Operations Management Problems at Nike

Operations management is a vital business function that remains a very important field of study in both academia and the corporate world. Operations is concerned with the transformation of inputs into outputs, and how this transformational process is managed determines the efficiency and profitability of a company. Operations can be viewed as the central core of an organization through which all other functional areas interface. Functional areas such as finance, marketing, and human resources each serve specialized roles that support an organization’s operations. The central dependence on operations in regards to the purpose of an organization’s existence highlights the importance of effective operations management.



In a global market, managing operations is no small task. With factories, offices, stores, and distribution centers dispersed throughout the world, multinational organizations are responsible for coordinating operations across a global supply chain. Supply chain management is a field of operations management that is concerned with the flow of information, products, and services across a network of customers, enterprises, and supply chain partners. While coordinating this web of operations, organizations must minimize costs, maintain and improve quality, manage processes and human resources, and continuously seek innovative ways to compete in a highly dynamic global marketplace.

Nike Inc

For the purpose of exploring concepts and tools used to effectively manage operations, let us consider an organization that has encountered problems with the management of their global supply chain in the past. Nike is an iconic footwear and apparel manufacturer that operates in over 180 countries with reported revenues of $25.3 billion in 2013. Nike currently has 719 factories, employing 990,325 workers in 44 countries around the world. It is the world’s leading manufacturer and seller of athletic apparel and sports equipment. It takes its name from the Greek goddess of victory, and is branded by the highly renowned swoosh logo and “Just do it” company slogan.

Global Supply Chain

Nike’s global supply chain is an extremely complex network that impacts a wide range of stakeholders around the world. The supply chain was initially built through the outsourcing of manufacturing directly to suppliers. In 1975, the company introduced the Future Program which divided Nike’s operations into 5 geographical regions with the goal of improving operations. Due to the ineffectiveness of this program, by the 1990s the company’s supply chain had many problems such as ineffective forecasting and an inability to keep up with changing consumer trends. As a result, Nike launched the Nike Supply Chain (NSC) project in 2000 with goals of implementing enterprise resource planning (ERP) and customer relationship management (CRM) software into an integrated platform. This project proved to be a disaster for Nike.

i2 Technologies

In 2001, Nike reported significantly lower earnings that expected, which the company blamed on i2 Technology’s demand-forecasting and supply chain management software. Nike officials claimed that the software resulted in shortages of some stock and excess of others. The inventory upset reduced Nike’s fiscal third-quarter sales by about $100 million. Nike and i2 worked to track down the problems and develop new software and operational procedures, but before the changes could be made the inventory problems had already significantly affected Nike’s bottom-line. Additionally, the company’s ordering and scheduling system was causing shortages and overstocks which had a huge impact on inventory and logistics costs. Nike was forced to quickly fill back orders and dispose of excess inventory through discount distribution channels.

Identifying Key Problems

In order to devise a plan of action to address the problems discussed in this case study, it is necessary to identify the problems faced by Nike during this challenging time. The primary issues outlined are inventory management, scheduling, and demand forecasting. To address inventory and scheduling, it is necessary to consider the company’s supply chain management strategy and design. Additionally, we will need to consider ways that Nike can improve their operations as originally intended back in 1975 with the Future Program. We will explore strategies, tools, and software that Nike can implement to effectively reverse its growing problems through the realization of an objective global operations strategy.

Demand Forecasting

One of the most important components of efficient supply chain management is accurate demand forecasting. This is because procurement, production, distribution, ordering, scheduling, and inventory are all determined based on predictions of what demand will be. While forecasts are never completely accurate, there are a variety of tools and techniques that Nike can use to improve the accuracy of their predictions. Since i2 Technology’s forecasting software proved to be ineffective, Nike should consider a variety of quantitative methods utilizing in-house data to generate insights.

One common and useful method of forecasting demand is linear regression. By relating demand to time and studying the linear trend line, the company can project the slope into the future and make predictions based on past behavior. Seasonal adjustments should be made and forecast error calculated to improve accuracy. Forecast error can be calculated using techniques such as mean absolute deviation (MAD). By monitoring forecast error over time, Nike can implement forecast control and calculate a tracking signal to determine if predictions are consistently high or low. This will allow the progressive refinement of their predictions from one period to the next.

Inventory Management and Scheduling

With today’s dynamic demand fluctuations, inventory management is paramount to ensure that a company has enough inventories on hand to satisfy demand while minimizing the many costs associated with maintaining large inventories. The first step to efficiently managing inventory is generating accurate demand forecasts. Next, Nike should utilize their recently implemented ERP software and coordinate this with their suppliers. Considering Nike’s supply chain, it would likely be very beneficial to consider vendor managed inventory (VMI) and a continuous replenishment program (CRP). The combination of these two strategies could have a significant positive impact on both Nike and its suppliers; improving the entire supply chain starting farthest upstream at the procurement of raw materials.

As explained by IBM, “Getting enough of the right product to the right outlet at the right time is the secret of success in supply chain management. That’s why these days more and more companies see the benefits associated with VMI/CRP.” Vendor managed inventory and continuous replenishment makes the supplier responsible for inventory management and product replenishment. The effective implementation of VMI/CRP would be dependent on Nike successfully implementing their ERP software and integrating it with their suppliers to share point-of-sales data and demand forecasts. It would require a strong relationship between Nike and its suppliers where information is exchanged daily. This would allow the manufacturer to accurately schedule its operations according to demand forecasts and inventory requirements rather than producing arbitrarily as Nike places order.

Supply Chain Management Strategy and Design

A supply chain encompasses all activities associated with the flow and transformation of goods and services from the raw materials stage to the end user (customer), as well as the associated information flow. This means that Nike’s supply chain begins where their manufacturers source the raw materials for the production of Nike’s apparel. The fact that Nike outsources their manufacturing implies that the company has little or no control over procurement or manufacturing processes. These are major operational areas that could help to minimize costs and improve quality and efficiency if managed properly.

Nike could consider acquisition of its suppliers to gain full control of their operations; otherwise the company is limited to its supplier selection and whatever influence it has as a third-party. The implementation of VMI/CRP as previously discussed would help to improve Nike’s operations upstream because it would give the manufacturer greater control in the production process by having the data to procure and produce only what is needed. This would mutually benefit both Nike and its suppliers because both parties will have the ability to mitigate costs and maximize efficiency. Good communication and the consistent flow of accurate data are vital for this strategy to be effective.

Conclusion and Recommendations

In recent years, Nike has made great strides in improving their supply chain management. This assessment has been based on past conditions of which many have been resolved in the past decade. The goal of this paper was to outline a strategy to allow Nike to recover from the downward slide that resulted from forecast errors projected by i2 Technology’s software. During this time, Nike’s supply chain was in a state of chaos that resulted in huge earnings decline. The primary areas that needed improvements were demand forecasts, inventory management, and scheduling. Each of these areas are interrelated, as demand forecasts determine inventory requirements which sets the tone for scheduling.

Because of the interrelatedness of these three problems, a major strategy that Nike should consider is VMI/CRP which could effectively address all three problems provided successful implementation and integration of ERP software. Additionally, Nike should consider various methods for forecasting demand and continuously refine their predictions over time. This data as well as point-of-sales data generated by the ERP software needs to flow smoothly between Nike and its suppliers to ensure the effectiveness of VMI/CRP and to allow the manufacturing facilities to mitigate waste and maximize efficiency.

References

Russell, R., & Taylor, B. (2011). Operations Management (7th ed.). Hoboken, NJ : John Wiley and Sons, Inc.

Nike, Inc., Manufacturing. (n.d.). NIKE, Inc.. Retrieved June 24, 2014, from http://nikeinc.com/pages/manufacturing

Goel, P. (2009, December 27). Supply chain management Disaster at Nike. Scribd. Retrieved June 24, 2014, from http://www.scribd.com/doc/24540648/Supply-chain-management-Disaster-at-Nike

Wilson, T. (2001, March 1). Nike: i2 Software Just Didn't Do It. . Retrieved June 24, 2014, from http://www.corvelle.com/library/ebuscouse/caseStudies/Nike_i2.doc

IBM. Vendor Managed Inventory (VMI), Continuous Replenishment Program (CRP). (n.d.). IBM -. Retrieved June 25, 2014, from http://www.935.ibm.com/services/be/en/it-services/vmi-crp.html