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BA561: Final Report Nike Supply Chain Report Eric Alldritt
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NIKE SUPPLY CHAIN REPORT
By: Eric Alldritt
ABSTRACT
Thisreportwill provide ageneral overlookon
Nike’ssupplychainstructure,alongwith
where there are threatsandopportunities.
Eric Alldritt
BA561
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Contents
Table of Contents 1
Introduction 2
Scope of This Project 2-3
ResearchMethod 3
Current Operations, Footwear 3-5
A.I machine production in each market 5-7
Analysis of Current Business Model w/ Retailers 7
Digital commerce & Nike Direct 7-9
Sustainability 10-11
Nike Lean Manufacturing 11-12
Nike “Sweatshops” 13-14
Other Regions Nike Could Outsource 14
Recommendations 15
References 16-18
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Introduction
Nike was originally started as a handshake between University of Oregon Track & Field Coach
Bill Bowerman, and Oregon alumni Phil Knight in 1964. The one vision both men had was to
sell the best running shoes at affordable prices. In his thesis paper at Stanford University, Phil
Knight came up with the idea that buying high-quality shoes from Japanese factories would
compete just as well as the ones being made in Europe by Adidas. Since purchasing shoes from
Japan, it has gone from selling shoes in a van to a $36.4 billion empire (FY 2018 income
statement, (Nike Inc. 2018). According to Gartner Inc. in 2018 Nike was ranked in a survey as
the 6th best company in the world based on a combination of performance metrics, paired with
the perspectives of supply chain insiders (Pettey, 2018). The average compounded growth rate of
Nike’s revenue has been an annual 5.54% over the past five years. Headquartered in Beaverton,
OR, they have operations all around the world: North America, Latin America, Europe, Middle
East, Africa and Asia (China is in their own category). As stated in Item 1 of the 2018 10-k form
“We sell our products through NIKE-owned retail stores … in virtually all countries around the
world.” This means that a robust supply chain structure is needed to go from raw materials to the
ground, to in the hands of loyal customers as Nike operates all over the world.
Scope of this project
This paper will provide an overview of what the supply chain structure of Nike is, with a greater
focus on footwear, leaving apparel and sports equipment out. It will cover the aspects of vertical
integration that Nike owns or is in contract with, along with providing either solutions to each
stage of the supply chain, or what Nike is currently doing to further improve that stage (if the
information is publicly avaiable). Given that Amazon and Walmart have recently announced in
the United States they will be offering one-day shipping, these changes here will have the
customer expecting Nike to be able to provide fast free shipping as well. This perfectly ties in to
an increasing amount of sales occurring through an online platform, from FY2017 to FY2018,
revenue from online sales increased from $2.2 billion to $2.8 billion. This represents about 30%
of the new revenue generated for Nike during that time frame, assuming the share of revenue
growth from ecommerce increases overtime, this will be a new end of the supply chain that Nike
must be increasingly aware of (pg. 76 of the 2018 10-K form). Another issue to be aware of is
what effect will Trump’s recently announced tariffs on China will have on Nike, assuming this
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lasts at least until 2021, are there any low-cost alternatives that Nike could utilize to mitigate this
risk? This is very important question as in the FY2018, China represented 26% of the
manufacturing of Nike footwear and apparel respectively. Among the recently announced 25%
tariffs on China, this included “ cotton and polyester” materials that are commonly made into
athletic apparel (Wearden, 2019).
Other areas will include Nike’s lean manufacturing process, where “lean” refers to The Toyota
Way management system that is dependent on “Respect for People and Continuous
Improvement.” (The Leadership Network, 2016). Along with imposing this to all of Nike’s
contracted factories, this philosophy is a competitive advantage that will last for years, if not
decades assuming Nike fully adheres to its principles. Nike found that from the FY2013 to FY
2015 this has led to a 26.5% increase in contract factory performance ratings, paired with a
subtraction of 11.8% total factory contracts. For this part, the objective is to figure out how Nike
can further continue improvements within their factories so that a repeat of the late 1990’s
protests against Nike sweatshops does not occur again and damage the brand.
ResearchMethod
This report will rely on documents that are avaiable from Nike’s investors site, such as 10-k
forms and annual reports. Articles from various online newspapers will be used to provide an
external outlook of Nike’s situation and provide insight into what actions they need to take.
Lastly, academic journals will be used for both in-depth analysis into Nike’s actions and events
that have occurred for the company, along with what supply chain/economic principles they are
adhering to.
Current Operations, Footwear
The current model of manufacturing of Nike involves the use of contracted factories mainly
located in Vietnam, China, and Indonesia, representing 47%, 26% and 21% of the total brand
footwear that Nike produces (combined these three countries account for 94% of Nike’s
footwear production). On the demand side for footwear, China purchased $3.5 billion in
footwear from Nike (20% growth from FY2017 to FY2018, from $2.92 billion). Asia Pacific and
Latin America purchased $3.58 billion (9% growth from FY2017 to FY2018 from $3.29 billion)
(Nike Inc. 2018, pg. 57). These two markets also account for 73% of Nike’s footwear revenue
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growth globally. These two markets currently account for 31% of Nike’s demand for footwear
based on revenue. Nike has placed themselves well to enjoy the strong growth experienced in
China and in the Asia Pacific region with factories already in place, this will keep shipping
distance at a minimum in these markets.
One problem however, is where does the other 63% ($22.268 billion*63%=$14.02 billion) of
Nike’s footwear production go once it leaves China, Vietnam and Indonesia? As stated in the
10k-form of FY2018 (pg. 57), “Virtually all of our athletic footwear and apparel is manufactured
outside of the United States, and the majority of our products are sold outside of the United
States.” The area of concern is the recently announced 25% tariff on imported Chinese goods
from the Trump Administration (Jackson, 2019). Given that 68% of Nike’s footwear production
occurs within both Vietnam and Indonesia, Nike could have their shoes they send to the United
States solely manufactured in Vietnam and Indonesia, since North America represents $9.322
billion in footwear revenue. This also means the North American market represents 41.8% of
Nike’s footwear revenue and has from FY2017 to FY2018 seen a decline of -4%. One of the
main problems with this suggestion is transitioning this to other factories outside of China. If the
contracts Nike has formed with Chinese owned factories will last for a period of a few years (or
even months), this would put Nike in a position to where they can’t exit out of those factories
due to the contract. Nike also does not wish to alienate China, as they still have 26% of footwear
production occurring there, along with the fact that China accounts for 15.7% of Nike’s footwear
revenue, and from FY17 to FY18, 48.5% of Nike’s footwear revenue growth occurred in that
country alone. Assuming consistent 20% growth of the Chinese market paired with constant
supply of Nike shoes, all the supply from China could be sold to as demand in China by FY21
(unlikely assumption but demonstrates how important China is in the long-run). Also, the
Chinese government has also imposed tariffs on U.S made goods, thereby it is possible soon they
may impose restrictions on U.S companies if both governments’ relationships do not improve. If
Vietnam and Indonesia were cheaper to produce shoes compared to China, Nike would
presumably have already started production in those facilities. At least temporarily for a period
(months to a year) of time, Nike’s footwear in the United States will experience price increases
due to U.S tariffs.
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The recommendation for this situation is to slowly pivot increased production for the U.S market
to non-Chinese factories within Vietnam and Indonesia. As well as explore automated
production solely by robots with minimum employee oversight of the robots (will explore this
area deeper next section). Nike will temporarily have to either increase prices of shoes or tolerate
lower profits, as they recently in May signed a letter with more than 170 U.S shoe retailers
messaging to the White House that the tariffs will, “Increase in the cost of importing shoes.”
(Siegel, 2019).
A host of problems can still happen with having all the production within China, Vietnam and
Indonesia. As mentioned earlier, 67% of footwear production is exported to other countries
outside Asia Pacific and China, thereby this creates the necessity of Nike’s current practice of
having their retailers (87% of them) order six months in advance for shoes (Nike 2015 10k
form). With retailers needing to purchase that far in advance, this creates a delayed bottleneck
within the Nike supply chain as Nike prides itself as high-end, innovative company. As this time
lag will make it more difficult to respond to consumer demand (both in value and volume of
shoes) Nike needs to reduce this time requirement.
A.I machine production in each market:
One idea to prevent the effects of future tariffs, paired with reducing costs, distance traveled for
shipment of the shoes from manufacturing to consumer would be the use of complete
automation. According to Quartz, Nike and Adidas have both investigated using machines to
speed up their manufacturing process. A robotics startup named Grabit, has machines that can
take a partially finished shoe, attach the necessary pieces of the upper part of the shoe. The
machine takes only 50 to 75 seconds to complete, whereas a human worker takes 10 to 20
minutes to assemble the upper parts of the shoe. The production numbers over an eight-hour shift
would be anywhere from 300 to 600 pairs of shoes with only a single employee monitoring
(Bain, 2017). When further analyzing these given numbers (assuming they are true), it is found
that even in the worse-case scenario where the robot takes an average of 75 seconds to assemble
the upper part vs. a human at 10 minutes, the robot can speed up the production process by a
factor of 6.53, as demonstrated in Table 1. If the upper portion of the shoe is the last step of
manufacturing the shoe and it is one machine vs. one man.
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Table 1: Calculations for a Human Worker vs. Machine
This would also allow for Nike to assemble shoes within countries located in North America and
Europe, where labor is typically more expensive. By having the factories closer to where demand
is, this would allow for fast free shipping, which customers will increasingly desire as more
consumers are transitioning toward online purchases, rather than in-store. As mentioned earlier
within Nike’s 2018 10-k form, no production is occurring within the United States. Doing this
would also minimize the threats of future tariffs, not just by the United States and Chinese
government, but any country around the world. Under this scenario, assuming the machines are
fully capable of producing the entire shoe in the factory, only the raw materials would be subject
to tariffs. The machines would also take advantage of economies of scale to where the more
shoes it produces, the lower cost per shoe it is since a factory (even with no employees) still must
deal with fixed costs to an extent (leasing, electricity, property taxes, insurance, among other
things).
Now heavy capital expenditure will be needed for these machines (assuming Grabit charges per
machine) and some time will be needed before they can be fully paid off. However, given the
numerous goals that Nike has launched: Increased revenues, more sustainability, their signature
for 100% renewable energy by 2025 (RE: 100, 2015), reducing factories with sweatshop
violations, etc. The machine by Grabit simultaneously accomplishes a lot of goals by Nike and it
is highly recommended that Nike seeks to further improve the implementation of such
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technology. Nike has already seen relatively major success in implementing this new way of
production.
Nike back in 2017 announced a partnership with Flex to allow for shoes to go from
manufacturing to market from 60 days to 10 days. By 2023, they are hoping that automated
machines will be able to produce tens of million shoes near North American markets (Bain,
2017). This automation paired with shorter lead times is exactly what Nike needs to accomplish
their economic, vertical integration, sustainability and personalization goals all simultaneously.
Expanding on Nike’s futures program (mentioned earlier) it is stated in Nike’s 2018 10-K that
the futures ordering program does not prevent the retailers from having inventory shortages or
excess inventory (pg. 62). This current program of mass production can not be continued as the
probability of selling a perfect number of shoes the retailer purchases is practically impossible. A
viable alternative to this system is automated production, not just within Asian factories but in
North American and European regions. This may not eliminate unsold inventory or shortage
completely, but it can be much more easily controlled if Nike’s owns the machines producing
shoes and they know through their data management system and cloud-connected Nike stores
what demand paired with inventory of all different brands of shoes is in real-time.
Analysis of Current Business Model w/ Retailers
The cost to produce Nike shoes needs to broken down before it can be properly analyzed.
According to an analysis by SOLEREVIEW, the average net profit margin for a $100 Nike shoe
is on average 5%. Looking at the cost breakdown of a Nike shoe, one big area that Nike could
cut out is the retailer margin. The total costs of a Nike shoe in the United States comes at $45
dollars and Nike sells to retailers at a price of $100 (SOLEREVIEW, 2016). One area of
opportunity is to increase the market share at which shoes are sold within Nike owned stores, or
online.
Digital commerce & Nike Direct
According to the FY 2018 10k form that Nike released, Nike Direct (sales done in Nike owned
retail stores and digital platforms) sales represented around 30% of Nike’s revenue, an increase
from 4% of the FY2012 according to Bloomberg (Stock, 2017) (pg. 25). Digital commerce alone
in FY2017 to FY2018 represented 30% of Nike’s revenue growth. The motive for doing this is
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not only to cut costs associated with having retailers, but this would allow for further
simplification of Nike’s own supply chain as this is forward vertical integration.
Vertical integration has been demonstrated to have positive effects for the vendor, for starters the
double marginalization problem is eliminated. Double marginalization means that a company
sells their product to an intermediary (a retail store), where the retail store sets their own price as
they see fit and as a result, both Nike and the end customer are both worse off as the retailer
needs to cover their own costs (Glock, 2015). This would also limit Nike’s ability to promote
their own products in retail stores as they are not the only shoe brand. For instance, one of Nike’s
intermediaries is Dick’s Sporting Goods and they also sell Adidas, Under Armour, New Balance,
AZICS, Skechers, among other competitors would be under the same shelfs. Thereby in a
consumer’s eyes as they walk into the store, they are considering other brands which would not
allow Nike to directly sell to those consumers.
One of Nike’s moves to the ecommerce space was two years ago when the company announced
Amazon was a certified retailer for selling Nike products (Garcia, 2017). This move will help
Nike prevent counterfeit shoes from being sold on the Amazon platform, Also the fees for selling
on Amazon would be comparatively lower than selling the shoes to retailers. The typical fee
structure for a $100 pair of Nike shoes would be set at 18%, plus a $1 per item fee paired with
$.55 cent shipping fee (assuming the shoes and the box are two pounds). The margin that
Amazon takes is 20%, which compared to a typical retailer at 50% is a major improvement
(Weinstein, 2019). On the secondary note, Nike would also benefit from the review system of
Amazon, as some customers will leave reviews on their shoes, unlike a customer buying shoes
from a store. Lastly, unlike big box retailers which they can offer discounts for the shoes and
thereby reducing Nike’s high-value image, Nike is able to set the price as they see fit on
Amazon.
However, they are some downsides to this deal, such as Amazon caters to Nike’s competition as
well (Adidas, Under Armour, AZICS, New Balance, Skechers, etc.), second since Amazon’s
revenue stands at $233 billion for the FY2018, compared to Nike’s $36.4 billion (6.4 times
smaller than Amazon’s revenue), Nike’s bargaining power is limited compared to smaller retail
stores. If half of Nike’s ecommerce sales (valued at $2.8 billion) came from Amazon, this would
equate to $1.4 billion which is .6% of Amazon’s total revenue for the FY2018. Whereas for
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Nike, Amazon represents a bigger share of their revenues at 3.84%, thereby Amazon is in a
stronger bargaining position.
Nike should continue to maintain its current relationships with Amazon, as the same $100 pair of
Nike shoes could be sold on Amazon with a much lower retailer margin than other stores. Given
that Amazon from FY2017 to FY2018 store revenues have gone from $160.4 billion to $207.2
billion (a 29.2% increase in one year), Amazon is an opportunity for growth for Nike. Along
with Amazon’s five-star review system and comments, it will provide online feedback that is
otherwise unavailable at traditional retail stores. The tradeoff is Nike has some limitation in how
they can present their shoes, but as stated maintaining the current relationship is the current
recommendation (Amazon.com Inc., 2018).
Although being on Amazon’s platform does create exposure for Nike, Nike should continue to
pursue their own brand of ecommerce. Nike does have their own online store, social media
platforms and advertising campaigns to maintain their popularity on the web. But to further
personalize themselves, Nike came out with an application called “Nike Fit” on May 9th of this
year that allows users to properly measure their foot size with their smartphone using augmented
reality. Nike’s own internal research states that 60% of people are wearing the incorrect shoe
size. With ecommerce growing as a more popular platform, individuals could easily buy shoes
without trying them on. Depending on the person, along with what they use the shoes for (sports,
casual walking, etc.) they can report discomfort with their feet and thus leading to dissatisfaction
toward Nike shoes, rather than them realizing they picked the wrong shoe size. This app is an
excellent response to that problem and presents an opportunity to collect data what are the right
sizes for individual customers, thus allowing for better information gathering toward how many
pairs of Nike shoes at what size should be made. This will in turn improve supply chain
operations by knowing exactly what the foot sizes are of their own individual customers
overtime. This will also allow Nike to further improve on selling directly to consumers instead of
relying on big box retailers (Ogus, 2019).
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Figure 1: Cost Breakdown of Nike shoe (SOLEREVIEW, 2016).
Sustainability
Nike has implemented various measures to make themselves a completely sustainable company.
For starters, as early as 2010 Nike stopped purchasing renewable energy certificates and began to
implement their own energy efficiency and renewable energy initiatives (Vestel, 2010). Nike has
publicly stated that they joined RE100, a coalition of businesses that have pledged to have all
their operations be powered by 100% renewable energy. all their operations will be 100%
renewable. In their latest Sustainability Report (2018), Nike’s owned, and operated facilities are
currently on track to have an average use of 75% renewable energy through planned renewable
projects/agreements.
Another area is through decreasing the average amount of energy used within operations and
transportation of various goods. Nike is currently working with their freight ocean and air
transportation providers to allow for more efficient energy use and less carbon emissions.
However, given that Nike’s own estimates put that air freight is 25 times more carbon intensive
than ocean freight, Nike should look to implement automated factories in North America and
Europe, (as mentioned within this report) so that air freight is no longer needed. Unfortunately,
no numbers were provided on what portion of goods are delivered through different modes of
transportation, thereby knowing how much this will improve the sustainability of operations is
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unknown. This should provide Nike additional incentive to pursue complete automated
production of their footwear within select regions with no production such as North America and
Europe. Not only would this greatly reduce CO2 emissions associated with per mile logistics, but
protection from costs associated with ocean freight and planes if oil prices were to rise
unexpectedly.
One area that Nike is doing extremely well in is eliminating footwear waste, within the FY2018,
99.9% of Nike’s footwear waste was either used for recycling or turned into electricity. This
aligns with the company recently joining the Global Fashion Agenda 2020 Circular Fashion
System Commitment where it calls for fashion related brands to commit to a circular supply
chain. Nike still has a way to go before all their material not only comes from either sustainable
source (Organic Cotton) or recycled materials. Currently footwear and apparel stand at 34% and
31% of their material either coming from recycled, and or sustainable sources respectively. One
idea for this could be on the tags of Nike apparel and footwear, Nike could put a barcode that can
be scanned via smartphone to allow for instructions on how consumers can recycle their used
Nikes. This would also increase customer engagement, as millennials will be most likely
responsive to an initiative. Also, pair that within the marketing campaigns of Nike, to increase
awareness of Nike recycling programs, but to showcase how socially responsible of company
Nike is. (Nike Inc. 2018)
Nike Lean Manufacturing
This part of Nike’s manufacturing is interesting as Nike’s mission statement is, “To bring
inspiration and innovation to every athlete* in the world. (*If you have a body, you are an
athlete” (On Nike’s website). The key term is innovation, for a company to be both innovating
with its products while at the same time pursue a lean system, which promotes standardization
and efficiency. Innovation is the creation of new products, thereby it would seem these two
philosophies contradict with one another. Although, it does appear Nike is implementing lean
innovation, it involves capturing customer feedback paired with eliminating waste when the
product is developing. This system seeks continuous, incremental improvement through planned
and coordinated experimentation (Landry, 2017).
For Nike, incorporating the two is a competitive advantage for them and since they are an
athletic apparel/shoe company, this would work within their sports-oriented culture. The two
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original founders, Bill Bowerman (University of Oregon Track & Field Coach from 1949-72)
and Phil Knight (an athlete of Bowerman while at the University of Oregon) were both involved
in track & field. As a coach, Bowerman would constantly experiment with new ways for
improving his athletes, whether through designing workouts, recommending nutritional plans or
developing faster shoes. Mr. Bowerman used a waffle iron to create new shoes and his obsession
with continuous improvement and experimentation led to success for his athletes (In his 24-year
career as coach, he led the team to 4 NCAA championships and 16 top 10 National finishes)
(Knight, 2016). What this has to do with Nike’s supply chain is that their two co-founders,
applied what they knew in sports about incremental improvement and innovation to the company
when it was started in 1964. Their experience in sports played a part in contributing to Nike’s
commitment to lean innovation. This was the necessary leadership to implement lean innovation,
who better to advocate than the two co-founders?
This system of lean innovation and design thinking is exactly what Nike needs to follow the
Porter triple bottom line (Kenton, 2019). The economic portion of lean manufacturing is that if
waste is eliminated and efficiency is maximized both result in cost savings. The environmental
aspect is the use of less materials, paired with using recycled materials will allow for a closed
loop supply chain, thereby appealing to environmentally-conscious customers and protecting
themselves from future environmental regulations. The social aspect is by making the factories
more productive, this will allow the factory workers to not only earn a fair wage, but to reduce
the pressure of the factories to use overtime, which for Nike was a major problem in 1999. It is
highly recommended that Nike continues this course of action and ensures that all their
employees working directly in these fields fully understand why they are pursuing lean
manufacturing. This would be best implemented through managers/experts within Nike
providing workshops and/or using online courses such as Udemy. Greater understanding will
create more active engagement with employees working on lean manufacturing and more active
engagement will lead to faster innovation for the factories. With how much Nike measures
themselves with their own metrics of performance, this will allow for sustained improvement for
years to come (Nike Inc. 2018). Which in turn will lead to improvement within the Porter triple
bottom line as mentioned earlier.
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Nike “Sweatshops”
During the late 1990’s, Nike started to receive criticism for its practices toward sweatshops.
Initially Nike and Phil Knight as CEO denied the allegations, as stated in a 2001 interview by
Nike’s director of compliance stated, “Our initial attitude was, ‘Hey, we don’t own the factories.
We don’t control what goes on there.’” (Miller, 2014). In 1999, Nike created the Fair Labor
Association, a non-profit that would combine companies into incorporating ethical labor
practices into factories through independent monitoring and a code of conduct (Nisen, 2013).
Another area to consider is that the foreign governments who have looked away from the labor
violations in the past, may not do so in the future if the right politicians were elected enacting
laws against sweatshops. By Nike deciding to be a leader in preventing these kinds of abusive
practices, this will create competitive advantage and protect from negative publicity. As with the
popularity of social media nowadays (Facebook has 2.38 billion monthly active users, according
to the company), all it takes is a smartphone or a video recorder to post a video of what happens
inside Nike contracted factories. If the video shows horrific enough events, then millions of
people could see it and this in turn would discourage customers purchasing from Nike (Segarra,
2019).
Given the power and popularity of Nike now, continuing to push the bar toward corporate social
responsibility is highly recommended. As demonstrated in their 2018 Impact Report, 86% of
factories have been fully compliant with labor practices in 2015, 2018 that percentage has
increased to 93%. Nike has also been experimenting with new compensation and benefit models
for factory workers so that when productivity of each worker increases, each worker would get a
portion of the new revenue generated from that production as stated in their “Engaged
Workforce” section in their Impact Report. One suggestion to further improve these compliance
ratings is that Nike could have the contracted workers take educational videos on what to do if
managers are doing non-compliant practices, along with ensuring their salary is safe. Continuing
to develop in this area is highly recommended since their recent advertising campaigns have
advocated for equal rights toward minorities and women in sports. This recent advertising
campaign Nike has launched, starting with the advertisement titled “Equality” back in 2017
appeals to millennials and millennials tend to be more “values-based” customers (Jiang, 2018).
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Thereby if Nike fails in their attempts to eliminate sweatshops, this would be a repeat of U.S
college students protesting Nike over sweatshop allegations back in the 1990’s. Or back in 2010,
when in periods of high demand, a supplier in Honduras subcontracted orders originally intended
for two other factories. The two factories shut down suddenly, failed to pay their 1,800 workers
more than $2 million dollars they were legally obligated toward and this led to protest on college
campuses once again. Nike now forbids subcontracting within its code of conduct (Hsieh, 2019).
Other Regions Nike Could Outsource
According to a Harvard Business Case Study, to reduce lead time and/or costs as well as further
diversify their supplier network (by country), the company has looked toward two countries in
particular: Bangladesh and the Caribbean. These two had their own advantages, such as
Bangladesh having among the lowest minimum wages in the world at $37/month. And the
Caribbean which would greatly reduce the time it would take to physically bring Nike products
to about a week, compared to 45 days in Asia. This would align well with Nike’s goal to be able
to respond to consumer demand by using their behavior, rather than retailers’ orders as consumer
behavior can change very quickly.
However, both Bangladesh and the Caribbean are ranked as very corrupt countries (according to
their own internal. This would only in the long run damage Nike’s brand as they have spent
almost the past 20 years making all their factories meet minimum compliance (reference sus
report). While offering a greatly reduced lead time paired with cheap labor of the Caribbean
would be well economically for Nike, the tradeoff of noncompliant factories will be too great for
Nike, thus it would be recommended to pursue automated production shoes (assuming it can get
to scale quickly enough) (Hsieh, 2019). Thereby, unless Nike starts with just one factory and
heavily monitors it for compliance issues, then creating a contract with any factories in
Bangladesh and the Caribbean is highly unrecommended. Nike’s best long-term strategy is still
to pursue automated factories that can produce shoes based on consumer behavior, rather than
what big-box retailers order.
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Recommendations
Nike should continue to pursue lean manufacturing for all their factories, as this will reduce the
likelihood of noncompliance of their contracted factories by reducing the need for excessive
overtime and underpaying workers. To counteract the tariffs as previously mentioned, Nike
should continue to pursue automated machines manufacturing shoes and apparel within North
America and Europe, rather than create a contract with a factory in the Caribbean. The
automated machines have demonstrated they not only can produce shoes quicker, but this would
allow Nike to determine their own production, rather than the future orders that big box retailers
as that would require them to order months in advance. Which at that time would limit Nike’s
ability to react to customer demands if there is a sudden shift. Also considering that Nike’s
revenue is coming directly from ecommerce or their own stores, the automated machines would
allow for Nike to offer the customer a more personalized experience, thereby better retaining
them as demonstrated with their Nike Fit app for instance.
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Bain, M. (2017, September 7). Nike is investing in robots that use static electricity to put its
shoes together. Quartz. Retrieved June 5, 2019, from https://qz.com/1070240/nike-is-investing-
in-grabits-robots-which-use-static-electricity-to-put-its-shoes-together/
Garcia, T. (2017, July 03). In Nike-Amazon partnership, Amazon's scale could put the Nike
brand at risk. Retrieved June 5, 2019, from https://www.marketwatch.com/story/in-nikeamazon-
partnership-amazons-bigger-size-could-put-the-nike-brand-at-risk-2017-06-30
Glock, C. H., & Kim, T. (2015, March 16.). The effect of forward integration on a single-
vendor–multi-retailer supply chain under retailer competition (Vol. 164, pp. 179-192,
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Hsieh, N., Toffel, M. W., & Hull, O. (2019). Global Sourcing at Nike. Harvard Business Review,
1-29. Retrieved June 5, 2019, from https://hbr.org/product/global-sourcing-at-nike/619008-HCB-
ENG.
Jackson, D., Collins, M., & Fritze, J. (2019, May 9). Trump's 25% China tariffs begin as trade
talks between two nations continue. USA Today. Retrieved June 5, 2019, from
https://www.usatoday.com/story/news/politics/2019/05/09/donald-trump-white-house-continues-
trade-talks-china-past-deadline/1150788001/
Kenton, W. (2019, May 03). How There Can Be Three Bottom Lines. Retrieved June 5, 2019,
from https://www.investopedia.com/terms/t/triple-bottom-line.asp
Landry, L. (2017, October 13). Lean Innovation: What It Is and How It Can Impact Your
Business. Northeastern University Graduate Programs. Retrieved June 6, 2019, from
https://www.northeastern.edu/graduate/blog/what-is-lean-innovation-and-why-use-it/
Miller, D. T. (2014, October 10). Sarah Soule: How Activism Can Fuel Corporate Social
Responsibility. Stanford Graduate School of Business. Retrieved June 5, 2019, from
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https://www.gsb.stanford.edu/insights/sarah-soule-how-activism-can-fuel-corporate-social-
responsibility
Nike Inc. (2018). Annual report 2018. Retrieved from
https://s1.q4cdn.com/806093406/files/doc_financials/2018/ar/index.html
Nike Inc. (2018). FY18 NIKE, Inc. Impact Report Retrieved from https://s3-us-west-
2.amazonaws.com/purpose-cms-production01/wp-
content/uploads/2019/05/20194957/FY18_Nike_Impact-Report_Final.pdf
Nisen, M. (2013, May 9). How Nike Solved Its Sweatshop Problem. Business Insider. Retrieved
June 5, 2019, from https://www.businessinsider.com/how-nike-solved-its-sweatshop-problem-
2013-5
Ogus, S. (2019, May 28). Nike Looks To Use Technology To Help Prevent Ill Fitting Shoes
With Nike Fit App. Forbes. Retrieved June 5, 2019, from
https://www.forbes.com/sites/simonogus/2019/05/28/nike-looks-to-use-technology-to-help-
prevent-ill-fitting-shoes-with-nike-fit-app/#272053523427
Pettey, C., & Meulen, R. V. (2018, May 17). Gartner Announces Rankings of the 2018 Supply
Chain Top 25. Retrieved June 5, 2019, from Gartner website:
https://www.gartner.com/en/newsroom/press-releases/2018-05-17-gartner-announces-rankings-
of-the-2018-supply-chain-top-25
RE: 100, & Jones, H. (2015, September). Nike. Retrieved June 5, 2019, from
http://there100.org/nike
Pledge by Nike to source 100% of its electricity by 2025
Segarra, L. M. (2019, May 23). Facebook Removed 2.2 Billion Fake Accounts This Year. It
Only Has 2.38 Billion Active Users. Facebook Removed 2.2 Billion Fake Accounts This Year. It
Only Has 2.38 Billion Active Users. Retrieved June 5, 2019, from
http://fortune.com/2019/05/23/facebook-fake-accounts-transparency-report/
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18 | P a g e
Siegel, R. (2019, May 21). Nike, Converse, Adidas among 170 shoe retailers warning Trump
against trade war with China. The Washington Post. Retrieved June 5, 2019, from
https://www.washingtonpost.com/business/2019/05/21/nike-converse-adidas-among-shoe-
retailers-warning-trump-against-trade-war-with-china/?noredirect=on&utm_term=.4acc2f033107
Stock, K. (2017, September 27). Nike Cuts Out the Middleman to Sell You the Perfect Sneaker.
Bloomberg. Retrieved June 5, 2019, from https://www.bloomberg.com/news/articles/2017-09-
27/nike-cuts-out-the-middleman-to-sell-you-the-perfect-sneaker
Vestel, L. B. (2010, February 2). Nike Makes Environmental Strides and Abandons Carbon
Offsets. The New York Times. Retrieved June 5, 2019, from
https://green.blogs.nytimes.com/2010/02/02/nike-makes-environmental-strides-and-abandons-
carbon-offsets/
Wearden, G. (2019, May 10). A cast of thousands: Products from China facing 25% US tariff.
The Guardian. Retrieved June 5, 2019, from
https://www.theguardian.com/business/2019/may/10/a-cast-of-thousands-products-from-china-
facing-25-us-tariff
Weinstein, M. (2019, April 29). How to Sell on Amazon: Everything You Need to Know for
2019. Retrieved June 5, 2019, from http://www.cpcstrategy.com/blog/2019/04/sell-on-amazon/

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Final supply chain project

  • 1. BA561: Final Report Nike Supply Chain Report Eric Alldritt 0 | P a g e NIKE SUPPLY CHAIN REPORT By: Eric Alldritt ABSTRACT Thisreportwill provide ageneral overlookon Nike’ssupplychainstructure,alongwith where there are threatsandopportunities. Eric Alldritt BA561
  • 2. BA561: Final Report Nike Supply Chain Report Eric Alldritt 1 | P a g e Contents Table of Contents 1 Introduction 2 Scope of This Project 2-3 ResearchMethod 3 Current Operations, Footwear 3-5 A.I machine production in each market 5-7 Analysis of Current Business Model w/ Retailers 7 Digital commerce & Nike Direct 7-9 Sustainability 10-11 Nike Lean Manufacturing 11-12 Nike “Sweatshops” 13-14 Other Regions Nike Could Outsource 14 Recommendations 15 References 16-18
  • 3. BA561: Final Report Nike Supply Chain Report Eric Alldritt 2 | P a g e Introduction Nike was originally started as a handshake between University of Oregon Track & Field Coach Bill Bowerman, and Oregon alumni Phil Knight in 1964. The one vision both men had was to sell the best running shoes at affordable prices. In his thesis paper at Stanford University, Phil Knight came up with the idea that buying high-quality shoes from Japanese factories would compete just as well as the ones being made in Europe by Adidas. Since purchasing shoes from Japan, it has gone from selling shoes in a van to a $36.4 billion empire (FY 2018 income statement, (Nike Inc. 2018). According to Gartner Inc. in 2018 Nike was ranked in a survey as the 6th best company in the world based on a combination of performance metrics, paired with the perspectives of supply chain insiders (Pettey, 2018). The average compounded growth rate of Nike’s revenue has been an annual 5.54% over the past five years. Headquartered in Beaverton, OR, they have operations all around the world: North America, Latin America, Europe, Middle East, Africa and Asia (China is in their own category). As stated in Item 1 of the 2018 10-k form “We sell our products through NIKE-owned retail stores … in virtually all countries around the world.” This means that a robust supply chain structure is needed to go from raw materials to the ground, to in the hands of loyal customers as Nike operates all over the world. Scope of this project This paper will provide an overview of what the supply chain structure of Nike is, with a greater focus on footwear, leaving apparel and sports equipment out. It will cover the aspects of vertical integration that Nike owns or is in contract with, along with providing either solutions to each stage of the supply chain, or what Nike is currently doing to further improve that stage (if the information is publicly avaiable). Given that Amazon and Walmart have recently announced in the United States they will be offering one-day shipping, these changes here will have the customer expecting Nike to be able to provide fast free shipping as well. This perfectly ties in to an increasing amount of sales occurring through an online platform, from FY2017 to FY2018, revenue from online sales increased from $2.2 billion to $2.8 billion. This represents about 30% of the new revenue generated for Nike during that time frame, assuming the share of revenue growth from ecommerce increases overtime, this will be a new end of the supply chain that Nike must be increasingly aware of (pg. 76 of the 2018 10-K form). Another issue to be aware of is what effect will Trump’s recently announced tariffs on China will have on Nike, assuming this
  • 4. BA561: Final Report Nike Supply Chain Report Eric Alldritt 3 | P a g e lasts at least until 2021, are there any low-cost alternatives that Nike could utilize to mitigate this risk? This is very important question as in the FY2018, China represented 26% of the manufacturing of Nike footwear and apparel respectively. Among the recently announced 25% tariffs on China, this included “ cotton and polyester” materials that are commonly made into athletic apparel (Wearden, 2019). Other areas will include Nike’s lean manufacturing process, where “lean” refers to The Toyota Way management system that is dependent on “Respect for People and Continuous Improvement.” (The Leadership Network, 2016). Along with imposing this to all of Nike’s contracted factories, this philosophy is a competitive advantage that will last for years, if not decades assuming Nike fully adheres to its principles. Nike found that from the FY2013 to FY 2015 this has led to a 26.5% increase in contract factory performance ratings, paired with a subtraction of 11.8% total factory contracts. For this part, the objective is to figure out how Nike can further continue improvements within their factories so that a repeat of the late 1990’s protests against Nike sweatshops does not occur again and damage the brand. ResearchMethod This report will rely on documents that are avaiable from Nike’s investors site, such as 10-k forms and annual reports. Articles from various online newspapers will be used to provide an external outlook of Nike’s situation and provide insight into what actions they need to take. Lastly, academic journals will be used for both in-depth analysis into Nike’s actions and events that have occurred for the company, along with what supply chain/economic principles they are adhering to. Current Operations, Footwear The current model of manufacturing of Nike involves the use of contracted factories mainly located in Vietnam, China, and Indonesia, representing 47%, 26% and 21% of the total brand footwear that Nike produces (combined these three countries account for 94% of Nike’s footwear production). On the demand side for footwear, China purchased $3.5 billion in footwear from Nike (20% growth from FY2017 to FY2018, from $2.92 billion). Asia Pacific and Latin America purchased $3.58 billion (9% growth from FY2017 to FY2018 from $3.29 billion) (Nike Inc. 2018, pg. 57). These two markets also account for 73% of Nike’s footwear revenue
  • 5. BA561: Final Report Nike Supply Chain Report Eric Alldritt 4 | P a g e growth globally. These two markets currently account for 31% of Nike’s demand for footwear based on revenue. Nike has placed themselves well to enjoy the strong growth experienced in China and in the Asia Pacific region with factories already in place, this will keep shipping distance at a minimum in these markets. One problem however, is where does the other 63% ($22.268 billion*63%=$14.02 billion) of Nike’s footwear production go once it leaves China, Vietnam and Indonesia? As stated in the 10k-form of FY2018 (pg. 57), “Virtually all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States.” The area of concern is the recently announced 25% tariff on imported Chinese goods from the Trump Administration (Jackson, 2019). Given that 68% of Nike’s footwear production occurs within both Vietnam and Indonesia, Nike could have their shoes they send to the United States solely manufactured in Vietnam and Indonesia, since North America represents $9.322 billion in footwear revenue. This also means the North American market represents 41.8% of Nike’s footwear revenue and has from FY2017 to FY2018 seen a decline of -4%. One of the main problems with this suggestion is transitioning this to other factories outside of China. If the contracts Nike has formed with Chinese owned factories will last for a period of a few years (or even months), this would put Nike in a position to where they can’t exit out of those factories due to the contract. Nike also does not wish to alienate China, as they still have 26% of footwear production occurring there, along with the fact that China accounts for 15.7% of Nike’s footwear revenue, and from FY17 to FY18, 48.5% of Nike’s footwear revenue growth occurred in that country alone. Assuming consistent 20% growth of the Chinese market paired with constant supply of Nike shoes, all the supply from China could be sold to as demand in China by FY21 (unlikely assumption but demonstrates how important China is in the long-run). Also, the Chinese government has also imposed tariffs on U.S made goods, thereby it is possible soon they may impose restrictions on U.S companies if both governments’ relationships do not improve. If Vietnam and Indonesia were cheaper to produce shoes compared to China, Nike would presumably have already started production in those facilities. At least temporarily for a period (months to a year) of time, Nike’s footwear in the United States will experience price increases due to U.S tariffs.
  • 6. BA561: Final Report Nike Supply Chain Report Eric Alldritt 5 | P a g e The recommendation for this situation is to slowly pivot increased production for the U.S market to non-Chinese factories within Vietnam and Indonesia. As well as explore automated production solely by robots with minimum employee oversight of the robots (will explore this area deeper next section). Nike will temporarily have to either increase prices of shoes or tolerate lower profits, as they recently in May signed a letter with more than 170 U.S shoe retailers messaging to the White House that the tariffs will, “Increase in the cost of importing shoes.” (Siegel, 2019). A host of problems can still happen with having all the production within China, Vietnam and Indonesia. As mentioned earlier, 67% of footwear production is exported to other countries outside Asia Pacific and China, thereby this creates the necessity of Nike’s current practice of having their retailers (87% of them) order six months in advance for shoes (Nike 2015 10k form). With retailers needing to purchase that far in advance, this creates a delayed bottleneck within the Nike supply chain as Nike prides itself as high-end, innovative company. As this time lag will make it more difficult to respond to consumer demand (both in value and volume of shoes) Nike needs to reduce this time requirement. A.I machine production in each market: One idea to prevent the effects of future tariffs, paired with reducing costs, distance traveled for shipment of the shoes from manufacturing to consumer would be the use of complete automation. According to Quartz, Nike and Adidas have both investigated using machines to speed up their manufacturing process. A robotics startup named Grabit, has machines that can take a partially finished shoe, attach the necessary pieces of the upper part of the shoe. The machine takes only 50 to 75 seconds to complete, whereas a human worker takes 10 to 20 minutes to assemble the upper parts of the shoe. The production numbers over an eight-hour shift would be anywhere from 300 to 600 pairs of shoes with only a single employee monitoring (Bain, 2017). When further analyzing these given numbers (assuming they are true), it is found that even in the worse-case scenario where the robot takes an average of 75 seconds to assemble the upper part vs. a human at 10 minutes, the robot can speed up the production process by a factor of 6.53, as demonstrated in Table 1. If the upper portion of the shoe is the last step of manufacturing the shoe and it is one machine vs. one man.
  • 7. BA561: Final Report Nike Supply Chain Report Eric Alldritt 6 | P a g e Table 1: Calculations for a Human Worker vs. Machine This would also allow for Nike to assemble shoes within countries located in North America and Europe, where labor is typically more expensive. By having the factories closer to where demand is, this would allow for fast free shipping, which customers will increasingly desire as more consumers are transitioning toward online purchases, rather than in-store. As mentioned earlier within Nike’s 2018 10-k form, no production is occurring within the United States. Doing this would also minimize the threats of future tariffs, not just by the United States and Chinese government, but any country around the world. Under this scenario, assuming the machines are fully capable of producing the entire shoe in the factory, only the raw materials would be subject to tariffs. The machines would also take advantage of economies of scale to where the more shoes it produces, the lower cost per shoe it is since a factory (even with no employees) still must deal with fixed costs to an extent (leasing, electricity, property taxes, insurance, among other things). Now heavy capital expenditure will be needed for these machines (assuming Grabit charges per machine) and some time will be needed before they can be fully paid off. However, given the numerous goals that Nike has launched: Increased revenues, more sustainability, their signature for 100% renewable energy by 2025 (RE: 100, 2015), reducing factories with sweatshop violations, etc. The machine by Grabit simultaneously accomplishes a lot of goals by Nike and it is highly recommended that Nike seeks to further improve the implementation of such
  • 8. BA561: Final Report Nike Supply Chain Report Eric Alldritt 7 | P a g e technology. Nike has already seen relatively major success in implementing this new way of production. Nike back in 2017 announced a partnership with Flex to allow for shoes to go from manufacturing to market from 60 days to 10 days. By 2023, they are hoping that automated machines will be able to produce tens of million shoes near North American markets (Bain, 2017). This automation paired with shorter lead times is exactly what Nike needs to accomplish their economic, vertical integration, sustainability and personalization goals all simultaneously. Expanding on Nike’s futures program (mentioned earlier) it is stated in Nike’s 2018 10-K that the futures ordering program does not prevent the retailers from having inventory shortages or excess inventory (pg. 62). This current program of mass production can not be continued as the probability of selling a perfect number of shoes the retailer purchases is practically impossible. A viable alternative to this system is automated production, not just within Asian factories but in North American and European regions. This may not eliminate unsold inventory or shortage completely, but it can be much more easily controlled if Nike’s owns the machines producing shoes and they know through their data management system and cloud-connected Nike stores what demand paired with inventory of all different brands of shoes is in real-time. Analysis of Current Business Model w/ Retailers The cost to produce Nike shoes needs to broken down before it can be properly analyzed. According to an analysis by SOLEREVIEW, the average net profit margin for a $100 Nike shoe is on average 5%. Looking at the cost breakdown of a Nike shoe, one big area that Nike could cut out is the retailer margin. The total costs of a Nike shoe in the United States comes at $45 dollars and Nike sells to retailers at a price of $100 (SOLEREVIEW, 2016). One area of opportunity is to increase the market share at which shoes are sold within Nike owned stores, or online. Digital commerce & Nike Direct According to the FY 2018 10k form that Nike released, Nike Direct (sales done in Nike owned retail stores and digital platforms) sales represented around 30% of Nike’s revenue, an increase from 4% of the FY2012 according to Bloomberg (Stock, 2017) (pg. 25). Digital commerce alone in FY2017 to FY2018 represented 30% of Nike’s revenue growth. The motive for doing this is
  • 9. BA561: Final Report Nike Supply Chain Report Eric Alldritt 8 | P a g e not only to cut costs associated with having retailers, but this would allow for further simplification of Nike’s own supply chain as this is forward vertical integration. Vertical integration has been demonstrated to have positive effects for the vendor, for starters the double marginalization problem is eliminated. Double marginalization means that a company sells their product to an intermediary (a retail store), where the retail store sets their own price as they see fit and as a result, both Nike and the end customer are both worse off as the retailer needs to cover their own costs (Glock, 2015). This would also limit Nike’s ability to promote their own products in retail stores as they are not the only shoe brand. For instance, one of Nike’s intermediaries is Dick’s Sporting Goods and they also sell Adidas, Under Armour, New Balance, AZICS, Skechers, among other competitors would be under the same shelfs. Thereby in a consumer’s eyes as they walk into the store, they are considering other brands which would not allow Nike to directly sell to those consumers. One of Nike’s moves to the ecommerce space was two years ago when the company announced Amazon was a certified retailer for selling Nike products (Garcia, 2017). This move will help Nike prevent counterfeit shoes from being sold on the Amazon platform, Also the fees for selling on Amazon would be comparatively lower than selling the shoes to retailers. The typical fee structure for a $100 pair of Nike shoes would be set at 18%, plus a $1 per item fee paired with $.55 cent shipping fee (assuming the shoes and the box are two pounds). The margin that Amazon takes is 20%, which compared to a typical retailer at 50% is a major improvement (Weinstein, 2019). On the secondary note, Nike would also benefit from the review system of Amazon, as some customers will leave reviews on their shoes, unlike a customer buying shoes from a store. Lastly, unlike big box retailers which they can offer discounts for the shoes and thereby reducing Nike’s high-value image, Nike is able to set the price as they see fit on Amazon. However, they are some downsides to this deal, such as Amazon caters to Nike’s competition as well (Adidas, Under Armour, AZICS, New Balance, Skechers, etc.), second since Amazon’s revenue stands at $233 billion for the FY2018, compared to Nike’s $36.4 billion (6.4 times smaller than Amazon’s revenue), Nike’s bargaining power is limited compared to smaller retail stores. If half of Nike’s ecommerce sales (valued at $2.8 billion) came from Amazon, this would equate to $1.4 billion which is .6% of Amazon’s total revenue for the FY2018. Whereas for
  • 10. BA561: Final Report Nike Supply Chain Report Eric Alldritt 9 | P a g e Nike, Amazon represents a bigger share of their revenues at 3.84%, thereby Amazon is in a stronger bargaining position. Nike should continue to maintain its current relationships with Amazon, as the same $100 pair of Nike shoes could be sold on Amazon with a much lower retailer margin than other stores. Given that Amazon from FY2017 to FY2018 store revenues have gone from $160.4 billion to $207.2 billion (a 29.2% increase in one year), Amazon is an opportunity for growth for Nike. Along with Amazon’s five-star review system and comments, it will provide online feedback that is otherwise unavailable at traditional retail stores. The tradeoff is Nike has some limitation in how they can present their shoes, but as stated maintaining the current relationship is the current recommendation (Amazon.com Inc., 2018). Although being on Amazon’s platform does create exposure for Nike, Nike should continue to pursue their own brand of ecommerce. Nike does have their own online store, social media platforms and advertising campaigns to maintain their popularity on the web. But to further personalize themselves, Nike came out with an application called “Nike Fit” on May 9th of this year that allows users to properly measure their foot size with their smartphone using augmented reality. Nike’s own internal research states that 60% of people are wearing the incorrect shoe size. With ecommerce growing as a more popular platform, individuals could easily buy shoes without trying them on. Depending on the person, along with what they use the shoes for (sports, casual walking, etc.) they can report discomfort with their feet and thus leading to dissatisfaction toward Nike shoes, rather than them realizing they picked the wrong shoe size. This app is an excellent response to that problem and presents an opportunity to collect data what are the right sizes for individual customers, thus allowing for better information gathering toward how many pairs of Nike shoes at what size should be made. This will in turn improve supply chain operations by knowing exactly what the foot sizes are of their own individual customers overtime. This will also allow Nike to further improve on selling directly to consumers instead of relying on big box retailers (Ogus, 2019).
  • 11. BA561: Final Report Nike Supply Chain Report Eric Alldritt 10 | P a g e Figure 1: Cost Breakdown of Nike shoe (SOLEREVIEW, 2016). Sustainability Nike has implemented various measures to make themselves a completely sustainable company. For starters, as early as 2010 Nike stopped purchasing renewable energy certificates and began to implement their own energy efficiency and renewable energy initiatives (Vestel, 2010). Nike has publicly stated that they joined RE100, a coalition of businesses that have pledged to have all their operations be powered by 100% renewable energy. all their operations will be 100% renewable. In their latest Sustainability Report (2018), Nike’s owned, and operated facilities are currently on track to have an average use of 75% renewable energy through planned renewable projects/agreements. Another area is through decreasing the average amount of energy used within operations and transportation of various goods. Nike is currently working with their freight ocean and air transportation providers to allow for more efficient energy use and less carbon emissions. However, given that Nike’s own estimates put that air freight is 25 times more carbon intensive than ocean freight, Nike should look to implement automated factories in North America and Europe, (as mentioned within this report) so that air freight is no longer needed. Unfortunately, no numbers were provided on what portion of goods are delivered through different modes of transportation, thereby knowing how much this will improve the sustainability of operations is
  • 12. BA561: Final Report Nike Supply Chain Report Eric Alldritt 11 | P a g e unknown. This should provide Nike additional incentive to pursue complete automated production of their footwear within select regions with no production such as North America and Europe. Not only would this greatly reduce CO2 emissions associated with per mile logistics, but protection from costs associated with ocean freight and planes if oil prices were to rise unexpectedly. One area that Nike is doing extremely well in is eliminating footwear waste, within the FY2018, 99.9% of Nike’s footwear waste was either used for recycling or turned into electricity. This aligns with the company recently joining the Global Fashion Agenda 2020 Circular Fashion System Commitment where it calls for fashion related brands to commit to a circular supply chain. Nike still has a way to go before all their material not only comes from either sustainable source (Organic Cotton) or recycled materials. Currently footwear and apparel stand at 34% and 31% of their material either coming from recycled, and or sustainable sources respectively. One idea for this could be on the tags of Nike apparel and footwear, Nike could put a barcode that can be scanned via smartphone to allow for instructions on how consumers can recycle their used Nikes. This would also increase customer engagement, as millennials will be most likely responsive to an initiative. Also, pair that within the marketing campaigns of Nike, to increase awareness of Nike recycling programs, but to showcase how socially responsible of company Nike is. (Nike Inc. 2018) Nike Lean Manufacturing This part of Nike’s manufacturing is interesting as Nike’s mission statement is, “To bring inspiration and innovation to every athlete* in the world. (*If you have a body, you are an athlete” (On Nike’s website). The key term is innovation, for a company to be both innovating with its products while at the same time pursue a lean system, which promotes standardization and efficiency. Innovation is the creation of new products, thereby it would seem these two philosophies contradict with one another. Although, it does appear Nike is implementing lean innovation, it involves capturing customer feedback paired with eliminating waste when the product is developing. This system seeks continuous, incremental improvement through planned and coordinated experimentation (Landry, 2017). For Nike, incorporating the two is a competitive advantage for them and since they are an athletic apparel/shoe company, this would work within their sports-oriented culture. The two
  • 13. BA561: Final Report Nike Supply Chain Report Eric Alldritt 12 | P a g e original founders, Bill Bowerman (University of Oregon Track & Field Coach from 1949-72) and Phil Knight (an athlete of Bowerman while at the University of Oregon) were both involved in track & field. As a coach, Bowerman would constantly experiment with new ways for improving his athletes, whether through designing workouts, recommending nutritional plans or developing faster shoes. Mr. Bowerman used a waffle iron to create new shoes and his obsession with continuous improvement and experimentation led to success for his athletes (In his 24-year career as coach, he led the team to 4 NCAA championships and 16 top 10 National finishes) (Knight, 2016). What this has to do with Nike’s supply chain is that their two co-founders, applied what they knew in sports about incremental improvement and innovation to the company when it was started in 1964. Their experience in sports played a part in contributing to Nike’s commitment to lean innovation. This was the necessary leadership to implement lean innovation, who better to advocate than the two co-founders? This system of lean innovation and design thinking is exactly what Nike needs to follow the Porter triple bottom line (Kenton, 2019). The economic portion of lean manufacturing is that if waste is eliminated and efficiency is maximized both result in cost savings. The environmental aspect is the use of less materials, paired with using recycled materials will allow for a closed loop supply chain, thereby appealing to environmentally-conscious customers and protecting themselves from future environmental regulations. The social aspect is by making the factories more productive, this will allow the factory workers to not only earn a fair wage, but to reduce the pressure of the factories to use overtime, which for Nike was a major problem in 1999. It is highly recommended that Nike continues this course of action and ensures that all their employees working directly in these fields fully understand why they are pursuing lean manufacturing. This would be best implemented through managers/experts within Nike providing workshops and/or using online courses such as Udemy. Greater understanding will create more active engagement with employees working on lean manufacturing and more active engagement will lead to faster innovation for the factories. With how much Nike measures themselves with their own metrics of performance, this will allow for sustained improvement for years to come (Nike Inc. 2018). Which in turn will lead to improvement within the Porter triple bottom line as mentioned earlier.
  • 14. BA561: Final Report Nike Supply Chain Report Eric Alldritt 13 | P a g e Nike “Sweatshops” During the late 1990’s, Nike started to receive criticism for its practices toward sweatshops. Initially Nike and Phil Knight as CEO denied the allegations, as stated in a 2001 interview by Nike’s director of compliance stated, “Our initial attitude was, ‘Hey, we don’t own the factories. We don’t control what goes on there.’” (Miller, 2014). In 1999, Nike created the Fair Labor Association, a non-profit that would combine companies into incorporating ethical labor practices into factories through independent monitoring and a code of conduct (Nisen, 2013). Another area to consider is that the foreign governments who have looked away from the labor violations in the past, may not do so in the future if the right politicians were elected enacting laws against sweatshops. By Nike deciding to be a leader in preventing these kinds of abusive practices, this will create competitive advantage and protect from negative publicity. As with the popularity of social media nowadays (Facebook has 2.38 billion monthly active users, according to the company), all it takes is a smartphone or a video recorder to post a video of what happens inside Nike contracted factories. If the video shows horrific enough events, then millions of people could see it and this in turn would discourage customers purchasing from Nike (Segarra, 2019). Given the power and popularity of Nike now, continuing to push the bar toward corporate social responsibility is highly recommended. As demonstrated in their 2018 Impact Report, 86% of factories have been fully compliant with labor practices in 2015, 2018 that percentage has increased to 93%. Nike has also been experimenting with new compensation and benefit models for factory workers so that when productivity of each worker increases, each worker would get a portion of the new revenue generated from that production as stated in their “Engaged Workforce” section in their Impact Report. One suggestion to further improve these compliance ratings is that Nike could have the contracted workers take educational videos on what to do if managers are doing non-compliant practices, along with ensuring their salary is safe. Continuing to develop in this area is highly recommended since their recent advertising campaigns have advocated for equal rights toward minorities and women in sports. This recent advertising campaign Nike has launched, starting with the advertisement titled “Equality” back in 2017 appeals to millennials and millennials tend to be more “values-based” customers (Jiang, 2018).
  • 15. BA561: Final Report Nike Supply Chain Report Eric Alldritt 14 | P a g e Thereby if Nike fails in their attempts to eliminate sweatshops, this would be a repeat of U.S college students protesting Nike over sweatshop allegations back in the 1990’s. Or back in 2010, when in periods of high demand, a supplier in Honduras subcontracted orders originally intended for two other factories. The two factories shut down suddenly, failed to pay their 1,800 workers more than $2 million dollars they were legally obligated toward and this led to protest on college campuses once again. Nike now forbids subcontracting within its code of conduct (Hsieh, 2019). Other Regions Nike Could Outsource According to a Harvard Business Case Study, to reduce lead time and/or costs as well as further diversify their supplier network (by country), the company has looked toward two countries in particular: Bangladesh and the Caribbean. These two had their own advantages, such as Bangladesh having among the lowest minimum wages in the world at $37/month. And the Caribbean which would greatly reduce the time it would take to physically bring Nike products to about a week, compared to 45 days in Asia. This would align well with Nike’s goal to be able to respond to consumer demand by using their behavior, rather than retailers’ orders as consumer behavior can change very quickly. However, both Bangladesh and the Caribbean are ranked as very corrupt countries (according to their own internal. This would only in the long run damage Nike’s brand as they have spent almost the past 20 years making all their factories meet minimum compliance (reference sus report). While offering a greatly reduced lead time paired with cheap labor of the Caribbean would be well economically for Nike, the tradeoff of noncompliant factories will be too great for Nike, thus it would be recommended to pursue automated production shoes (assuming it can get to scale quickly enough) (Hsieh, 2019). Thereby, unless Nike starts with just one factory and heavily monitors it for compliance issues, then creating a contract with any factories in Bangladesh and the Caribbean is highly unrecommended. Nike’s best long-term strategy is still to pursue automated factories that can produce shoes based on consumer behavior, rather than what big-box retailers order.
  • 16. BA561: Final Report Nike Supply Chain Report Eric Alldritt 15 | P a g e Recommendations Nike should continue to pursue lean manufacturing for all their factories, as this will reduce the likelihood of noncompliance of their contracted factories by reducing the need for excessive overtime and underpaying workers. To counteract the tariffs as previously mentioned, Nike should continue to pursue automated machines manufacturing shoes and apparel within North America and Europe, rather than create a contract with a factory in the Caribbean. The automated machines have demonstrated they not only can produce shoes quicker, but this would allow Nike to determine their own production, rather than the future orders that big box retailers as that would require them to order months in advance. Which at that time would limit Nike’s ability to react to customer demands if there is a sudden shift. Also considering that Nike’s revenue is coming directly from ecommerce or their own stores, the automated machines would allow for Nike to offer the customer a more personalized experience, thereby better retaining them as demonstrated with their Nike Fit app for instance.
  • 17. BA561: Final Report Nike Supply Chain Report Eric Alldritt 16 | P a g e References: Amazon.com Inc. (2018). Annual report 2018. Retrieved from https://ir.aboutamazon.com/static-files/0f9e36b1-7e1e-4b52-be17-145dc9d8b5ec Bain, M. (2017, September 7). Nike is investing in robots that use static electricity to put its shoes together. Quartz. Retrieved June 5, 2019, from https://qz.com/1070240/nike-is-investing- in-grabits-robots-which-use-static-electricity-to-put-its-shoes-together/ Garcia, T. (2017, July 03). In Nike-Amazon partnership, Amazon's scale could put the Nike brand at risk. Retrieved June 5, 2019, from https://www.marketwatch.com/story/in-nikeamazon- partnership-amazons-bigger-size-could-put-the-nike-brand-at-risk-2017-06-30 Glock, C. H., & Kim, T. (2015, March 16.). The effect of forward integration on a single- vendor–multi-retailer supply chain under retailer competition (Vol. 164, pp. 179-192, Publication). Elsevier. doi:https://doi.org/10.1016/j.ijpe.2015.03.009 Hsieh, N., Toffel, M. W., & Hull, O. (2019). Global Sourcing at Nike. Harvard Business Review, 1-29. Retrieved June 5, 2019, from https://hbr.org/product/global-sourcing-at-nike/619008-HCB- ENG. Jackson, D., Collins, M., & Fritze, J. (2019, May 9). Trump's 25% China tariffs begin as trade talks between two nations continue. USA Today. Retrieved June 5, 2019, from https://www.usatoday.com/story/news/politics/2019/05/09/donald-trump-white-house-continues- trade-talks-china-past-deadline/1150788001/ Kenton, W. (2019, May 03). How There Can Be Three Bottom Lines. Retrieved June 5, 2019, from https://www.investopedia.com/terms/t/triple-bottom-line.asp Landry, L. (2017, October 13). Lean Innovation: What It Is and How It Can Impact Your Business. Northeastern University Graduate Programs. Retrieved June 6, 2019, from https://www.northeastern.edu/graduate/blog/what-is-lean-innovation-and-why-use-it/ Miller, D. T. (2014, October 10). Sarah Soule: How Activism Can Fuel Corporate Social Responsibility. Stanford Graduate School of Business. Retrieved June 5, 2019, from
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  • 19. BA561: Final Report Nike Supply Chain Report Eric Alldritt 18 | P a g e Siegel, R. (2019, May 21). Nike, Converse, Adidas among 170 shoe retailers warning Trump against trade war with China. The Washington Post. Retrieved June 5, 2019, from https://www.washingtonpost.com/business/2019/05/21/nike-converse-adidas-among-shoe- retailers-warning-trump-against-trade-war-with-china/?noredirect=on&utm_term=.4acc2f033107 Stock, K. (2017, September 27). Nike Cuts Out the Middleman to Sell You the Perfect Sneaker. Bloomberg. Retrieved June 5, 2019, from https://www.bloomberg.com/news/articles/2017-09- 27/nike-cuts-out-the-middleman-to-sell-you-the-perfect-sneaker Vestel, L. B. (2010, February 2). Nike Makes Environmental Strides and Abandons Carbon Offsets. The New York Times. Retrieved June 5, 2019, from https://green.blogs.nytimes.com/2010/02/02/nike-makes-environmental-strides-and-abandons- carbon-offsets/ Wearden, G. (2019, May 10). A cast of thousands: Products from China facing 25% US tariff. The Guardian. Retrieved June 5, 2019, from https://www.theguardian.com/business/2019/may/10/a-cast-of-thousands-products-from-china- facing-25-us-tariff Weinstein, M. (2019, April 29). How to Sell on Amazon: Everything You Need to Know for 2019. Retrieved June 5, 2019, from http://www.cpcstrategy.com/blog/2019/04/sell-on-amazon/