which the manufacturing takes place, but some specialized materials have to be imported to the manufacturing company.

Nike’s primary business is not the manufacturing of its footwear and apparel. Instead, the company focuses on “design, development and worldwide marketing.” (10-K) This means that Nike uses contract manufacturers to make its products. In fact, almost all shoe-manufacturing activities take place outside of the United States with the exception of the proprietary air bag. Apparel and equipment manufacturing take place in both the United States and around the world.

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After Nike products are manufactured, they are sent to distribution centers throughout the globe. US distribution centers are located in Wilsonville, Oregon, Memphis, Tennessee, Greenland, New Hampshire, and Costa Mesa, California. Outside of the United States, Nike operates 24 distribution centers in Europe, Asia, Australia, Latin America, Africa, and Canada. Nike also distributes through independent distributors, licensees in developing countries, and has subsidiaries and branch offices outside the US.

Nike sells its products through about 18,000 retailers (Hoovers) in the United States, which includes everything from sports specialty stores such as FinishLine and Footlocker to smaller family footwear stores. Globally, Nike sells its products through an additional 30,000 retailers. The needs, capabilities, and demand of these retailers are as diverse as the locations in which they sell. Nike also operates and sells products in 161 retail stores in the US and 175 retail outlets abroad. These stores range from the NIKETOWN flagship stores, Employee-only stores, to factory outlet stores.

Overall, the supply chain currently takes approximately six months from beginning to end. According to Nike spokeswoman Joani Komlos, product orders take a minimum of six months to process. The current system forces the company to speculate on demand which causes more financial risk. Since the product shelf-life is usually around three months, product supply can run short and it will generally take too long to re-supply before the product is out of style.

Nike Supply Chain Goals

Like every large IT undertaking, the team responsible for the implementation of Nike Supply Chain (NSC) began with a set of specific, stated goals:

Enhancing NIKE's ability to respond to changing conditions;
Reducing inventory and capital investment risk;
Improving service to meet customer/consumer needs;
Improving process, information and product quality; and
Providing an efficient global supply chain with local implementation.

A large risk of the clothing and footwear industry is the speed at which the market conditions can change. This is driven by the fierce competition that Nike faces from other brands. NSC is designed to speed the time to market, and therefore allow for Nike to respond to those changes at a much faster rate.

An example of the need to respond quickly to changing conditions can be seen with Nike’s recent reconciliation with its Footlocker account. For a time, Nike and Footlocker had restricted business in key footwear lines due to differences in business policies. However, the relationship has been recently repaired and Nike is scrambling to provide shoes to the company for the Christmas season. However, because Nike has a 6 month lead time for product orders, Nike will only be able to divert certain product lines from other accounts into the retail giant. Nike’s hottest current product, the LeBron James shoe, will not be able to reach Footlocker in time for the holidays. If the NSC Project can continue to reduce the lead time required ordering products, such a situation may be avoided in the future.

In 2003, inventory at Nike was valued at over $1.5 billion. Inventory costs at this level are excessive, and inventory reduction would have a dramatic improvement to the company’s bottom line. Distribution centers and warehouses are extremely costly. Each facility that Nike has to add increases the amount of capital and labor costs that the company must incur. Having more effective visibility along the supply chain would mean being able to engage in activities much closer to just-in-time.

Nike’s success depends on its ability to respond to customer needs within the ever-changing clothing and footwear industry. Nike may find that one of its products has become an overnight hit with customers, and Nike needs to quickly respond to that increase in demand before the shelf life of the product dies. This is also true when Nike has a product that does not sell to forecasted expectations. If Nike is unable to stop or slow production of the product in a timely manner, the company will be left with significant amounts of inventory that it will have to sell at a reduced price through discount retail outlets.

Shrinkage from theft and competitors gaining access to product is another reason to better control the flow of inventory. Having the latest style of Nike is valuable to many people, and Nike has to ensure that its inventory does not sit too long in vulnerable places. This also ensures that the latest products do not end up in the hands of Nike’s competitors, who would then be able to copy the product, undercut the price, and rush it to market in order to disrupt Nike’s product launch. It would also help decrease the product which is diverted to third world markets such as Mexico and sold in black markets.

At its fundamental level, NSC is designed to provide information to the corporate level about how the supply chain is performing. Having the necessary information to make important decisions and evaluations allows for improvements to be made throughout the process, and ultimately improves the product quality.

The implementation of the Nike Supply Chain solution was also designed to reduce the amount of materials it required for Nike to produce shoes. The intent is to have a positive affect on the gross margin of its products, which will dramatically increase the profitability of the company due to the large volume of product that the company delivers to market each year.

Challenges of the Project

With the goals of NSC in mind, the project team that designed and implemented the project had some serious obstacles to overcome. One of the most apparent difficulties of the project is the size of the company and complexity of the supply chain into which the solution was being integrated. According to SAP, the deployment of its Apparel and Footwear Solution into NSC was the largest implementation in history with 5,000 users.

The nature of the fashion industry also provided a complexity to the project that may not be seen in more traditional companies. Most supply chain solutions deal with a much smaller amount of products and do not have levels of SKUs anywhere near the levels that Nike maintains. Nike products must deal with extensive sizes, colors, and styles. Software dealing with the footwear industry had not been successfully created and some analysts believed that Nike was taking a significant risk using companies who have never implemented their software in the athletic industry.

Even more difficult, the product line that Nike offers goes beyond athletic shoes and apparel. The company sells Cole Haan dress shoes, Bauer Skates, Hurley skateboarding clothing, sunglasses, bags, sports equipment, and even electronic equipment such as watches and MP3 players.

Another challenge of the project is the subcontracting nature of Nike’s manufacturing business. Instead of having a static upstream supply line, Nike makes significant changes depending upon market conditions and other opportunities (such as government subsidies).

Finally, as is true in many large corporations, Nike was engaged in rolling out several large IT projects simultaneously. Certain components of Nike were being upgraded to SAP (such as the Cole Haan division) so a high level of integration and coordination was necessary to successfully implement the projects.

Project Management

The expertise required to undertake a project with the complexity and size of NSC could not all reside within Nike. Although the company has an extensive IT department, it was clear that the company was going to need significant amounts of help from outside consultants.

Many of the key consultants on the project came from the companies from which Nike bought the software. The SAP solution that Nike purchased is not similar to buying Microsoft Office. Where you can simply install the Office software on a machine and have it up and running, SAP has teams of consultants that help its customers with training, deployment, and customization of its products to fit the needs of the organization. Nike had teams from SAP, Siebel, i2, and Rentrak working on the project to assist the internal team.

Another key component of the project management strategy of the NSC team is the methodology of deployment. Attempting to build the entire solution in one stage and flipping the switch to the new system would be too big of a business risk. With every complex solution, there are unforeseen difficulties and bugs to fix for months after the solution is deployed. As a result, the NSC team decided to break the project up into logical geographical components.

The project was divided up into five key components: Canada, United States, Europe, Global Operations, and the rest of the world (Japan, Malaysia, Philippines, Singapore, and Thailand). Canada was chosen to as the first country to implement the solution as a test case for the rest of the world. Each geographical area had its own implementation schedule, including specific implementations of each software product and a Go Live date.

NSC Information Technology Infrastructure

As one can imagine, Nike Supply Chain consists of the integration of a large variety of software products. The size and complexity of the solution is as vast as the global nature of the company. Rolling out NSC requires utilizing new software solutions from leading Supply Chain Management companies, but also the integration of existing systems. The NCS solution consists of five main components: Supply Chain Foundation Software from SAP, Customer Relationship Management Software from Siebel, Business Planning Software from i2, Online Order Tracking from Global Logistics Village, and Product Flow Analysis from Rentrak.

The foundation software for NSC is SAP’s Apparel and Footwear Solution. The foundation software is the fundamental backbone of the solution that all other software is built upon or integrated into. SAP is the world leader in providing Enterprise Resource Planning software to large companies, so its ability to integrate disparate systems was key to the success of NSC. Another possible reason that Nike chose SAP is its reliance on SAP for other information technologies is the company. Nike also uses the mySAP.com family of solutions “as the core information technology platform for its worldwide operations.” (SAP)

SAP Apparel and Footwear Solution consolidated all of the legacy and other software into five core systems. The solution allows for users to get financial information, view order fulfillment information, and also view the logistical data in the supply chain. The solutions is designed specifically for the unique needs of the apparel and footwear industry, which means the structure of the solution will better ensure that NSC Project goals are met.

NSC Project includes deployment of solutions designed to assist downstream in the supply chain as well. For the Customer Relationship Management component of the chain, Nike uses Siebel. The Siebel component of NSC is ultimately designed to assist account managers at Nike in effectively servicing the 38,000 retailers worldwide through which Nike products are distributed. Siebel helps account managers better forecast sales volumes, “improving forecast accuracy and minimizing out-of-stocks.” (Siebel) It also helps Nike with the implementation of marketing programs, facilitating the ability to track performance with the customer.

One of the main reasons for implementing a Supply Chain Management solution is gaining the ability to do effective business planning. Nike uses i2 to do activities such as long-range and short-range demand planning, and supply planning. The software is designed to provide visibility along the entire supply chain to facilitate better organization of the supply chain. This includes activities in “procurement, manufacturing, distribution, and warehousing.” (i2) It is also designed to allow for Nike to detect problems along the supply chain quickly so that they can be resolved in an effective manner.

Another key advantage of the i2 planning software is the logistical planning that it facilitates. With an annual Cost of Goods Sold of over $6 billion dollars, minor adjustments and improvements to the logistical side of the business can have a massive impact to the bottom line of the company. i2 claims that its software can reduce lead times 10 to 40%, the logistical costs within a supply chain between 5 and 15%, and reduce inventory levels between 10 to 30%.

The NCS Project also includes the online tracking of shipments. Software provided by Global Logistics Village called Intelligent Supply Chain allows for this to happen. Online tracking of order shipments allows for Nike to quickly realize when orders fall behind schedule, or when a shipment date has been missed. This means that account representatives will be able to track down any potential problems and either resolve them or communicate them to Nike’s customers. Customer service is ultimately improved and dropped orders and customers can be avoided.

The final piece of the NSC puzzle is software from Rentrak. One of the most important aspects of implementing an IT solution in its supply chain is the ability to analyze product flow from beginning to end. The software that Nike chose as a part of its supply chain is called Supply Chain Essentials, developed by Rentrak. After being implemented in 2003, the software has been used for “managing a wide range of data involved in operations such as securing materials, invoicing products and tracking orders.” The reason that Nike selected the software over some of Rentrak’s much larger competitor’s (IBM, Oracle, and others) is the ability for the software to be customized. Given Nike’s need to rush orders, or make other exceptions along the supply chain, Nike was able to develop a solution that fits the company’s needs.

Implementation

The first phases of the rollout of NSC Project did not go as anticipated. In May 2001, Nike announced that sales for the quarter were $100 million less than expected due to problems in the supply chain. The supply chain software had caused for some products to be ordered more than once, while others were not ordered at all. The consequence was a significant amount of cancelled orders and a large amount of inventory that was useless to Nike.

The problem with the implementation lay with the failed installation of i2’s APS system. The party to blame for the failed implementation depends upon whom you talk to. Nike’s CEO, Phil Knight, pointed the finger at i2. At a news conference, he said, “"This is what we get for our $400 million, huh?" i2, on the other hand, defended their work and said that the problems lay with its client.

Although the initial results of the supply chain implementation were a disaster, Nike has since seen a dramatic rebound. It took nearly three years for the company to return to the profitability seen before the implementation, but in September of 2003 Nike finally announced that it was seeing positive results. Gross margins were increased from 41.4% to 43%. Net income swung from a net loss of $49 million to a profit of $261 million. "The positive effects of the tighter supply chain and cleaner inventories drove 75% of the improvement" in gross profit margins, said Nike’s Chief Financial Officer Donald Blair.

“This major supply chain represents a significant building block for future growth by allowing the company to implement updated systems that will streamline processes and create new efficiencies for both Nike and its customers,” said Roland Wolfram, vice president of Global Operations and Technology, Nike, Inc. “With the (NSC) solution, we have implemented a sophisticated IT system that will allow us to improve our manufacturing lead times, increase the performance of our supply chain, and present a more consistent face to our retail customers.”

Although the implementation of much of the NSC project is already completed, a project like NSC in organization like Nike is never really done. Although the project had a scheduled completion date, new software and capabilities are being added each day. For example, Nike is currently working to create global purchase ordering for its manufacturers. The end result is a dynamic solution that has changed the speed at which Nike does business, but will change it more in years to come.

Bibliography

Barret, Larry. “Long Strange Trip Nike Finally Regains Footing.” Baseline: 1 November 2003. Page 44.

Hilleren, Deborah – Nike Global Brand Director for Kids. Personal Interview. 5 December 2003.

Hoovers Online. Nike, Inc. – Fact Sheet. 2 December 2003. 2 December 2003. <http://www.hoovers.com/nike/--ID__14254--/free-co-factsheet.xhtml>

i2 is Value Chain Management for Business. 2 December 2003. <http://www.i2.com>

Nike, Inc. “Form 10-K, Securities and Exchange Commission.” 7 August 2003.

Nikebiz: The Inside Story. 2 December 2003. 2 December 2003. <http://www.nike.com/nikebiz/>

Rentrak – Essential Business Intellegence. 2 December 2003. <http://www.rentrak.com>

SAP. Nike Achieves Project Milestones with Deployment of SAP Apparel & Footwear. 5 June 2002. <http://www.sap.com/solutions/industry/consumer/apparel-footwear/newsevents/index.asp?pressID=1327>

Siebel Systems. 2 December 2003. <http://www.siebel.com>

12/8/03 NIKE Supply Chain Project Page