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 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 2000–2001 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 he 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 system was 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 “that 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 which
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.
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.”
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 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 2000–2001 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 he 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 system was 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 “that 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 which
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.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.” Case Study Questions:
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Sources:
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; and Tim Wilson, “Errors Aren’t
Always the Computer’s Fault,” Internet Week, March 26,
2001
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