A New Supply Chain Project Has Nike Running for Its Life
Nike, Inc., is the world's number one athletic shoemaker, with 500,000 workers in 55 countries and sales topping 40 percent of the athletic shoe market. The company went through a phenomenal growth spurt from 1996 through 1999, with its annual sales reaching $9 billion in 2000. And yet during 2000 and 2001 the company encountered financial problems and its reputation was seriously damaged.
Many reasons have been suggested for the Nike's recent decline. One, in the minds of many, is Michael Jordan's final retirement as a basketball player (Jordan had been a Nike spokesperson). Many also believe that the slowing economy in 20002001 hurt Nike. However, John Shanley, an analyst at Wells Fargo Van Kaspar, points out that, "Athletic footwear remains hot as a pistol." When Nike's stock value fell by more than 15 percent, Reebok's stock skyrocketed by more than 250 percent. Analysts blame poor shoe design and note that New Balance's market share climbed from 7 percent in 1999 to 9 percent in 2000, whereas Nike's share dropped from 43 percent to 40 percent. (New Balance is successfully placing greater emphasis on more subtle designs.)
Nike may have been hurt by the severe public relations problems it faced in recent years. The company was the object of intensive public accusations of exploiting foreign labor, particularly in Indonesia.
One reason for Nike's problems that everyone, including Nike, agrees on, has been the overproduction of some unpopular shoes and the underproduction of other popular designs. Nike blames both the new supply-chain software it installed and i2 Technologies Inc., the maker of that software, for these production errors.
Dallas, Texas-based, i2 is a major supply-chain software vendor. The company has been highly successful, with many customers both large and small. I2's supply-chain software is designed to improve the management of inventory, production, shipping, and sales forecasting. Nike turned to i2 because it wanted to be able to respond more quickly to shoe market changes by being able to plan production schedules and begin production of a new line of shoes in one week rather than taking a full month after demand shifts. The system is supposed to help predict demand so that the company could better plan and control the production of existing products. Thus, Nike would be able more quickly to reduce the production of shoes that have gone out of style, leaving the company with fewer unwanted shoes, while increasing its production of shoe styles that are rising in demand.
Nike had previously made a major commitment to this type of software by installing an SAP supply-chain management system in the late 1990s. However, the systems were problem ridden and, in Nike's view, inadequate, leading to Nike's second attempt, this time with i2. Nike, like most big corporations, has experience with major information technology projects, the previous one being the installation of an intranet in mid-1997. That project was meant to bring key people in many countries into close contact with the headquarters in order to improve global collaboration and so significantly reduce the time it took to make product design decisions. In that case also, Nike's goal was to respond rapidly to changes in style demands. But many vital employees seldom used the intranet. A later evaluation of the project showed that Nike had planned the project poorly, that key people had been left out, and that the staff was inadequately trained on both the system and its business value.
The key element of the i2 project was to aid in speedily forecasting market changes. In addition it was also to automate and so make efficient the way Nike manufactures, ships, and sells its shoes, and thereby lowering operating costs. Even Federal Reserve Chairman Alan Greenspan, recognized the potential of that type of software when he said, "New technologies for supply-chain management can perceive imbalances in inventories at a very early stage—virtually in real time." He added it "can cut production promptly in response to the developing signs of unintended inventory building."
However, that type of software raises many questions. Very few companies can prove any real payoffs from supply-chain management systems. "Documenting the ROI from supply-chain management is difficult," claims Vinod Singhal, an associate professor of operations management at the Georgia Institute of Technology in Atlanta. Moreover, supply-chain projects are costly and time consuming. In one study by Singhal, supply-change project blunders resulted in an average stock price drop of 8.62 percent.
Not only did Nike recognize that the project would be difficult after its SAP experience, but so did i2. "We knew going in that it was going to be a tough implementation," said Katrina Roche, i2's chief marketing officer, "because the apparel industry tends to be very complex and because Nike had tried other [supply chain tool] vendors and they didn't work out." The $400 million project, part of which was to install the i2 software, began in June 2000.
The problems became public when Nike miscalculated future demand for its shoes, and Nike officials blamed the i2 supply-and-demand-planning (supply-chain) software, claiming that it did not perform as expected. Nike made the problem public on February 27, 2001, when it warned of a profit drop at the end of its fiscal third quarter (the next day). A Nike spokeswoman said the i2 software "didn't deliver on performance or functionality." Philip Knight, the Nike chairman and CEO, commented that Nike "experienced complications arising from the impact of implementing our new demand and supply planning systems and processes." However Knight did insist that his company would fix the problem and achieve big savings. Pierre Mitchell, an analyst and supply-chain expert at AMR Research, wondered why Nike couldn't predict the disaster. He said, "Blaming the software vendor is a very old practice." Criticizing Nike's CEO, he said, "Phil Knight makes it sound like it's a surprise to him." Commenting on Knight's management, Mitchell added, "If he doesn't have checkpoints for these kinds of [giant] projects, if he doesn't know where $400 million of his company's money is going, then he doesn't have control of his company." He also pointed out that the system was not designed specifically for the shoe and apparel business, and "[t]hat increases the risk that something is going to go terribly wrong."
Nike ran into financial problems when it ordered suppliers to produce too many shoe styles that were declining in popularity, and it did not order enough of the newer models for which the popularity had sharply increased. Orders for some of the less popular shoes were sent to the factories twice—once by the old order-management system and once by the new system—whereas orders for the newer models "fell through the cracks." Foot Locker, the largest Nike shoes retailer in the United States, had to reduce prices on such shoes as Nike's Air Garnett III, which had become a slow-selling shoe and now had to be sold at about $90 instead of about $140. Similarly, the price of Air Terra Human 2 was lowered to $49.99 when it should have been selling at about $100. The company also was late in delivering many of its more popular shoes because of their late production. As a result Nike had to ship them by plane at $4 to $8 a pair compared to 75 cents for shipping by boat, according to Shanley.
At the February 27 informational meeting, Nike said their estimated profit for the quarter would decline from about 50 to 55 cents per share to about 35 to 40 cents. It also announced that the inventory problems would persist for the next six- to nine months while the company sold off the overproduction. It further announced that the problems would cost $80 million to $100 million in sales for that quarter.
As to the future of the project, Knight said, "We believe that we have addressed the issues around this implementation and that over the long term, we will achieve significant financial and organizational benefit from our global supply-chain initiative." A Nike spokeswoman said that Nike is working with i2 to solve the problems and added that i2 had "created some technical and operational workarounds," and the implementation is now stable.
i2 had a very different view on the source of Nike's problems. i2's initial response, on February 27, was that there had been implementation problems, but they "are behind us," according to an i2 spokesperson. He said further that it is a very large and difficult project, but insisted the two companies have "a strong partnership." However, the company also answered directly Nike's finger pointing. Greg Brady, the president of i2 Technologies Inc. and a person who had been highly involved with the project, said that he and his company only learned that Nike blamed them when Knight made his public statement that day. "If our deployment was creating a business problem for them, why were we never informed?" Lee Geishecker, a Gartner analyst, commented on Brady's statement saying she does not understand why a company losing so much money because of deployment would not inform the principals. "How can you let the problems not be solved?" Nike never responded to that allegation.
An i2 spokesman said, "Think of all the possible permutations, and it becomes a complex and challenging job to get the system implemented." He claimed that i2 software accounts for only about 10 percent of Nike's $400 million supply-chain project. He pointed out that SAP and Siebel Systems Inc. are also involved with the system, and Nike's stated cost ($400 million) also includes hardware. Brady added, "There is no way that software is responsible for Nike's earnings problem." The company claimed the major problem with the software was Nike's customization. I2 said it did all the required specialized customization work that Nike requested. The customized software then had to be linked with Nike's other back-end systems. However, Roche maintained, "We recommend that customers follow our guidelines for implementation—we have a specific methodology and templates for customers to use—but Nike chose not to use our implementation methodology." She believed Nike saw the i2 methodology as too rigid and so did not use it. Jennifer Tejada, i2's vice president of marketing, also said that i2's software had been too heavily customized.
Tejada raised another issue when she said her company always urges its customers to deploy the system in stages, but Nike went live to thousands of suppliers and distributors simultaneously. Roche claimed this is "an isolated incident." She contended that, "We've got over 1,000 customers up and running, and some of them are in the apparel industry as well. This is the first time any of them have made this kind of announcement." According to Geishecker, Nike went live a little more than a year after launching the project, yet this large a project customarily takes two years, and the system is often deployed in stages. Brent Thrill, an analyst at Credit Suisse First Boston, sent a note to his clients saying that because of the complexities he would not have been surprised if to test the system Nike had run the i2 system for three years while keeping the older system running. Larry Lapide, a research analyst at AMR and a supply-chain expert, jumped in saying, "Whenever you put software in, you don't go big-bang and you don't go into production right away. Usually you get these bugs worked out . . . before it goes live across the whole business." However, Karen Peterson, a research director in the Gartner Group, disagreed, noting that Kmart, which also has major complexities in its forecasting and managing of the supply chain, also reported problems with i2 software. She asserted that, "i2 excels at sales but its execution isn't always flawless. The salespeople make bold promises that their software doesn't always live up to." Roche also said that Nike converted to the new software too early. She claimed Nike started to enter data for its forthcoming spring 2001 line before the cutover to the i2 software was completed. "The solution wasn't stable at the time they started using it."
Sources: Mark Ballard, "Preparation Is Key to Supply Chain Management, vnunet.com, January 10, 2003; Tim Wilson, "Nike: I2 Software Just Didn't Do It," Techweb, March 1, 2001; Eric Young and Mark Roberti, "The Swoosh Stumbles," The Industry Standard," March 12, 2001; Marc L. Songini, "Nike Blames Financial Snag on Supply-Chain Project," Computerworld, February 27, 2001; "Disaster of the Day: Nike," Forbes, February 22, 2001;"Dog of the Day: I2 Technologies," Forbes, February 27, 2001; "Forbes Forecast: Nike Gets the Boot," Forbes, February 27, 2001; Alorie Gilbert, "I2 Forecasts Slow Growth, Losses," Information Week, April 19, 2001; Sari Kalin, "SneakerNet," CIO Web Business Magazine, August 1, 1999; Steve Konicki, "I2 Says: 'You Too, Nike,'" Information Week, March 1, 2001, "Lower Profit at Nike Blamed on i2 Software," Information Week, February 28, 2001, and "Nike Just Didn't Do It Right, Says I2 Technologies," Information Week, March 5, 2001; Mark Roberti, "I2 Names a New CEO," The Standard, May 2, 2001; David Shook, "Why Nike Is Dragging Its Feet," Business Week Online, March 19, 2001; Tom Smith, "Supply Chain Isn't Place to Experiment," Internet Week, March 6, 2001; "Swoosh Suits," Forbes, April 16, 2001; Marc Songini, "Supply-Chain ROI Is Elusive," Computerworld, January 1, 2001; Tim Wilson, "Errors Aren't Always the Computer's Fault," Internet Week, March 26, 2001.