Company background NIKE is a name that scarcely needs any introduction.

It has been one of the business phenomena of the 1980s and 1990s, second perhaps only to Microsoft in its pursuit of global dominance from very humble beginnings. Founder Phil Knight famously made his first shoes using a waffle iron in what he has called a tiny operation in my mothers laundry room. By 1992 it had become a $4.5 billion turnover corporation. In fact, NIKEs history goes back to 1963 , when Knight (still today very much the head of the business) set up Blue Ribbon Sports to import running shoes from Japan to the US, or even to the late 1950s when he ran for the University of Oregan track team and started looking for better footwear. The name (Nike was the Greek goddess of victory) did not appear until 1972, and sales grew steadily thereafter on the publics new-found enthusiasm for fitness. Having overtaken Adidas, NIKE was caught napping by Reebok who stole US market share leadership in 1986. Far from admitting defeat, however, NIKE was reinvented and fought back using sponsorship of sports stars such as Michael Jordan, Andre Agassi and (more recently) Eric Cantona to spearhead its positioning as the maker of top-flight performance athletic wear. Today it is the undisputed industry leader. NIKEs culture is easy to recognize, if hard to define. It prides itself on being a bit different, creative, and iconoclastic. The senior team used to meet together for sixmonthly strategy reviews that became known as buttface meetings, with no holds barred and plenty of shouting at each other. Inevitably, as the company grew to have 10,000 employees (or associates as they are known), something of the informality had to go. The surprise, perhaps, is that it managed this transformation without coming to grief. One part of the founding philosophy that is still fundamental is the pursuit of athletic performance. To outsiders, NIKE may appear to live in a fashion-dominated sector, but fashion is not a word that NIKE people like to use. They consider it to be technology company and insist that their success stems from performance and quality, not slick salesmanship. With growth came internationalization. In Europe, NIKE initially worked through distributors, selecting local partners in each country. The success of these led the company to decide that it wanted to own its own distribution, and gradually through the 1980s it bought out its distributors and converted them into wholly owned subsidiaries, each operating largely autonomously. A European headquarters was set up, which migrated several times through different countries before settling at Hilversum(The Netherlands), but it remained small and did not even act as a financial holding company for NIKE in Europe. Nineteen-ninety-two was the year that NIKE set out to do something about Europe. It had now reached over $1 billion of sales in Europe alone. It owned its distribution in all the major countries but each country still ran its own operations. Roger Tragesser, an experienced logistics professional who had set up NIKEs operations in Memphis, was sent to Europe to take a fresh look at how the business was being run. With the help pf consultants, he set about rethinking NIKEs European logistics from scratch. In November of that year a workshop was called to bring together key NIKE managers from both Europe and the USA. Its purpose was to receive the consultants recommendations and to determine which way to go.

Sales and markets The consultancy team collected data for 1992 expected sales and forecasts for 1997. These were prepared in a pre-recessionary climate and reflected a bullish vision of the prospects for Europe over the intervening period. In aggregate, the forecasts represented a doubling of sales to around $2 billion per annum. While footwear was the origin of NIKEs strength, it had also become a major seller of apparel (clothing), ranging from socks and sweat bands to jackets and to complete jogging suits. In Germany and in the UK, by 1992, it was selling more pieces of apparel than pairs of shoes. However with the average price of footwear being much higher, shoes in aggregate outsold apparel by two to one in sales value terms. Exhibits 5.1 and 5.2 show the sales by country for footwear and apparel. It can be seen that three markets France, Germany and the UK- dominated 1992 sales, representing 68% of footwear volumes and 77% of apparel. This situation was expected to change somewhat by 1997, because of strong growth in the south of Europe. By 1997, total sales of footwear were forecast to reach 31 million pairs, of which 62% would be in the three largest countries. Apparel was expected to reach 27 million pieces, with the main countries representing exactly two-thirds of the total. Exhibit 5.3 summarizes the situation for apparel as it was in 1992. ( This pattern reflects what economists refer to as the hot banana of demand in Europe, which curves from the middle of the UK down through eastern France, Benelux and western Germany into northern Italy. Within this areas lies a large proportion of Europes population and spending power.) It should be noted that Scandinavian countries ( Sweden, Norway and Finland) were not members of the EU at that time. Goods moving to and from the EU, or between Scandinavian countries, still required customs clearance. The business was strongly seasonal, with two main seasons (spring and autumn) somewhat alleviated by smaller intermediate seasons. The seasons were driven not only by weather but also by the sporting calendar: demand for tennis shoes in winter, or football boots in summer, was very limited. Stock had to be built up in advance of peak sales, particularly as most products were brought in from the Far East on long lead times (see below). The next graph shows the resulting profile of sales and inventory. It can be seen that the seasons were more pronounced in the apparel business. NIKEs approach to its markets was a special one. Firstly, it strongly supported the independent and specialist sports retailer. This was not simply out of philosophy or altruism. By dealing with independents, and declining to sell top- flight product to mass retailers, NIKE maintained the image of its shoes and at the same time avoided price discounting. NIKE : seasonality (1992) For example, it did not sell to hypermarkets or discount retailers, with the possible exception of close-outs, i.e. product left unsold at the end of a season. This policy is legitimate provided it can be shown that the product has special needs which require a particular level of advice to the consumer. NIKE argues that performance sportswear cannot be sold in the same way as tins of beans.

Secondly, a large proportion of NIKEs sales were on what it termed the futures programme. Basically, the retailer was expected to place his bulk orders some six months in advance of the selling season. For example, for spring 1993 (products which would reach the retailer from January onwards), samples were shown to the trade in May and June 1992 and their orders were required by the end of July. This enabled NIKE to manufacture at least a proportion of its requirements on the basis o firm orders, thereby reducing its inventory risk. Not surprisingly, retailers had been less than impressed by the introduction of the futures programme. However, the strength of the brand was such that NIKE was able to impose it in most cases. Retailers had to agree to place futures orders in order to earn the right to order replenishments during the course of the season. In aggregate, around 70-80% of NIKEs volumes were shipped under the futures programme, the balance being bought for stock and then sold as replenishments. Although, as stated, NIKE supported specialist outlets, this did not mean only dealing with mom and pop stores. The customer base included some very large sportswear retailers, including Olympus in the UK and Decathlon in France, both of which were expanding internationally. In addition, the US retailer Foot Locker was starting to enter the European marketplace. NIKEs nationally based organization was poorly positioned to service international retailers who expected the same prices and service in each country. This was one reason why change was necessary. Larger retailers tend to have their own distribution centers and buy centrally. In the UK, the top 20 delivery addresses accounted for over 50% of NIKEs sales. In France, the equivalent figure was under 40% and in Germany only around 15%. Spanish retailers were much less concentrated and the top 20 addresses accounted for less than 10% of that market. Logistics Among the consultants, it became a standing joke that no one could ever work out exactly how many stockholding points NIKE had in Europe. There were almost 20 main warehouses in the 11 countries that the consultants visited, but several others were also used on a seasonal or ad hoc basis. In some case, footwear and apparel were stocked in separate warehouses. The majority of products were sourced in the Far East and imported in container loads. There was a small function in Hilversum which consolidated the orders raised by national subsidiaries and passed them to NIKEs Hong Kong office which co-ordinated purchase and manufacture. Where necessary, different products destined to a single country would be consolidated together to make up a full load. Consolidation of goods for a number of countries was less common, although not unknown. While virtually all footwear was imported from the Far east, apparel was more varied. Of this, around 30% was sourced in or near Europe, from low-cost countries including Ireland, Portugal and Turkey. The precise source tended to vary from year to year, as orders followed the lowest costs or the most favourable exchange rate. Goods from these sources were normally shipped by road in full truck loads. The next graph shows the main locations used for warehousing. Details on the three largest countries are as follows.

UK. NIKE had an in-house operation at Washington, Country Durham, of around 18,600 m squared. The status of the site was somewhat unusual, in that part of it was owned freehold and part was leased. There was some scope for expansion and the possibility of buying the remainder of the freehold. The distribution centre performed a range of value-added services for customers, particularly Olympus ,such as relabeling and repackaging of shoes. Import containers came through the port of Southampton and goods could be held in the warehouse under customs bond i.e. without paying duties or VAT until they were delivered to customers. FRANCE. NIKE France was based at an owned facility north of Paris which had itself only been opened some two years before. Although it had an area of around 14,300 m squared, strong growth in the market meant that the warehouse had been almost too small on the day it opened, and stock was also held in at least two outside warehouses with an area totaling some 10,000 m squared. The building had, however, been designed for easy expansion on to the adjoining plot, which was available for ,purchase. Le Havre was the main port of importation, but the only bonded storage was at a forwarders warehouse at the port. Value-added services were not performed on-site but sent out to a subcontractor. GERMANY. Stork in Germany was split between three warehouses, a mixture of in-house and contracted operations, totaling 25,000 m. The lease on one of these was close to expiry. Like France, Germany was struggling to cope with the volume that it had reached.

A critical difference between countries was the number of SKUs that each was able to offer in its range. It should be understood that, in footwear and apparel, there is a multiplication of SKUs: A styles x B colours x C sizes = D combinations. From the point of view of the logistician, D is what counts since each of these is a separate reference for picking and packing. Calculating SKUs at the most detailed level (D). NIKEs total catalogue for footwear and apparel ran to over 10,000 SKUs each per season. However, no single country was offering anything like this range. The large countries were selling an average of around 5000 SKUs of each category. In the smaller countries, the figure could be under 2000. Although the nature of the retail market varied significant from country to country, there was a similar pattern of deliveries in most countries. An analysis of delivery notes showed that in Belgium, which was reasonably typical, half of all orders delivered were for fewer than ten pairs or pieces and a further third were for between 11 and 50 pairs or pieces. This pattern of many small orders was created partly by customer demand ( frequent replenishment orders during the season) but also by internal company failures. In many cases, although customers placed their orders months in advance, goods were not available in stock by the agreed shipment date. This led to split

shipments and the release of a large wave of back-orders when the goods eventually arrived from suppliers. The problem was particularly acute on the apparel side. One particular case was the difficulty that NIKE experienced in the handling of collections. For example, customers might want to buy not only Jordan basketball shoes but also co-ordinating socks, pants and sweatshirt. These three items were often sourced from three different manufacturers and received in Europe at different times. The warehouses found it very difficult to ensure that all items in a collection were shipped to retailers at the same time. An analysis of order lines shows that the large operations were processing around 10,000-20,000 per day on average, and several times this at peak. Small operations might pick under 2000 order lines per day outside the peak. However the average number of units (pairs or pieces) per order line was between one and five in all subsidiaries. (An order will typically be for a number of different products. Each of these is usually set out on a separate line of an order form, hence the description order line. For example, if you order six red widgets, three green and three blue, this is an order for three order lines comprising 12 units.) Generally, footwear and apparel were ordered and delivery separately. This corresponded to the way in which both NIKE and large customers were organized. Customer service issues Roger Tragesser and the consultants met with both general and logistic management in all NIKEs subsidiaries, to discuss not only the operation but also the needs of local customers. It became clear from this that, despite (or in cases because of) the growth in the business, NIKE was far from perfect in the delivery of customer service. Some of the issues highlighted were as follows. There were major problems in getting apparel to the retailer by the due date. Long order lead times and unreliable suppliers were blamed for this. There was a lack of information available to local management about the expected arrival date of shipment, and a corresponding failure to keep customers informed of when they might receive the orders. There were difficulties, as mentioned, in keeping collections together. If a retailer wished to specify some special collection of their own, ensuring that this was sent as a single delivery often proved impossible. There was a lack of availability of consistent value-added services. Relabelling, reboxing and other services were recognized as potentially an important part of the package ( summarized as making NIKEs easy to do business with) but not all countries were equipped to provide these. Computer systems had been developed autonomously in each country and most have serious deficiencies. In some cases there was no on-line inventory record to refer to when taking a customer order. In others, there was no scope for prioritizing or batching up orders before passing them for picking. If a customer tries to order a product which he or she was informed was out of stock, this lost sale was not generally recorded. Indeed, there was little measurement of customer service standards in most countries: Belgium

suggested that 10% of customer orders were cancelled for one reason or another but it was impossible to know for certain. Deficiencies in customer service, delays in production or volatility in the markets tended to lead to goods being left unsold in the warehouse at the end of the season. These were referred to by NIKE as close-outs. There were several options for disposing of these. The first was to reduce the price and sell them through normal channels: to do this it was desirable to spot as early as possible in the season that there was a developing overstock situation and to start taking action to push the product with a minimum of discount. The second opinion was to wait until the end of the season and then sell at much larger mark-downs to discounters or order secondary channels. The third opinion was to keep the goods until the following year and hope to clear them. Unfortunately, this not only cluttered up the warehouse but risked undermining the sales of the new products for the following year. Close-outs were a headache for management and a symptom of underlying problems.