Case study of NIKE-The Problem and the Analysis.
Strategy to solve the problem..
NIKE is named after the Greek goddess of victory and is presently the number one brand for shoes and sports apparel. The company sells a lot of products mainly aiming at the sports playing and fitness conscious population. The company is also involved in marketing a range of products that are sports inspired and are designed for various sports competitions and children as well. The company sells sportswear under Hurley and Converse brands as well (Website, n.d.). The company has more than eleven hundred self owned retail stores, generates nearly sixty percent of its sales from outside United States. The company has a dedicated online platform as well as sells through various e-commerce platforms such as Amazon, Flipkart etc. We will try to analyse one of the issues faced by NIKE and the decision making it undertook to address the issue.
NIKE faced problems in inventory management and the company also lost around 100 million in sales in response to these issues. The basic issue was that NIKE faced problems in adopting a new software that would help streamline the whole production to retail process. The company had been following a very complicated supply chain system and it obtained finished products from manufacturing facilities from all over the world. The company obtained orders from retailers almost six months before the actual dates of delivery. The orders were then forwarded to various facilities all over the world and the finished products were then picked up and shipped to the retail outlets worldwide. The company then thought of introducing various supply chain measures in order to reduce the problems which again took a long time in emerging as successful (Aniyrudhh & Kiran Kumar, 2018).
From the above discussion we can well understand how important problem solving and decision making is for a company, especially for a huge brand like NIKE. In fact the company also signed up Michael Jordon as their brand ambassador about which their competitor Adidas was reluctant. The company took the right decision in signing up Jordan as well as took the sponsorship of NBA from Reebok, which was owned by Adidas.
From the above decision tree we can see that while signing for a brand ambassador, the company had to follow a decision making choice that would ultimately help it to analyse all the pros and cons of the decisions. The problem usually occurs only when there is a gap between what we desire and what is actually there in reality. Problem solving thus taking of corrective actions that would eventually help a company to meet the objectives. And decision making is the selection of the course of action that would eventually help to meet the problem. We can define the decision making structure here and also try to evaluate NIKE's problem with regards to its inventory management that resulted in huge losses for the company, however which was eventually resolved with the help of correct decision making.
Here we need to know that there are basically two types of decision making, programmed and non-programmed. A programmed decision is basically about routine things, such as those that may occur in daily course of business or routine situations. An example of this is reordering of the inventory, every time the stock reaches a pre specified level. Non-programmed decisions are those which do not occur in the normal course of business. For example, the inability of NIKE to manage the inventory as per requirement due to its widespread operations all over the world. Thus the non-programmed problem needed a solution.
Image Credit: https://courses.lumenlearning.com/wm-organizationalbehavior/chapter/the-decision-making-process/
The above image represents the rational decision making model. However in a rational world where we are working under controlled conditions this model may be useful as there are no time or cost constraints on this particular model of decision making. In case of NIKE, the cost that was being involved due to its lack of inventory management was really high. The company lost around $100Million due to inventory management issues and that could definitely not be solved with only rational decision making process that could work with only certain limitations. The company was in fact facing a very unique problem that definitely needed a unique solution.
Nike was in a tie-up with i2 technologies for its software related issues such as demand forecasting for various products and supply chain management (Sudral, 2019). After the above issue exploded, both the companies blamed each other for the above issue. Later, due to obvious reasons a new software was introduced to correctly predict the demand forecasting and also the supply chain management. But unfortunately for the company, before the same could be implemented, the sales figures had already dipped and the company had to resort to clear the excess stock in discount sales. The company had huge amounts of overstock that had to be disposed off in this way only (Simon, 1979).
The bounded rationality model usually assumes that various individual and organizational level factors usually affect the decision making. In bounded rationality model it's the decision of the decision maker to gather the amount of information for correct decision making. Another method is the linear decision making model where the pros and cons of the decision are thoroughly analysed and accordingly a solution needs to be determined (Simon, 1990). NIKE introduced a new software after much deliberating however, the model implementation happened much too late and by then the loss of $100million had already happened. The company originally handled its supply chain through assembling of outsourcing.
In 2000, the company initiated the NIKE supply chain venture wherein its objectives was enterprise resource planning and customer relationship management. However, probably all the pros and cons had not been taken into consideration and therefore this decision proved to be a catastrophe for the company. NIKE had made all their decision based on the faulty software. The underproduction of some goods that were in demand and overproduction of other goods that were not in demand. Although it was a very smart move by the company as forecasting demand would lead to better productions yet before the software was implemented, it should have been tested and then perhaps the analysis should have been considered.
The above decision tree illustrates that NIKE had decided to introduce the new software that would help them demand the forecast effectively. However, the software was not tested effectively for bugs and the data errors that resulted out of this created further issues in the company. The supply chain was also badly affected due to the faulty software data in decision making. In NIKE's case, the supply chain is initiated when the makers of NIKE's attire source the crude materials for the creation of NIKE's products. In other words the company has practically no influence on the assembling and acquiring forms (Wolbert, 2013).
The new software in fact suffered a lot of teething problems as already discussed above and that resulted in reducing the profit of NIKE by 24% in 2001. The same was announced by Phil Knight, Co-founder and CEO. The software was implemented by i2 Technologies Inc. at an approximate cost of $400Million but unfortunately could not fully mitigate or control the demand supply mismatch.
It can be a matter of deep interest and study that how a big company like NIKE was attempting to dump the market with overabundant, less in demand goods. NIKE started to concentrate on boosting up the speed of item creation, conveyance and assembling of its products over all the territories of the business. This meant that the inventory was significantly reduced. Also a major reshuffle in the plan was the introduction of the idea that the brand would now put 25% less styles before the customers and only concentrate on the smash hits that the company was already in the process of producing. This helped the company to a very large extent and later on the bugs were successfully identified and a better software was introduced within the system which resulted in giving accurate results (Aniyrudhh & Kiran Kumar, 2018).
The company came up with a new five year corporate responsibility plan in 2007 for addressing issues such as outsourcing and also sustainability. The company has introduced many practices such reducing waste and toxins at the manufacturing units. The target markets have been identified and better strategies need to be implemented for achieving targets (Ewbank & Chevalier, n.d.).
Although the problems shook the company very badly, still the vigilance with which the company monitored the entire process, from the procurement of crude material for manufacturing to supplying the finished product to retailers, finally paid off and the company was finally able to convert the losses into profits. This proved that choosing a good inventory was a major decision making aspect that could positively or negatively affect any business, even a business which was as big and as widespread as NIKE. The software should have catered to a major requirement and that is a software that was accurate, flexible and customised as per the customer's requirements (Wilson, 2001).
Another major problem that was identified was that both the companies, NIKE and i2 Technologies were not communicating with each other effectively throughout the project (Dutta, Sanjib; Regani, Shirisha, 2004). It was also seen that both the companies had been really hasty in taking the decision and did not really test the product before launching it for demand and supply forecasting. As we have noted before, the company was outsourcing its products from many manufacturing facilities spread almost all over the world, including Taiwan and Korea.
The timely supply of finished goods was therefore a major problem combining with it the company policy of ordering of goods six months prior to the requirement. Processing of these orders to the various factories all over the world including too far off locations as far as Korea and Taiwan and again picking up the finished goods from there and transporting them to retailers, which were again spread all over the world. To minimize the efforts the company was pouring on the process, the company finally decided to go for a new supply chain system, which perhaps was not thought in great detail looking at the final results it produced (McAfee, 2003).
The problem as we have discussed in detail was oversight and mismanagement by the company. By mid of 2003, the company was finally able to reap the benefits of the changes in the supply chain management ingrained through the new software. Irrespective of whether the organization is big or small, the inventory management could be the make or break in the business strategy. NIKE had 1,20,000 different varieties of products(SKUs). Some of its products even required around 130 steps to get manufactured (Pooja, n.d.). NIKE had thus a huge product line and naturally maintained a inventory for the same. NIKE has always maintained that the problem occurred mainly because i2 had not kept its side of the bargain and could not provide authentic forecasts.
i2 Technologies on the other hand had consistently maintained that NIKE had completely ignored their recommendations of minimizing customization to only 10-15% of the software deployment in the company (Pooja, n.d.). It was erroneous on the part of the company to make changes and go for extreme customization so that the product failed to give the expected results. Some experts have also believed that perhaps a third party could have helped in identifying the issues in the software as the company was anyways replacing a redundant software with a new supply chain software. NIKE ultimately stopped using the i2 Planner for its sneaker model and it positively affected the sales of the company and the company was finally able to supply the orders which were given by the consumers on the date they had been promised. NIKE is a sports product manufacturing company which is completely driven by competition and hence continuous innovation is the requirement for producing better products.
Aniyrudhh, S. & Kiran Kumar, H., 2018. INVENTORY PROBLEMS FACED BY NIKE. International Journal of Pure and Applied Mathematics, 120(5), pp.4283-93.
Dutta, Sanjib; Regani, Shirisha, 2004. Inventory Problems at NIKE. Productions and Operations Management. IBS Center for Management Research: IBS Center for Management Research IBS Center for Management Research.
Ewbank, B. & Chevalier, P., n.d. Towards inventory reduction in a seasonal consumer goods company Case Study at Nike EMEA.
McAfee, A., 2003. When too much IT knowledge is a dangerous thing. MIT Sloan management review, 44(2), p.83.
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Simon, H.A., 1979. Rational decision making in business organizations. The American economic review, 69(4), pp.493-513.
Simon, H.A., 1990. Bounded rationality. In Utility and probability. London: Palgrave Macmillan.
Sudral, 2019. Catastrophic Inventory Mistakes By Huge Brands And How To Avoid Them. [Online] Available at: HYPERLINK "https://www.assetpanda.com/catastrophic-inventory-mistakes-by-huge-brands-and-how-to-avoid-them/" https://www.assetpanda.com/catastrophic-inventory-mistakes-by-huge-brands-and-how-to-avoid-them/ [Accessed 16 May 2020].
Website, C., n.d. NIKE COMPANY. [Online] Available at: HYPERLINK "https://nikecompanyblog.wordpress.com/about-us/" https://nikecompanyblog.wordpress.com/about-us/ [Accessed 16 May 2020].
Wilson, T., 2001. Supply chain debacle—Nike faces yearlong inventory problem after I2 implementation fails. Internetweek.
Wolbert, M., 2013. Predictive analytics for inventory in a sporting goods organization (Doctoral dissertation, Massachusetts Institute of Technology).
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