1. The failure of the new supply chain system affected Nike adversely. What were the reasons for the failure and how did the breakdown harm Nike?
2. What are the important elements to be kept in mind while implementing a new system in an organization? What is the importance of a good working relationship between partners and the sharing of responsibility in implementing critical projects? What mistakes did Nike and i2 make?
3. comment on the lessons learned and the future of Nike’s supply chain system.
Inventory Problems at Nike
NI KE'S PROFITS FALL
In Febntary 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 percen t. 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 fa llen 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 prob lem squarely at the door of i2. During a press meet, Knight compEained, "This is what we get for our $400 million, h uh?"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 Reebok7• One of the leading sports goods companies in the world, Nike manufactured high quality athletic shoes for a variety of sports including baseba ll, athletics, golf, tennis, volleyball and wrestling. In addition to footwear (which accounted for almost 60 percent of the company's sales), Nike also manu factured 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 count1ies 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 trnck program in the country) and Bi ll 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 man ufactiiring indusirry. His assertion was that low cost, high quality running shoes could be imported from labor-rich Asian count1ies 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 manufactmed high quality athletic shoes under the brand name ;Tiger'. He airnnged for these shoes to be imported to th e US for sale under the name 'Blue Ribbon Shoes' (BRS). (When the management of Onitsu ka asked him about which company he represented, he thought up this name. BRS became the forerunner of Nike). ln late 1963, Knight received his first shipment of 200 Tiger shoes. In 1964, Knight and Bowerman formed a partnership, with each of them cont1ibutin g $500, and BRS formall y 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 a.th letes wbo 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.
In 1965, the paitners hired Jeff Jobnson (Johnsoo), the first full time employee of BRS. Johnson was formerly a salesperson for Adidas shoes8 bn 1966, Johnson helped open the first exclusive BRS store in California. Sales of the shoes grew and in 1969, Knight resigned from his job as a professor at the Portland University and devoted himself to BRS full time. By the end of the 1960s, BRS had 20 full time employees and several retail stores.
By 1971, BRS staited manu facturing its own line of athletic shoes in addition to selling Tiger shoes. For the new line of shoes, Johnson thought up the name Nike9• Carolyn Davidson, an acquaintance of Knight, designed the 'Swoosh ' symbol, which was a graphic representation of the wing of Goddess Nike (Refer Exhibit-I). In ret11m for what became one of the most recognized symbols in adve1tising, Knight paid her $35.
The first shoe with the Swoosh logo came out in early 1972. In the same year, following distribution differences, BRS patted ways with Onitsuka and from then BRS only sold shoes manu factured under the Nike brand. T-shirts, wiith the Nike name and logo printed across them were introduced at the Pre-Olympic trials in 1972, marking the beginning of the company's foray into the apparel business.1n the same year, BRS also introduced the ';Futures" booking program , which allowed production forecasters to "make to order" and pre-finance while reducing risks of over inventory . Knight was one of the first businesspersons to allow retailers to pre-order inventory. This was a revolutionaiy business decision that soon became standard among other businesses.
During the first halfof the 1970s, sales of Nike shoes grew from $10 million to $270 million . The growth was facilitated by the creation of revolutionruy shoe designs like the waffle sole and the air cushioned sole system, known as Nike Air. DUJin.g the 1970s, BRS opened production faci lities in Taiwan and Korea. Sales in other pmts of the world, like Europe, Australia and Asia also increased. In 1978, BRS officially changed its name to Nike Inc, in keeping with the populaiity of its brand . Nike rapidly expanded its product line during the 1970s and early 1980s and in b·od uced a wide variety of shoes for different spo1ts. Models such as Nike-Air and Air Force I for basketba ll, and the Nike-Air and Air Ace shoes for tennis were introduced over the years. (By the early 1980s, the company had over 200 shoe models in its prod uct line).
In 1980, Nike went for a public issue of 2 million shares of common stock. It also opened a Spo1ts Research and Development Lab in Exeter, New Hampshire, US. By 1981, Nike shoes were manu factured in 1 1 coLmtJies around the worldl, and the company employed more than 3000 people. In the same year, Nike International Ltd. was formed to serve a growing overseas market. At the Olympics in 1984, 58 Nike-sponsored athletes from around the world won 65 medals in all, generating immense publicity for the company.
In 1985, the company signed a contract with Michael Jordan, an NBA 10 player for the Chicago Bu lls11 who went on to become one of the most successful celebrities ever to endorse Nike.Nike introduced a range of shoes called 'Air Jordan', named after the player. In 1986, the revenues of th e company crossed the one bi llion dollar mark for the first time. In 1987, Nike introduced the first cross-training shoe, which could be used for mnning as well as indoor sports. In 1988, Nike adopted a new punch-line which said "Just Do It". A series of advertising campaigns highlighting the new punch-line were made.
By 1991, Nike had become the world's first sports and fitness-equipment company to sw·pass $3 billion in total revenues. The year J 992 saw the opening of the first Niketown in Chicago. Niketown was a specialized store showcasing the different products developed by Nike over the years. Nike Asia was fot1'l'led in 1997. In 1999, tbe company embarked on a huge IT project to implement a new supply chain system and several new applications in Customer Relations Management (CRM). The new system experienced teething troubles, causing Nike to experience some problems in the fiscal year ended May 200 I. However, the company made necessaiy modifications to bounce back and regain its position as tbe number one sports goods manufacturer in the world. In the fiscal year ended May 2003, Nike's revenues exceeded $ 10 billion . (Refer Exhibit-II for Income Statement).
NEW SYSTEM'S TEETHING TROUBLE S
Nike built its original demand management system in the mid-1980s, as it moved towards becoming the number one sports shoes retailer ii n tbe world. During that period, Nike had also b·emendous ly increased the number of its man u fact11ring 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 inhuduced by Nike in the 1970s, which was supposed to help Nike manage invento1y more effectively. Under this system, Nike's retail partners placed orders with the company six months before the required delive1y date.These orders were then forwarded to the manufactu1ing units around the world .
The system worked well enough in the initial years. However, as Nike grew, it found that the system was not equipped to deal with the increasingly complicated operations. The number and complexity of orders began increasing at a very fast pace and the length of the product line also increased tremendously. Manufacturing of products also became very com plicated and some of the populru·models like the A ir Jordan sneaker requi red over 130 individual steps to manufacture. ln the meantime, the company had also entered into conh·acts with several new manufacturers, all of whom had to be incorporated into the system . To deal witb the increased scope of operations, the system was constantly modified over the years by Nike's in-house technicians.The programmers made thousands of adjustments to accommodate busier manufactuiing schedules, tighter shipping dates, and growth in the consumer list. These constant adjustments made the system more complicated and susceptible to breakdown. "It's been modified thousands and thousands of times. These Little arcane changes had to create seiious prob lems as Nike moved to a whole new system,"said one former employee of Nike12•
In 1999, Nike embarked on an IT project that involved the creation of a new supply chain system that was more suitable to the requirements at hand . The IT overhaul was designed to sb·eamline communications with buyers and suppliers and lower operating costs. The supply chain project was clubbed with CRM applications that would help take orders from customers and other systems of inventory management. The company expected the new supply chain system to reduce orde1to delivery time by about 50 percent. Nike contracted i2, to install the main system, and SAP AG and Siebel Systems Inc. for the other CRM applications. The enti re project, which was to take five years to complete, was estimated to cost $400 million, of which the price of i2's software was $40 million. In implementing the system however, Nike refused to use the templates and methodology developed by i2, prefeffing instead to customize the system to match its existing demand management software. Therefore, the new system was customized to accommodate the eccenh·icities of the oiiginal system . This customization and modification slowed down the new application considerably and made it more complicated to use. A nalysts said that these modifications resulted in users waiting as long as ;three minutes for a single screen to load.
In addition to this, increased employee turnover also harmed the project. For instance, the CIO involved in the decision to initiate the supply-chafo renovation left the company before the system was properly installed.The company also did not use third patty integrators to help implement the software and bad trouble integrating the new system with the company's processes and with the SAP software being implemented simultaneously.
In 2000, when the project was only a year old, Nike began using it to send orders to its manufacturers in the Far East. However, because the system was not completely developed, the glitches led Nike to overestimate demand for some shoes while underestimating demand for others, creating major invento1y problems.The system sent flawed data to the manufachJrers in the Far East, causing some of them to receive double orders for the same shoes and not enough orders for other, sometimes more popular models. "The solution wasn't stable at the time they slatted using it,"said Katrina Roche (Roche), i2's chief marketing officer13
By late 2000, it was discovered that Nike's manufoctu1ing units were producing too many shoes of ce1tain models and not enough of others. Therefore, the com pany was also not in a position to meet retailers' demands for some fast selling models. Nike and i2 staffers soon tracked down the problems and developed ways to get around them,either by changing operational procedures or by writing new softwa re. However, by the time the problems were tracked and rectified, it was too late and Nike found itself with serious inventory problems on ha nd. In early 200 I, Nike warned that "complications"caused by the implementation of the i2 software had led to product sho1tages and excesses as well as late deliveiies. Soon after that,Nike posted a profit of $ 97 million for the third quaiter ending in Februruy.This was almost 24 percent lower than what was estimated earlier.The prices of Nike shru·es also fell shru"Ply, sending investors into frenzy.
THE CONSEQUENCES OF THE BREAK DOWN
The breakdown of the new system had several adverse consequences on Nike. It u pset 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. In retail-dollar sneaker sales, New Balance went from less than four percent market share in the first quarter of 1999 to over nine percent in the same quarter of 2000. During that period, Nike's share dropped from over 48 percent to about 39 percent. (Refer Exhibit-Ill). "For some reasoa, Nike took its eye off styling content and, when added with these inventory problems, that has cost the company not only market share but valuable shelf space,"said Wells Fargo Van Kasper analyst John Shanley.14
The huge number of unpopular models manufachtred had to be sold at highly discounted prices, resulting in a decline in profits for the company. When the scarcity of popular models was discovered, the company had to get them manufactured very rapidly and ship them to retailers to meet at least part of the demand.Consequently, the company incurred additional shipping costs as it had to airfreight the shoes at a cost of $4 to $8 a pair compared with about 75 cents by sea. The liq uidation of the excess inventory took Nike six to eight months. The delay in shipping the shoes also soured relations between Nike and several of its major retailers. Footlocker, the biggest retailer of Nike shoes in the US, reduced the shelf space allotted to Nike in all its stores. fn addition, it also began selling several Nike shoes at less than half the marked price to liq uidate excess slow moving inventory soon after the suppl y chain fiasco. Footlocker also entered into several lucrative contracts with Nike's rival New Balance.
Nike laid the blame on i2 saying that the company failed to provide quali ty service. The supply chain software was supposed to reduce the amount of rubber, canvas and other materials that Nike needed to produce its shoes. It was also supposed lo help Nike bui lt more of the shoes customers wanted and fewer of the ones they did not. Paradoxically , Nike was left with far too many of the wrong shoes and not nearly enough pairs of its hottest sellers. Nike maintained that i2 did not deliver the functionality that it promised to deliver and that the defective software provided by the company was entirely to blame for the delivery of wrong orders that led to the under manufacturing of some models and the over-manufacturing of others. Officia ls at i2, however, said that Nike did not implement the software properly.They claimed that the applications generated bad data because Nike refused to use standard templates and modified the applications in an indiscriminating manner. "We recommend that customers follow our guidelines for implementa.tion--we have a specific methodology and templates for customers to use--but Nike chose not to use our implementation methodology," said Roche.15
Analysts opined that another important reason for the failure was that neither Nike nor i2 brought in a third-party integrator.The Nike supply planning application had replaced an older application that did not meet the requirements any longer. However, the application was implemented in a h urry by the Nike staffers and the i2 consultants. Neither Nike nor i2 thought of using a third-party integrator to adapt the systems to the organizational processes . Analysts felt that using a third party integrator was of critical importance, especially in large scale projects like the one at Nike. A neutral third-pa1ty perspective from an integrator would have exposed flaws in the project, which might have been overlooked by people closely involved with it. Analysts also felt that both Nike and i2 moved too fast without taking the appropiiate cautionary measures. They also did not test the system, which would have revealed the glitches at a much earlier stage. Fwther, Nike extended the new system to its thousands of dispersed suppliers and dish·ibutors simultaneously. Analysts felt that a piecemeal implementation of the system would have reduced the magnitude of the problem considerably.
Another problem was that Nike implemented two major projects simultaneously. Both projects (supply chain and CRM) were company-wide initiatives and had to cover the large number of suppliers and customers who interacted with Nike. Each project by itself would have been difficult to implement, but Nike took u p both of them simultaneously, creating unnecessary complications for itself in the bargain .i2 was also relatively inexpeiienced in providing .supply chain software for the apparel industry . It had earlier worked with Dell Com puter Corporation '6, 3M 17, and other manufacturers and helped them garner considerable cost savings. However, Nike was the first apparel compa ny that it worked with, therefore, it was not prepared to dea.I with the dynamics of the apparel indust1y."The biggest lesson we learned was that we need to have more communication with the customer before we begin designing the supply-chain software," said Pallab Chatterjee, president of solutions operations at i2."We're su pply-chain experts, not shoe experts."18 Piene Mitchell, an analyst at AMR Research, suggested that the blame rested partly with Nike's control systems. "Phil Knight makes it sound like it's a surpiise to him," he said. "If he doesn't have checkpoints for these kinds of projects, i f be doesn't know where $400 million of his company's money is going, then he doesn't have control of his company."19
CONCLUSION
Both, N ike and i2 came out the worse for the supply chain failure.Analysts felt that, the negative publicity and the washing of dirty linen in pu blic 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 proj ect was to end in mid-2004), had made considerable progress. ln September 2003, the company announced that its ability to closely monitor the movement of goods from raw materials through factories to retailers was fina lly paying off. By 2003, Nike had managed to reduce its inventory levels and boosted gross margins and profits. In the quarter ending August 2003, the company obtained gross margins of 43 percent, which was up from 41 percent in the same quaiter the previous fiscal. The implementation of the new system also helped Nike streamline its orders for footwear. According to a report by BusinessWeek, a leading business magazine, before the new system was implemented, about 30 percent of the total volume of Nike's footwear orders was based on speculation and guesswork. By the end of 2003, when the system was over 75 percent complete, the orders based on speculation had reduced to just three percent. The futures orders had also in.creased by 10 percent over the previous year in mid-2003.Analysts expected Nike to benefit fu1ther after the project was fully functional.
1).The new supply chain system implemented by Nike had a lot of issues in the beginning. There were many reasons clearly visible which resulted in this failure and were also stated by people from both Nike and i2, as well as neutral analysts:
Nike never tested the system before the actual implementation. In most of the cases, glitches and flaws are revealed in the testing stage
Instead of bulk implementation, a piecemeal implementation of the system slowly would have reduced the magnitude of the problem considerably
Nike implemented two major projects simultaneously for supply chain and CRM. The issues in both the projects would have magnified the faults ineach other considerably
Increased employee turnover also harmed the project. The executive involved in the decision to implement the supply chain software left the company before the system was properly installed
The breakdown in the implementation of the supply chain system had a lot of adverse effects on Nike. The entire project was estimated to cost $400 million, of which the price of i2's software was $40 million. Nike ended up manufacturing a far greater number of a less popular shoes model and not enough of those models that were in high demand. These were major inventory problems. For example, the system sent flawed data to the manufacturers in the Far East, causing some of them to receive double orders for the same shoes and not enough orders for more popular models. All this resulted in products with excess manufacturing being sold at highly discounted prices, and thus a decline in profits for the company. They also had to incur additional shipping costs for shipping shoes through air at a cost of $4 to $8 a pair compared with about 75 cents by sea. The liq uidation of the excess inventory took Nike six to eight months. As a result, Nike's profits for the third quarter of the fiscal year ending May 2001 fell short of expectations by almost 24%.
2). The difficulty in implementing a new system in an organization is directly proportional to the size of the organization. It is not just a software installation procedure, but more of an organizational change. It also should be kept in mind that that different systems have different effects on any organization.
For example in this case, Nike was one of the first businesses to allow retailers to pre-order inventory. Nike brought about a revolution in the apparel industry and hence made supply chain the most crucial part of its business. So implementing a system which will completely change their supply chain, should have been taken more seriously.
The employess of the organization, along with its retailers or distributors also play a very important part in the implementation. Since these are the people who are most affected by any change in the organization. A proper training to all these stakeholders is crucial to the system's success.
All the reasons mentioned in the first part of this problem have also to be taken into consideration while implementing a system in an organization.
A good working relationship is extremely important between partners in implementing critical projects. Both the service provider and the client are equally responsible for the success of a project, as well as its failure. The service provider has its reputation at stake and the client risks all of its business operations that are based upon that project. A good relationship not only increases the chances of success, but also makes it possible to eliminnate flaws from the project, ease the process of implementation and also customize the system to the client's demands.
Nike and i2 had a lot of issues in their relationship, both while implementing the software as well as after its initial failure. Nike implemented the system without any previous testing, and by the time the problems were tracked and rectified, it was too late and Nike found itself with serious inventory problems on hand. But that was just the monetary implications of the failure and unfortunately wasn't the end of problems for Nike. Nike 's management laid the blame for the problem completely on i2. The negative publicity and the blame game affected both companies even more adversely. It forced Nike's retailers to move to other brands, since they were not sure whether Nike would be able to come out of this. The management should have been more inclined towards rectifying the procedures by taking the help of i2's expertise. Also, since it was i2's first experience in the apparel industry, it also meant i2 losing some of its future potential clients in this industry.
3).We have learned some very critical lessons from this case. Both Nike and i2 were good players in their respective markets. And a good partnership could have made a lot of fortunes for both these companies. But on the other hand, when the project failed, it meant that both the companies had to suffer a lot. This provides one simple conclusion that the scale and benefits of a project do not guarantee its success, but requires even more care and seriousness.
Nike however did not spend much time in retrospection. It soon moved forward with its supply chain system. Nike continued to work with i2 on the five-year long project and by the end of 2003 had made considerable progress. Before the new system was implemented, about 30 percent of the total volume of Nike's footwear orders was based on speculation and guesswork. By the end of 2003, when the system was over 75 percent complete, the orders based on speculation had reduced to just three percent. This shows that the system itself wasn't flawed, but the implementation was faulty.
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