Case Details: Price:

Case Code : OPER030 For delivery in electronic format: Rs. 300;

Case Length : 10 Pages For delivery through courier (within India):
Period : 1991 - 2003 Rs. 300 + Rs. 25 for Shipping & Handling
Organization : Nike Charges
Pub Date : 2004
Teaching Note : Available Themes
Countries : USA
Industry : Sports & Apparel Inventory Management

Abstract:

This case deals with the problems experienced

by Nike, the leading manufacturer of shoes
and other sports equipment in the world, in
implementing a new software application to
streamline its supply chain and manufacturing
processes. Nike sourced its products from
manufacturing facilities located in the
developing Asian countries like Taiwan and
Korea.

Consequently, the company had a complicated

supply chain system where orders were placed
by retailers six months ahead of delivery
dates. These orders had to be forwarded to the
factories in Asia and the final product had to
be shipped back to the retailers.

Issues:

» To appreciate the importance of an effective supply chain system, specially for a

manufacturing company operating in a highly competitive and trend- driven industry

» To understand the importance of integrating new systems with legacy systems and
processes in the organization for their effective functioning

Contents:

Page No.
Nike's Profits Fall 1
Background Note 2
New System's Teething Troubles 4
The Consequences of the Breakdown 7
Conclusion 9
Exhibits 13
Keywords:

Problems, Nike, manufacturer, shoes, sports equipment, world, software application,

streamline, supply chain, manufacturing processes, Nike, products, manufacturing
facilities, developing, Asian countries, Taiwan, Korea, retailers, six months

There's no way that software is responsible for Nike's earnings problems."

-Greg Brady, president of i2 (Nike's supply chain vendor) in 2001.1

"Announcements like Nike's will become more frequent as companies fail to understand
the realities of supply chain planning implementations. Supply chain planning
applications are immature and the supply chain problems of a company like Nike are
complex."

-Maria Jimenez, research director at Gartner Research in 2001.2

"Trends are what make this industry so unpredictable. Not having the right shoes in the
stores in that short window of opportunity is disastrous".

-John Shanley, an analyst at Wells Fargo Securities in 2003.3

Nike's Profits Fall

In February 2001, Phil Knight (Knight), the

co-founder and CEO of Nike Inc (Nike),
announced that the company's profits for the
third quarter of the fiscal year ending May
2001 would fall short of expectations by
almost 24 percent. The reason for the shortfall
was a failure in the supply chain software that
Nike had implemented in June 2000.

The supply chain software, implemented by i2

Technologies Inc (i2)4 had fallen prey to
technical glitches that affected the company's
inventory systems adversely, leading to a
supply chain failure.

Resultantly, Nike's production facilities around the world ended up manufacturing a far
greater number of a less popular shoe model and not enough of those models that were in
high demand.

In the finger pointing that followed, Nike's

management laid the blame for the problem
squarely at the door of i2. During a press
 meet, Knight complained, "This is what we
get for our $400 million huh?"5

On the other hand, i2 claimed that the

mismatch was a result of Nike's haste in using
the incomplete system and its unwillingness to
use i2's standard systems and procedures.

Regardless of who was to blame, Nike's

reputation in the market took a beating. The
company also lost considerable market share
to rivals like New Balance6 and Reebok.7

Nike's Profits Fall Contd...

One of the leading sports goods companies in

the world, Nike manufactured high quality
athletic shoes for a variety of sports including
baseball, athletics, golf, tennis, volleyball and
wrestling. In addition to footwear (which
accounted for almost 60 percent of the
company's sales), Nike also manufactured
fitness equipment, apparel and accessory
products. The company's products were sold
in over 140 countries around the world.
Headquartered in Beaverton, in the state of
Oregon, Nike had production facilities
scattered around the world and had a
complicated supply chain system that
extended from Nike factories in developing
countries in Asia to uptown stores in the US
and other parts of the developed world.

Background Note

The future co-founders of Nike met in 1957, when Knight was an undergraduate student
and middle-distance athlete at the University of Oregon (which was known for having the
best track program in the country) and Bill Bowerman (Bowerman), the athletics coach.

In the early 1960s, when Knight was doing his

MBA at Stanford University, he submitted his
marketing research dissertation on the US
shoe manufacturing industry. His assertion
was that low cost, high quality running shoes
could be imported from labor-rich Asian
countries like Japan and sold in the US to end
Germany's domination in the industry.
 In 1962, while on a world tour, Knight met the
management of the Onitsuka Company
(Onitsuka) of Japan, which manufactured high
quality athletic shoes under the brand name
'Tiger'. He arranged for these shoes to be
imported to the US for sale under the name
'Blue Ribbon Shoes' (BRS).

(When the management of Onitsuka asked him about which company he represented, he
thought up this name. BRS became the forerunner of Nike). In late 1963, Knight received
his first shipment of 200 Tiger shoes. In 1964, Knight and Bowerman formed a
partnership, with each of them contributing $500, and BRS formally came into being.

The first shoes were sold from the basement of Knight's house and the backs of trucks
and cars at local track events. The athletes who wore the shoes were asked for feedback
to improve future shoe designs. By the end of 1964, BRS had sold 1300 pairs of shoes
and generated $8000 in revenues...

New System's Teething Troubles

Nike built its original demand management

system in the mid-1980s, as it moved towards
becoming the number one sports shoes retailer
in the world. During that period, Nike had also
tremendously increased the number of its
manufacturing units around the world. The
demand management system was designed
and implemented by over one hundred
information specialists within the company.
This system was designed to run the Futures
program introduced by Nike in the 1970s,
which was supposed to help Nike manage
inventory more effectively. Under this system,
Nike's retail partners placed orders with the
company six months before the required
delivery date. These orders were then
forwarded to the manufacturing units around
the world...

The Consequences of the Breakdown

The breakdown of the new system had several adverse consequences on Nike. It upset the
supply chain system and caused the company to be bogged down by a large number of
unpopular models, while not having enough of the popular ones. Not being able to cater
to the market demands, Nike's reputation suffered and it lost considerable market share to
rivals like New Balance and Reebok. New Balance especially gained on Nike in market
share...

Conclusion

Both, Nike and i2 came out the worse for the

supply chain failure. Analysts felt that, the
negative publicity and the washing of dirty
linen in public affected both companies even
more adversely than the monetary losses and
the production complications. However, Nike
continued to work with i2 on the five-year
long project and by the end of 2003 (the
project was to end in mid-2004), had made
considerable progress. In September 2003, the
company announced that its ability to closely
monitor the movement of goods from raw
materials through factories to retailers was
finally paying off...

Exhibits

Exhibit-I: The Swoosh Symbol

Exhibit-II: Income Statement (All Numbers in Thousands of Dollars)
Exhibit-III: Market Share of Major Sports Goods Manufacturers in the First Quarters of
1999 and 2000