Question

Please answer the following Case analysis questions 1-How is New Balance performing compared to its primary...

Please answer the following Case analysis questions

1-How is New Balance performing compared to its primary rivals? How will the acquisition of Reebok by Adidas impact the structure of the athletic shoe industry? Is this likely to be favorable or unfavorable for New Balance?

2- What issues does New Balance management need to address?

3-What recommendations would you make to New Balance Management? What does New Balance need to do to continue to be successful? Should management continue to invest in the New Balance Executional Excellence initiative? What, if anything, should New Balance do in response to the acquisition of Reebok by Adidas?

New Balance Athletic Shoe Inc

On a pleasant August evening in 2005, Jim and Anne Davis enjoyed what was meant to be a relaxing dinner at home. As they fin­ished their meal , however, they could not help but turn their attention to a headl ine in that morning's Boston Globe, a copy of which sat on their kitchen ta ble: "Adid as to buy Reebok."For over 30 years, the Davises had been the sole owners of New Balance Athletic Shoe Inc., one of the top five producers of athletic footwea r in the world. Given their experi­ ence i n the industry, they had suspected for some time that an Ad idas-Reebok transaction might be in the works. Neverthe less, the formal announcement caused them to wonder about the implications of this deal for New Balance. By bringing together Adidas and Reebok-the second- and third-largest  produc­ ers of athletic footwear, respectively-this transac­ tion would create ajuggernaut that would rival Nike, the largest competitor in the industry. Although the Davises did not have to answer to Wall Street con­ cerning their competitive plans,they knew that many in the industry-including their own  employees­ would soon be asking for their response. Lately, the Davises had focused significant atten­ tion on an initiat ive cal led New Balance Executional Excellence (N B2E), the goal of which was to in­ crease the quality and efficiency of the company's operational processes through the application oflean manufacturing. Started less than one year earlier,

NB2E already had provided evidence of early im­ provement, and the Davises did not want to lose the growing enthusiasm for this initiative among New Balance 's 2,600 associates. Further,they realized the importance of staying true to the private company's uniq ue operating philosophy, strategy, culture, and history.Nonetheless, they could not help but wonder whether New Balance's priorities needed to be ad­ justed in light of the shi fting competiti ve landscape.

THE U.S. ATHLETIC SHOE INDUSTRY'

The United States was the world's largest mari<et for athletic shoes and apparel, accounting for roughly 50 percent of the $32 billion spent globally each year. Between 2004 and 2009, the number of pairs of ath­ letic footwear sold in the United States was expected to grow ata 6.3 percent annual growth rate (8.4 percent growth among women who accounted for 58 percent of all pairs purchased), reaching 530 million pairs in 2009. Industry trade group Sporting Goods Intelligence projected that the $9 bi llion branded-shoe market in the United States would grow by 8 percent in 2005. Growth was slowing in part because of a maturation in consumer interest in sports and fitness activities.

ln recent years, manufacturers moved to com­ bine fashion and comfort to appeal to a broader range of consumers, namely those who wore athletic shoes for casual purposes. Concurrently, a combi­ nation of technological developments and style im­ provements in athletic footwear helped drive growth. While leather continued to be the most popular ma­ terial for athletic footwear uppers, some firms, such as Adidas-Salomon (Adidas), had developed shoes with so-called "smart textiles" and microchips that adjusted fit based on the wearer's activity, height, weight, and running terrain. Nike maintained a comfortable lead ahead of its competitors with 43 percent of the total global market for athletic shoes and apparel (see Exhibit I for sales and financial data for leading firms in the industry). Within the U.S. footwear market, Nike accounted for 36 percent of the market, while Adidas, Reebok and New Balance held on to a variable 8-12 percent each (Exhibit 2). Appendix A provides a brief description of each of the top competitors in the industry. The acquisition of Reebok by Adidas would cre­ ate a firm that rivaled Nike in terms of size and would boost Adidas 's share to roughly 20 percent of the U.S. footwear market. Though the Adidas-Reebok transaction was notable for its size, it reflected a broader recent trend of consolidation in the ath­ letic footwear industry. In July 2003, Nike acquired Converse, a Massachusetts based manufacturer of court and casual shoes, for $305 million. In June 2005, Stride Rite-the maker of casual footwear brands Keds and Sperry Top Sider-announced its intention to acquire Saucony, a $I 70 million manu­ facturer of specialty running shoes and apparel based in Peabody, Massachusetts. With respect to worldwide marketing, Nike out­ spent its rivals, spending $213 mi Ilion in measured media in 2004, compared to Adidas' $89 mill ion and Reebok 's $42 million.2 For the first JO months of 2005, for example, New Balance total advertising expenditure was $17.3 million.3 For all companies , a large portion of worldwide media expenditure was geared toward the marketing of footwear brands in the United States (Exhibit 2).

In addition to spending more on marketing than New Balance, most of its competitors produced their shoes outside of the United States, largely because the manufacturing of athletic footwear was highly l.abor intensive and required relatively low levels of worker skill. As a result,China had become the larg­ est manufacturer of athletic footwear for the U.S. market, commanding 85 percent of the category.4 The U.S. trade deficit in shoes was expected to con­ tinue to deepen, as more manufacturers shifted pro­ duction offshore. The deficit had increased about 7 percent per year since 1999, reaching 379 million pairs in 2004. Overall,Americans purchased 2.2 bil­ lion pairs of shoes and boots in 2004, enough to give each man, woman and child there 7.7 new footwear options that year.5

Distribution Channels

In 2005, the American sneaker market was divided i.nto several discrete retai I channels catering to pe­ riodically overlapping demographics that defined themselves by distinctive tastes, buying patterns, and price elasticity. Foremost among these were the "big box" chains such as Wal-Mart, Target, and Sears which together sold an estimated $12 billion in ath- 1.etic apparel and equipment per year.6 The second­ Largest group by sales volume included national sellers such as Foot Locker, The Sports Authority, Finish Line, and The Athlete's Foot. Next were smaller urban chains that maintained strong ties to tastemakers and arbiters of fashion. These chains typically either sold brands at heavy discounts to younger consumers or catered to high-end custom­ ers with very specific needs (e.g., high-performance running). The leading sneaker manufacturers, such as Nike and Adidas, also maintained showcase stores that featured new products in lavish displays accom­ panied by TV screens and music.These branded out­ lets were less retail stores than museums to the sneak­ ers of tomorrow and the "classics" made legendary by the likes of Pele, Chuck Taylor, and Michael Jordan.

With 4,000 stores around the world, Foot Locker was widely recognized as the world's leading retailer of athletic shoes and apparel. Foot Locker contribut­ ed slightly less than I0 percent to Nike's annual sales, but Nike products represented as much as 50 percent of sales for Foot Locker. The Sports Authority had 400 U.S. stores, but maintained a broader product base, selling workout equipment, basketball gear, sneakers and sports apparel. Finally, with 598 stores in the United States, Finish Line, originally started in the early 1980s as a discounter whose primary business was in "closeout" sales, prided itself in of­ fering prices that were typically $5 less than other retailers. Although beholden to the vagaries of fashion and manufacturers' ability to design hit products that would drive traffic into their stores, larger re­ tailers held a great deal of sway over the fortunes of the sneaker companies. For example, even though Converse sneakers were sold through many retail and on-line outlets nationwide, Foot Locker accounted for roughly 20 percent of all Converse sales. Any decision by Foot Locker about Converse's product placement thus could have a material impact on the brand's sales. In another case, a 2003 dispute over promotional practices for Nike shoes caused a costly one-year rift between the manufacturer and Foot Locker.

THE MAKING OF NEW BALANCE

New Balance was founded in Boston in 1906 as New Balance Arch 7 by William J. Riley, a 33-year-old British emigre who committed himself to helping people with problem feet by making arch supports and prescription  footwear  to improve shoe  fit. In I 934, Riley went into partnership with his leading salesman, Arthur Hall. In 1954, Arthur Hall sold the business to his daughter and son-in-law, Eleanor and Paul Kidd. Arch supports and prescription fool:\vear remained the cornerstone of the business until 1961, when they manufactured the Trackster, the world 's first performance running shoe made with a ripple sole and available in multiple widths.

Du.ring the 1960s, New Balance's reputation for manufactu.ring innovative performance footwear available in multiple widths grew through word of mouth and grassroots promotions. When Jim Davis bought the specialized shoe man ufacturer from the Kidds on the day of the Boston Marathon in I 972, he committed himself to  uphold the  company's founding va lues of fit, performance , and manufac­ turing . He recalled: I wanted to buy a company, I wa  young and single. I didn't have anything. so I had nothing to lose. [ looked at it a year before I bought ii.Al the time, I was in electronics. 1 pa. ed. because l knew noth­ ing about footwear and not much about spotting goods.other than what I knew from doing spotts in college. I got a pair of the hoes.statted running in them,and peoplewould come up lo me and comment that I must be a good runner. Unable to put a deal together in elect1-onics.with the company still avail­ able. I went back,and t he guy was desperate losell it. We paid $100,000 for the company; we put $10,000 down, and the rest of the $90,000 was generated from lowering im•ento1y.

At the time N ew Balance was primarily a mail­ order business with only a handful of U.S. retail­ ers. Jim Davis started traveling around the country to expand reta il distribution , and sales grew from $ I 00,000 to around $300,000 over a two-year pe­ riod. Anne, who wou l d marry Jim in 1984, joined New Balance in 1978 and focused on bui lding a dis­ tinct culture for New Balance associates and those who would do business with the company around the globe. Indeed, N ew Ba l ance's first international sales office and first European manufacturing facility both opened in 1978 in Europe. Since then the brand had expanded from Europe and Asia to the Middle East, Latin America, and Africa.

In the early 1980s New Balance set up new manufacturing facilities in New England and signed on international distributors. In 1982, the company reached the $60 million mark and debuted the well­ received 990 running shoe, the first athletic shoe priced at $ 100.1 Jn the 1990s, the company unveiled its New Balance Suspension System to telegraph its emphasis on cutting-edge R&D and its dedication to meeting the needs of performance-oriented runners. The company 's commitment to multiple sneaker widths remained a sell ing point that was reflected in the brand 's iconic marketing logo of three differently sized feet.9 Being Different Herb Spivak, executive vice president of opera­ tions and a 12-year veteran of the company, provid­ ed a picture of New Balance's un ique features. He observed: Ow·values have been very, very con istent and re­ inforced continuously by J im and Anne Davis. We do not endorse athletes, as an example. We aim to make every one of ow·shoes a pc1fo1mance product as opposed lojusl a fashion product. We sell eve1y shoe that we make in multiple width . because we believe that fit is a critical pe1fo 1mance charac1e1is­ tic. We maintain a great percentage of our product in inventory for replenishment. so that dealers can con­ tinually get fill-ins when they sell and when they need ce1tain sizes and widths. In con1ra 1. competitors pretty much tell retailers. "OK. tell us six months in advance what you 're going lo want lo buy and we'll deliver it. But it's fixed. and we don't plan on having future invenlo1y.'·These basic factors, combined with the maintainin g of our domestic factories all come together to describe what makes us unique.

Because the company had remained private,Jim Davis felt that he and his colleagues could act more nimbly and be more socially responsible than their more well-heeled competitors. "I f we were a pu b­ lic company, I am sure the shareholders would say, cclose your factories and make the product abroad because you will make more dough for me and my quarterly dividend,"' Davis told the Boston Globe in 2004.'0 Davis also felt that the company had prod­ ucts capable of providi ng sol id margin s needed to generate the cash flow required  to finance growth. As such, the company's balance  sheet  remained very strong with a seven-to-one ratio of assets to Liabilities.

Beyond financial flexibility, other aspects of the company's operations and strategy suggested that it was somehow different from competitors. President and Chief Operating Officer Jim Tompkins noted: One thing that sets us aprui and that is we a1-e manu­ factun:rs. But "e at'C mediocre marketers by design. Our marketing spend as a percent of net revenue is much lower than our competitors.The message that we talk about in the marketplace i different from our competitors' message. And that's what makes the company unique-ii is that we are manufacturing­ and operations-based. not marketing-based.

Jim Davis emphasized this distinction: In the early lo mid- l 980s. Nikeand Reebok wem both becoming major players. and eve1ybody said, "You ought to really do this because Nike and Reebok are doing it." Well , we tried a cou ple limes with product and programsand whatever, and we failed. drastically. So then l woke up one moming and I said, "We're not any good at that. We're really good at this ." So we concentrated on doing this instead of that, and thus differentiated ow-selves. Culture Similar to its unique business model, New Balance's corporate culture developed over time. Teamwork was a critical component. "When you 're young and starting up," Jim Davis recalled, "you don't really think in terms of a culture. You just sort of do things a certain way. One day we realized that we're very team-oriented, and that we empower people. When we got to a certain size and maturity, we realized that that's basically what we were all about."Further, New Balance developed a long-standing commitment to social responsibility that, according to Anne Davis, "made people feel good about deal ing with the com­ pany." For example, after the 2004 Asian Tsunami, New Balance declared that it would match whatever its associates donated. Then retailers wanted to par­ ticipate, so New Balance decided to match their con­ tributions for a total contribution of $1 million. The company also promised to donate another $1 million if 100 pen;ent participation was reached among as­ sociates. In the end, every person in the organization contributed something.

The company's culture was also very entrepre­neurial, starting with the owners' willingness to take risks and encourage others to do the same. Anne em­ phasized that this culture of change and challenge extended to the factory, noting thatmatmfacturing em­ ployees, mostly organized in cross-functional teams, represented one of the greatest forces for change in the company.This spirit was also reflected across New Balance's senior managers. Chief Financial Officer John Withee observed, "Continuous improvement is a mantra here. Do the best you can, work cross­ functionally, and work towards a common goal." As an example of a major risk taken relatively early on by the company, Jim Davis pointed to the introduction of the 990 series running shoe in the 1980s, the first $I 00 shoe at a time when athletic shoes were retai ling for about $50. "People said we were nuts;' Jim mused, "but we couldn 't make them fast enough. People learned from that and be­ came more confident in pushing the envelope."As of 2005, the 990 series still represented the top-selling product for New Balance, accounting for roughly 3.5 percent of the company's sales.

Endorsed by No One

In an industry dominated by endorsement deals and large print and TV campaigns featuring celebrity ath­ letes, New Balance put its energies and investment into research, design, and domestic manufacturing, and let the resulting products speak for themselves. New Balance felt it could eschew celebrity endorse­ ments and position itself as a brand for performance­ oriented runners less swayed  by  fashion  trends and popular personalities. New Balance extended its product-focused strategy to its branding efforts in 1992 with its "Endorsed by No One" campaign despite holding only 3 percent of the U.S. market for athletic shoes at the time."

New Balance introduced edgier iterations of the campaign that culminated with an anti-endorsement ad message that actually chided professional athletes for losing sight of the game and focusing dispropor­ tionately on endorsement deals. With slightly older core customers (between 25 and 49), New Balance concluded it could afford to take this irreverent tone in commercials. The "For Love or Money" campaign was unveiled in February 2005.12 The slogan felt "nat­ural to us because it was something that only New Balance can stand in front of;' said Paul Heffernan, executive vice president of global marketing. "Jt's all about everyday athletes playing for the love of the game."13 By contrast, Reebok introduced a new ad campaign of its own that same month featuring bas­ ketball icon Yao Ming, Olympic gold medalist Kelly Holmes, actress Lucy Liu, and tennis player Andy Roddick, with the tagline "I Am What I Am.'*

The New Balance campaign featured a you ng basketball player admonishing "some of the pros out there," for their swagger and potentially un­ sportsmanlike conduct on and off the court that had become accepted behavior in some quarters. Most notably, a game-ending brawl during a Detroit Pistons game in Auburn Hills, Michigan, on November 19, 2004, that erupted after Indiana Pacers' forward Ron Artest leapt into the stands to retaliate against a spectator who had lobbed a cup of beer at players from the stands. The New Balance campaign took a direct approach with an unassailable jibe: "Is fight­ ing in sports everjustified?" In addition to 30-second TV spots, the campaign included print, billboard, and onl ine ads that posed a series of questions about athletes'-and by exten­ sion, their fans'--core values: "Can a losing coach still be a good coach?" and "Which teaches a player more, winning or losing?"Yet another New Balance ad from the same series was even more direct and confrontational: "Just in case you forgot, this is what a pass looks like. . . . This is what a Aoor burn looks like." New Balance was reportedly planning to spend $21 million on its 2006 advertising campaign, which was close to its entire promotional budget for the year.16

PRODUCT DESIGN

According to Paul Heffernan, New Balance's focus on width sizing and fit had  historically  dictated the design of many of the company's products. He explained: A 15-year-old who wants a pair of Nike Air Jordans might curl his toes or put on six pairs of socks to make that shoe fit. tn that case, purchases are made based on how a shoe looks rathe1·whether it really fits well. The market that is interested in width sizing and fit is a little bit older and more mat u.re; those custom­ ers demand a product that is a bit more conservative in its presentation and style.They tend to like a prod­ uct and buy it again and again and again. It 's Like a white button-down shirt. I own a white button-down, it wears out, I buy another white button-down.

New Balance had approximately 60 people in product design and development who were involved with efforts on two fronts. One was incremental de­ velopment of existing models. The second involved the incorporation of new technologies such as Absorb EX-a premium, visible-cushioning techno logy­ and Zip, a patented responsive-cushioning technol­ ogy scheduled to debut in 2006. Both technologies were oriented toward a younger customer base.

Despite New Balance's desire for long-lived products, Heffernan knew that the company had to remain capable of delivering prod ucts to the shorter­ cycle, fashion-oriented segments of the market. He noted:The 991 series-our franchise shoe of 25 years­ stays in line three years. With t hree ye;us to update that shoe, we can afford lo lake our time and be more thoughtful. But the more fashion-oriented products often need to chw·n every 60 to 90 days. which cre­ ates a completely different model for prod uct design. The fashion segment cares !es about widths and more about time to market, so we need to work under tighter timelines for these product .

Jim Davis felt that in the past five or six years, New Balance had "dropped the ball in a few places, and design is one of them." He added:

Right now. we are emphasizing design more tha n we have in the past and are raising the level and tature of design within the organization. Design is going to become more impo1tant as time goes on. a much larger foclor than it has been. We tend to be a little bit more conservative with design than our competition and stay within a ce1tain real.m for a relatively long pe1iod oftime. Then we find that we might have hit a wall. o we have to come back and reinvent ourselves a little bit and move forward. The manufact uring folks do that every day. The rest of the company is so11 of playing catch-up there, and we have to re­ invent ou1-i;e lves a little bit more often than we have in the past.

SALES AND DISTRIBUTION

New Balance had focused more on smaller retailers, running specialty shops, and family footwear shops. John Withee explained, "We are heavi ly focused on supporting the smaller type of service-oriented cus­ tomer." New Balance sold its products through ap· proximately 3,500 retailers representing over 12,000 sites, commonly referred to as "doors." Its largest retai I customer was Foot Locker, a major chain that, on its own, accounted for over 3,000 doors in the United States. New Balance divided its retai lers into two groups-key accounts and specialty dealers (see Exhibit 3). Key accounts were further divided into six strategic accounts and 49 other key accounts. Specialty retai lers were subdivided into three major channels: elite ru nning stores (i.e., specia lty stores for serious runners); independently owned and op­ erated New Balance stores; and other independent dealers, which were primarily family shoe stores.

Fran Allen, executive vice president for sales and service, noted that strong relationships with both small and large retailers were critica l for New Balance. "The importanc.e of independent, specia lty retai lers to the image of our brand far exceeds their 25 percent share of our sales volume. Obviously, large accounts are  extremely  important  in  terms of their sales volume. Consequently, we give both groups a lot of attention and work hard to give each what they need to be successful."

In contrast to competitors, New Balance relied on a sales force that was composed of independent agents. Allen noted, "In the sporting goods industr there is an unwritten rule-or maybe it isjust natural selection-that as you get to a certain point in sales volume, you grow out of an independent sales force. You bring the sales organization in house. At New Balance, we do not have any in-house accounts. We prefer using independent, dedicated sales agencies with an entrepreneurial mindset." Indeed, all the company's sales agents were independent of-but exclusive tNew Balance. These sales agencies were compensated through a sales-based commission. Under this system, new salespeople might earn $40,000 to $50,000 per year (from which they would cover their own expenses) whi le the most experienced salespeople could make several hundred thousand per year. Large retail ac­ counts were managed by a total of 10 head sales agents, 6 of whom were strategic account managers (SAMs). Specialty accounts were managed by ap­ proximately 100 agents, who worked for independ­ ent sales agencies, but were managed by five regional managers employed by New Balance (see Exhibit 4). New Balance was investing in a sales force automa­ tion system to increase the agents' productivity.

Despite the fact that these agents were not direct employees of New Balance, Allen-who had been with New Balance 15 years as sales manager-not­ ed that the company was not concerned about these relationships that were u nique to the industry. "We have a loyal group of salespeople, and their longev­ ity of service provides us with a distinct edge over our competitors," he explained, attributing this loy­ alty to the strength of New Balance 's leadership and culture. He added: In 1991, my first year at New Balance, the company sold $84 million in footwear in the United States; last year, we did a little over $1 billion. One of the reasons Jim Davis liked this sales organ'ization was that he had head sales agents who had been with him for 15 or 20 years before [ got here and had gone through some difficult times and stuck with the company.

For smaller, privately owned retailers, New Balance had historically paid an independent sales representative to take product orders and either key them into the New Balance order system or fax them to New Balance's corporate sales office at company headquarters in Allston, Massachusetts. To speed the ordering process, the company had recently invested in what Chief Financial Officer John Withee termed a "state-of-the-art" ilistribution center and was us­ ing technology to leverage this resource, support its retailers, and strengthen its retail relationships. In terms of information technology, a new sales force automation system enabled sales representatives to place direct orders remotely, access New Balance's inventory information, and check on delivery sta­ tus business-to-business (B2B). A B2B application promised to enable retailers-particularly smaller retailers-to do the same without intervention by the sales representative. Withee added, "This appli­ cation helps manage the flow of product through the supply chain and is about as vital as you can get in determining our performance."

Going forward, Withee explained, the B2B ap­ plication would help reta.ilers directly manage basic ordering, thereby freeing up the sales representative to engage with the retailer and make recommenda­ tions about new items to carry or options for reduc­ ing inventory levels. Concerning retailers, Jim Davis explained: If you've been selling New Balance shoes for  the last I 0 years, to sell 1,000 pairs you  had  400 pairs in inventory. Assuming you are selling all domestic product, which some of our accounts do, we would say: "We think we can increase your sales next year and lower your invento1y at ihe same time. We will ship to you the  day after you order the product, so yom inventoties can be decreased dramatically. Rather than canying 400 pairs, you can cru..-y 200 pairs, and sell maybe 1,200 pairs instead of 1 ,000.And your mru·kdowns ru·e negligible, because your inven­ tory's so low:' And we think ihat's a very compelHng argument. We ru·e taking all the risk when we do that.

By shipping quickly and accurately, New Bal­ ance offered retailers the ability to build loyal cus­ tomers of their own. Indeed, according to Jim Davis, New Balance had far the greater consumer loyalty than any of its competitors. "That translates well for the retailer, especially if that retailer's able to satisfy the customer with that 13EEEE, because that cus­ tomer always wants that 13EEEE. He or she will generally go back to that same retailer to get that product.. And retailers lmow that!'

SUPPLY CHAIN AND  MANUFACTURING

Jn contrast  to  Nike and  Reebok, who outsourced nearly all  of  their  production  to As.ian manufac­ turers, New Balance used  outsourcers  for only 75 percent of its U.S. volume. For the remaining 25 per­ cent,final product assembly took place in one of New Balance's five factories in  the Northeastern United States. One-third of these domestically  assembled shoes were  referred  to  as "cut through assembly" product. For these shoes, New Balance would import finished soles and the raw materials for the upper from Asian suppliers. The uppers would then be ful­ ly manufactured and attached to soles in the United States. The remaining two-thirds of New Balance's domestic product was referred to as "sourced up­ per." For sourced-upper shoes, New Balance would import finished  uppers  and  soles  from  Asia and would complete the assembly by attaching the appro­ priately sized uppers and soles at its U.S. factories. The more time-intensive cut-through-assembly prod­ uct was manufactured at New Balance's factories in Lawrence, Massachusetts; Skowhegan , Maine; and Norridgewock , Maine. Sourced-upper shoes were as­ sembled at these three sites,as well as another factory in Norway, Maine.17 Exhibit 5 provides an overview of the manufacturing network and supply chain.

Foreign Suppliers

New Balance sourced the soles for most of its shoes from two suppliers in China (suppliers A and B in Exhibit 5). Depending on the shoe, these two firms also supplied either finished uppers or kits contain­ ing a significant portion of the materials required to stitch uppers in the United States.18 Finally, these firms provided a limited amount of fully assembled shoes. These firms shipped to New Balance's three materials warehouses , two in Skowhegan, Maine, and one in Lawrence, Massachusetts.

Historically, it would take approximately one week for New Balance to place a purchase order for components (e.g., soles, uppers, or kits) and have it accepted by the appropriate supplier in China. It would then take roughly six weeks for the supplier to manufacture the required components and an ad­ ditional five weeks to ship them by boat across the Pacific and transfer them to cross-country transport for delivery to the designated warehouse. Until the early 2000s, New Balance tended to place orders for a particular sole on a monthly basis in batches as large as 20,000 pairs. For a single type of sole, each order would include roughly 20 different SKUs, re­ flecting different shoes' lengths and widths such as 90, J OY,E, and 12EEE.

John Wilson, vice president for manufacturing, noted that the company had taken several steps in recent years to reduce the lead times from Asian suppliers. First, New Balance had shifted to placing smaller orders of between 2,000 and 10,000 pairs on a weekly basis. Jn addition, New Balance made ar­ rangements with these suppl iers to enable them to "pre-buy" their own raw materials on behalf of the company, thereby reducing the lead time required to produce an order. Based on the above initiatives and other efforts to reduce lead time, the average time from placing a component order with a suppl ier to having those items available at the New Balance materials warehouses fell from 12 weeks to approxi­ mately 9 weeks by 2005.

New Balance also contracted with two other Chinese manufacturers who were  responsible  for 75 percent of New Balance's foreign final product assembly. These firms shipped finished shoes to several of New Balance's smaller international divi­ sions, but most were bound for the United States and were sent via ship directly to New Balance's product distribution centers in Lawrence, Massachusetts, or Ontario, Cal ifornia. The order-to-delivery lead time 25 percent of the total, while materials accounted for the remaining 50 percent. Estimates of the total cost for a cut-through-assembly pair of shoes assembled in the United States was approximately $13 greater than a similar product fully man ufactured in Asia. For "sourced upper" pairs, this difference was thought to be about $0.50, due to import duties placed on fin­ ished goods entering the United States.

In 200 I, the average lead time for a cut-through­ assembly batch (typically consisting of 12 pairs of shoes) through a New Balance plant-measured from arrival of the raw materials to loading on the truck as finished product-was roughly 8.5 days. By 2005, the company had reduced  this time to 2.5 days through significant attention to process improvement and work-in-process reduction within the plants. Wilson and his colleagues believed that further reductions in manufacturing lead time were attainable. Following production, domestically assembled pairs were transported via truck either directly  to the retai ler (in the case of large strategic accounts) or to inventory in the Lawrence or Ontario distribu­ tion center. Each of those sites received and filled orders from smaller retailers. Combined, these two distribution centers held roughly 6.4 million pairs of finished shoes. The Ne"v Balance Workforce­ A Key to Operations l111prove1nent

The Davises believed that improving the produc­ tion process at New Balance req uired widespread initiative and involvement from the company's front line workers. Before joining the New Balance team, these manufacturing employees went through a lengthy selection process. New Balance screened potential employees for their professional or per­ sonal experience in team-based environments. For example, the company often looked for employ­ ees who had played team sports in high school or college. New hires were paired up with an experienced employee, known as a "buddy;' and were placed in a training team for six to eight weeks u ntil they were comfortable enough to go on a regular production team. "As soon as new employees come in, we train them in the fow1dations of associate involvement, continuous improvement, and leadership," Anne Davis explained, "but we don't want to put them immediately into an existing team and have them intimidated by the skills that the more experienced members already have." Another important  feature  of  the  company's U.S. workforce was that it was not unionized. Some employees performed two or three jobs on teams-a feature that would not be possible under a strict job classification system. "If one area of the factory is slow and the other one is loaded up," Anne Davis explained, "people willingly go to the next area to make their numbers for the day,and we would not be able to do that if they were unionized." "It's a flexibility issue. The factories are always changing," Jim Davis explained. "The folks on the factory floor are always pushing us to change things so they can do it better. We would n't be able to do that if we were unionized." He added: Annie and l are constantly amazed at how flexible these folks are, and how engaged they are in what they're doing. They go home, and they come to work the next day thinking, "How can 1 do things better? How can [ be more productive?" And what we're trying to do is get the whole company to think that Beyond the organization of the workforce, compensation also played a key role in the abil­ ity of New Balance's management to leverage em­ ployee knowledge and initiative. A few years ago, New Balance briefly moved from individ ual-based hourly wages to team-based piece rates, but then quickly moved back to the hourly system. Jim Davis explained:

Teammates put too much pressure on each other under the team-based compensation system. If one person was out of work because she had a sick child at home, there would be too much pressure on the rest of the team to perfo1m, and she came in feel­ ing guilty the next day. So we have also a culture of mutual respect here, and we sat down with ow· supervisors and we talked about how we might bet­ ter accommodate these people, and one of the things that we came up with was hourly pay. We did a pilot run for a month or so, and we found that the produc­ tion when we were compensating them on an how·Jy basis was equal lo if not better than under the team­ bai;ed piecework system.

Anne Davis added that the maintenance of hourly compensatio n helped gain support for con­ tinued training of the workforce. "Under the team­ based rate, many supervisors saw training as another project, as taking their people away from the job;' she said. '•With hourly pay they were more willing to send poople to training, and by doing training early on, people know right away whether or not they fit in the company."

LEAN MANUFACTURING ­ NEW BALANCE EXECUTIONAL EXCELLENCE (NB2E)

In 2004, New Balance began New Balance Execu­ tional Excellence (NB2E) to apply the principles of the Toyota Production System (TPS) to shoe produc­ tion. One of the key goals of NB2E was to further reduce the lead time from a retailer's order to its delivery. Tompkins clearly stated his objective for NB2E:

Our goa l is I 00 percent delivery of requested prod­ uct within 24 hours. It may be impossible, but we are going to\\ ork toward something very, very close to that-to a position "here, for that two or three percent that \\ e can't deliver within 24 hours-we can ce11ainly replenish within. say, four days al the most. And that would be only for the worst-case scenario where we got completely surprised by an order.

According to Tompki ns, an essential component of NB2E would be to move the company's manu­ facturing plants from batch production to single-pair flow. He added:

Over a period of time I would like to know that when a part of an u pper gets cut to what pair of shoes that part is heading. . ..And we might be making several different models in a given factory on a given day, but we would still know that that pru·t right there and the one in the ot her factory over there are going to end up in a shoe that is put on tliat trailer heading to that cu tomer.Thal is where I would like lo get to.

Before NB2E, to improve product availabi lity, New Balance was required to resort to what Spivak called "brut e force" by greatly increasing finished goods inventory. For the compa ny's flagship shoe, the 991 , inventory was doubled to ensure availability for all colors, sizes, and widths. Though there was a significant increase in sales of the 991,the inventory cost was very high.

If N B2E were to be successful-approaching Tompkin s' goal of I 00 percent availabi lity within 24 hourswhile reducing inventory levels-manufacturing cycle times would need to be dramatically reduced. These changes required complete realignment of factory operations. Spivak observed:

0lll' factory had a classk a1rn ngement with a cutting, an embroidery. a stitching, and an assem bly depait­ ment. Each department did their particular tasks for all styles, and t he factory worked on a batch basis. To 1ealign that under NB2E would require a big change. Instead of moving a day's worth of production, we needed to move toward a more continuous flow. Doing this would require us lo reduce work in proc­ ess significantly and get the line associates and su­ pe1visors to embrace that change. The real challenge would be lo keep making shoes every day while this transformation \Va ongoing.

THE MARATHON

G limpsing the brilliant evening sun outside their kitchen window, the Davises could not imagine a more fitting time for reflection. Though New Balance traditionally had competed on the basis of its manu­ facturing, service to retai lers, and its ability to build loyalty among a core set of customers for its high­ margin, long-lived shoe models, 2005 had not been a stellar year mostly beca use of operational issues. "We did a very poor job of executing i n the first half of the year," J im Davis noted. "We had a lot of qual­ ity problem s, late del iveries, late samples, which in­ hibited the effectiveness of our salespeople." To Jim Davis, the answer to the company's problems was "basically doing everything we've always done be­ fore, only doing it better."Yet as New Balance grew well beyond $ I billion in revenue, the question of scalability came up.

Homework Answers

Answer #1
  1. New balance is the only footwear maker with manufacturing presence in US. It is one of the largest maker of sportswear in the worls.the acquisition of Reebok by Adidas will not have a major impact on the company as it has already introduced its new programs in lean manufacturing. There will be a quick response given by the company to this acquisition. This program will help the company to increase efficiency and reducing lead time.
  2. The main issues that the company is facing are demand uncertainity,long lead times, high cost of production, and high level of inventory
  3. New balance should establish an integrated communication system with retailers to record inventory levels for forecasting and managing production level to maintain low level inventory. It needs to eliminate overstocking and Overprioduction.the Company should improve its implementation of NB2E program to implant lean manufacturing strategy. This program should be solely dedicated to improve profitability and efficiency. Thus there is anteed to better implement the system.
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