Supply management: A complex function
Supply management is a complex function that’s critical to business success, responsible for delivering efficient costs, high quality, fast delivery and continuous innovation throughout companies’ entire supply chains. The strategic contribution of supply management is measured not only in savings made, but also in increased shareholder value (Niezen, Weller & Deringer, 2007). Nike and Adidas are two global companies try to improve their competitive advantage through strategically managing and utilizing their supply chain. The purpose of this report is to compare and evaluate the supply chain management practices of Nike & Adidas.
2. CORPORATE PROFILE
2.1 Nike Corporate Profile
Based in Beaverton, Oregon, and employing approximately 29,000 people worldwide, Nike Inc. is the world’s leading designer and marketer of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities (Comtex, 2002; Nikebiz, 2007a). Nike holds a 32 percent worldwide market share, a $20 billion market cap (Koch, 2004), has 40,000 stock-keeping units of goods (Mongelluzzo, 2002) and sells over 120,000 products in four cycles per year (Koch, 2004).
2.2. Adidas Corporate Profile
Adidas is a leading producer of sportswear and sports equipment, offering its products primarily through four brands: Adidas, TaylorMade-Adidas Golf, Maxfli and Reebok (Datamonitor, 2007) The Adidas group and its 150+ subsidiaries are directed from the headquarters in Herzogenaurach, Germany, and employ 26,376 people (Adidas, 2007)
The Adidas product line includes more than 20,000 items, with thousands of product variations. To keep up with market demand, the company changes its product range twice a year; more often if new technologies are available and in demand (Webex, 2004).
3. REPORT SCOPE
Nike and Adidas are global players across a number of product categories. Supply chain management practices vary as the different products across the portfolios work towards different objectives. Due to the wide scope of product categories, the following report limits itself to analyzing the supply chain management practices of Nike and Adidas within the context of the global footwear market.
Key supply chain processes under analysis include;
- manufacturing flow management
- supplier relationship management,
- demand management,
- order fulfillment
- customer services and relationship management
4. MANUFACTURING FLOW MANAGEMENT
4.1 Outsourcing as procurement strategy
The international sports shoe industry is typified by the large scale vertical disintegration of functions and high levels of subcontracting activity. Multinationals such as Nike and Adidas no longer manufacture products, relying strongly on outsourcing all production in low-cost overseas labor markets, invariably resulting in the majority being manufactured in Asia. Outsourcing practices allow Nike and Adidas to focus on their core competencies; marketing, design and product innovation, areas in which they can best achieve a competitive advantage (Anderson, 2005). The trade-off to outsourcing to offshore manufacturers is that companies face substantially longer lead-times for delivery – typically taking six to eleven weeks to receive products from Asia (Sahling, 2007). Efficiencies gained in terms of reduced wages are countered by the increased difficulty of monitoring the product and the actual working conditions in the factories (Van Dusen, 1998). Also, Nike & Adidas’ production capabilities are governed by the economic state of emerging markets; as countries prosper, there is a need to find new, low cost opportunities. Conversely, production could also be affected by external factors such as natural disasters or political instability.
4.1.1 Nike Approach
Asia provides the majority of Nike’s manufacturing and distribution, delivering to more than 80 destinations throughout the world, which now accounts for 65% of U.S. imports (Mongelluzzo, 2002). China now supplies 40% of Nike’s U.S. consumption, increasing its reliance on southern Chinese ports (such as the Yantian port) instead of the port of Hong Kong (Field, 2003a). Yantian currently handles about 20% of Nikes volume from China, and approximately 10% is shipped from the port of Qingdao (Field, 2003a). The Yantian port has increased efficiency due to the close proximity to the Nike factory base, and quicker transits to the States (Field, 2003a).
Nike places more importance on choosing the right local partners, not just the right ports. Nike doesn’t own any of its facilities, and local partners make important logistics decisions (Field, 2003a). To manage relationships, Nike has both a global and regional vendor management team – as output volume increases, Nike don’t expand the number of suppliers, but increase the volume of business they do with each supplier (Field, 2003a).
The Nike production system can be stratified into three classes; developed partners, volume producers and developing sources (Donaghu & Barff, 1990). Although Nike has developed different levels of supplier relationships with each class the production network is commonly classified as a ‘virtual enterprise’ where independent firms work together based on shared values and a common way of doing business to exploit a business opportunity through joint manufacturing (Pfohl & Buse, 2000).
4.1.2 Adidas Approach
Adidas has also been referred to as a ‘virtual enterprise’ however, it may be better characterized as a ‘strategic network’ because its supply chain utilizes three different types of suppliers; The first group have a direct contractual business relationship with Adidas, whilst the second group, subcontractors, are companies that have been subcontracted by their suppliers and do not have a direct business relationship with Adidas; and thee third group includes local sourcing companies, which source and manufacture products for local markets, rather than group-wide distribution (Adidas, 2002). Further, Adidas provides all of their suppliers with detailed technical and design specifications for the production and delivery of products, with strict quality control enforcement and inspections (Pfohl & Buse, 2000), rather than adopting co-operation techniques and joint manufacturing ideals.
4.2 Lean Manufacturing Principles & Lead Time Reduction
According to Gernaat (2006), the fashion (footwear) market characterized by short product life cycle, high variety, high demand volatility, low demand predictability, low volumes and high level of impulse purchase. Therefore short lead times are highly important functions of responsive, reactive and flexible supply chains (Gernaat, 2006). Global sourcing creates longer lead times, and more complex supply chains. Nike and Adidas have instituted lean manufacturing principles to rationalize the supply chain processes and decrease costs. However, lean manufacturing approaches leave the companies more vulnerable to potential stock outs and there is increased reliance upon other supply chain elements running in sync and without interruption.
4.2.1 Nike Approach
Nike utilizes several subcontracting arrangements that allow the company:
- a high degree of flexibility in dynamic and fluid markets
- a flexible ‘demand-driven production system’
- to shift production between factories and countries; opening plants and signing contracts that potentially only last a year and it
- to utilize capacity subcontracting methods to meet variable market demands
(Donaghu & Barff, 1990).
Nike is upgrading its supply chain to try to drive the manufacturing cycle for a sneaker down from nine months to six to match its lead time to retailers’ ordering schedule. Nike aims to manufacture its sneakers to order rather than three months in advance (Donaghu & Barff, 1990). Nike’s new supply chain, using just-in-time management – already active in the US and Europe – enables shipment of products to customers faster. Select retailers receive delivery within days rather than months; cutting costs and improving profits by freeing up inventory and increasing sales (Herzog, 2003)
4.2.2 Adidas Approach
Prior to 2002, Adidas’ operations were traditional batch and queue, and stored in warehouses until the order was processed. As part of its overhaul of its supply chain, Adidas sought to significantly reduce footwear lead times by introducing lean manufacturing principles across its supplier network. The time-to-market initiative involved a coordinated, global effort on behalf of Adidas and its consultants which included training suppliers, technology improvements in supply chain planning and a focus on internal design processes (Productivity Press, 2006). Efficient implementation of lean manufacturing principles also removed non-value-adding procedures, improved labeling and special handling to reduce lead time (Datamonitor, 2007). The reduction in lead time also lead to a 33% increase in correct product choice, increased accuracy in ordering and in some cases, resulted in larger orders as customers were less risk averse and displayed increased commitment (Productivity Press, 2006).
4.3 Centralisation & 3rd Party Logistics Specialisation
4.3.1 Nike Approach
The theme of Nike’s sneaker supply chain is centralisation. All product design, factory contracting and delivery is planned and co-coordinated from Beaverton, Oregon (Koch, 2004). Nike runs a single instance of SAP R/3 (a single planning engine), and centralised demand management to work with outsourced suppliers (MSI, 2004). Nike is currently pursuing a total information integration strategy – integrating ERP (enterprise resource planning), supply chain planning and CRM software onto a single platform shared by Nike operations in North America, as well as Europe, the Middle East and Africa. Initial results are promising; improved financial visibility, cash flow management, revenue forecasting, and taking advantage of shifting exchange rates through the re-allocation of Nike’s cash resources (Koch, 2004).
Nike’s key supply chain strategy is through achieving up-to-date shipment data that can be used to make the supply chain more efficient, with transit time being the deciding factor over other considerations (Mongelluzzo, 2002). Nike has pared its number of logistics providers from five to two. Nike’s two third-party logistics providers specialise in data management – APL Logistics handles eastbound shipments to the U.S., Canada and Latin America and Maersk Logistics manages U.S. outbound shipments (Mongelluzzo, 2002). Nike requires transportation vendors to provide:
- Geographic coverage of U.S., Canada and Latin America
- Carrier specialisation
- Multiple ports of entry
- Multiple consortia
- Expedited air and courier services
- Cargo security
- EDI interface
- Data and documentation management
For 60 percent of cargo from Asia, Nike controls the transportation move from Asian factories directly to the distribution centres of its U.S. retailer customers. The company moves the rest through its own U.S. distribution centres, where they are stored until a retailer needs them (Field, 2003b). Although the shipper and its logistics partners manage the supply chain, decisions on how much to ship and when to ship it are made in response to customer needs – Demand drives the logistics strategy (Mongelluzzo, 2002).
4.3.2 Adidas Approach
Traditionally Adidas has operated in a decentralized manner, with separate operating units independently choosing software that suited their internal preferences and geography (Tibco, 2007). Since 2002, Adidas has begun implementing common processes to help establish a global direction and help regain its competitive advantage. Tibco software was implemented to streamline and automate its business operations, improving flexibility, scalability and visibility across the enterprise helping to reduce product delivery times (Tibco, 2007).
Similarly, Adidas’ inadequate paper-based warehouse and distribution systems were replaced with unique WMS and RF software to halve distribution costs, reduce labour costs and improve accuracy and efficiency through automated cross-checking of all orders (CIPA, 2004). John Hamilton, the Development Manager for Supply Chain Applications noted that “We use third-party manufacturing so we are involved with a lot of different partners, from people who manufacture our product, to people who manufacture our raw materials, to the distributors that sell our product throughout the world …We had a bit of a lag in our ability to see downstream demand… It’s hard to see the end customer’s demand because we are working through a lot of different subsidiaries.” (i2, 2004) i2 solutions replaced the home-grown planning system, to ensure that Adidas continued to meet the needs of customers, suppliers, and consumers – enabling the company to reduce order confirmation times and to get products to market faster through its ability to improve asset utilization, factory fill rates, and to plan at multiple lead times (ibid).
Adidas moved further toward a centralization strategy as it implemented logistics software SAP AFS to facilitate process and system standardization worldwide, providing a solution that supported a consolidated global focus. Adidas chose the software because AFS is specific to the apparel and footwear industry with its emphasis on seasonal fluctuation, proliferation of design variations and product characteristics, multiple distribution channels and customer-service requirements, and outsourced manufacturing (SAP, 2002). Adidas consolidated the distribution system into UPS, a single streamlined network, with automated inventory and fulfillment systems that rapidly scaled its services and add enhancements as required (UPS, 2005)
4.4 Supplier Relationship Management
4.4.1 Nike Approach
Athletic footwear producers use similar techniques to promote stability and trust in their relationships with subcontractors; Nike develops and produces all high-end products with exclusive partners, while its volume producers manufacture more standardized footwear that experience larger fluctuations in demand (Donaghu & Barff, 1990). Nike’s strategies for alliance involve:
- Seeding Nike expatriate technicians into factories producing Nike footwear to function as a liaison between head office and R&D to ensure smooth product development processes and maintain product control.
- Encouraging partners to participate in joint product development activities, sharing responsibility for the development of new footwear
- Stabilize production and reducing demand variance with key factories partners by placing monthly orders with partners that exclusively produce Nike products
(Donaghu & Barff, 1990)
Nike are establishing longer-term contracts with key suppliers, operating more as partners (ibid), fostering strategic alliances and creating value-add capabilities within the supply chain.
4.4.2 Adidas Approach
Adidas’ current approach to supplier relationship management is consolidation; in 2001 it reduced the manufacturing base by over 25% with a medium term goal of reducing the suppler base by 40% (Adidas, 2002). The aim is to deepen relationships and therefore reliability, also to increase Adidas’ influence and bargaining power with suppliers. Adidas’ focus is on building their suppliers own capacity and internal management systems in health and safety and human resource management, seeking to develop “sustainable compliance” processes and to drive self-enforcement (Anderson, 2005)
5. DEMAND MANAGEMENT
5.1 Forecasting & Order Fulfillment
Gernaat (2006) argues that accurate forecasting is highly difficult in the fashion industry, as it is characterized by short PLCs, volatile demand and high variety.
Wide product lines are challenged by an increasing individualization of demand, which Nike and Adidas combat by creating an increasing number of variants (Berger & Piller, 2003). This makes forecasting and planning for the companies increasingly difficult which has the potential to result in high overstocks, increased supply chain complexity and the need to provide significant markdowns to get rid of surplus stock (ibid). Forecast accuracy can be increased through flexible supply chains with shorter lead times. However Gernaat (2006) also points to the use of Point Of Sale data to adjust forecasts and quick response programs to respond accordingly as a way of combating inaccuracies.
Nike’s forecasting is largely based on its ‘Futures’ program, where retailers must order up to 80% of their merchandise inventory 6 months in advance in order to get substantial discounts and guaranteed delivery times (Porter, Harris & Yeung, 2002). The futures ordering program allows Nike to minimize the amount of inventory held, purchasing costs, the time necessary to fill customer orders, and the risk of non-delivery (Nikebiz, 2007b). Nike gained a significant competitive advantage in the 90’s as retailers were eager to secure discounts and guaranteed delivery times.
Nike now faces pressure from customers and rivals because retailers are more reluctant to commit to ordering 6 months in advance as consumers’ tastes are increasingly fickle and smaller, more agile rivals are willing and able to work within shorter order cycles. Nike also is behind its rivals in direct point-of-sale (POS) integration with retailers; supply chain experts believe that actual store data, rather than software algorithms, are the best predictors of demand, but Nike’s SAP system cannot yet accept POS data (Koch, 2004).
Adidas’ recently launched ‘World Class Supply Chain’ initiative appears to be moving away from a forecast-based supply chain to a demand-driven supply chain. The company has re-engineered its supply chain to customize its business to five differentiated and dynamic business models which target consumer needs (Adidas, 2006). The initiative covers the whole concept-to-shelf process and incorporates marketing, sales and operations functions;
- Brand Model – delivers Adidas’ brand statement products, supported by comprehensive customer service, marketing, retail and supply chain capabilities (launched 2006)
- Evergreen Model – short lead times and never-out-of-stock capabilities for Adidas’ most commercial and long life cycle product lines (launched 2006).
- Quick Response model – seizes additional market opportunities with a 3-6 month concept-to-shelf process (launched 2007)
- Global/Regional model – creates regional adaptations of global concepts to reflect consumer needs in regional markets (launched 2007)
- 2008 model – aims to reduce the percentage of products turned around with 18 months lead time to only 25%.
5.2 Customer Service & Relationship Management
The success of global supply chains is the value they add to their ultimate customers in terms of the cost/price and the related services they provide (Coyle, Bardi & Langley, 2003). IT can play a significant role in facilitating customer service that provides the opportunity to remain competitive, improve differential advantage and finally, gain market share (ibid). Advances in IT allow sharing real-time information between supply chain partners, which facilitates better inventory management which increases customer service and value. Sharing data also strengthens relationships between supplier and customer, as there is a development on trust and reliability.
However, it is important to note that increased reliance on IT and software can potentially negatively affect positive customer service outcomes. Nike and Adidas have both been exposed to the negative consequences; Nike lost $100million in revenue due to ‘software bugs’ in its supply planning software in 2001 (Interestingly this is the i2 solutions supply chain planning software that Adidas has taken on board), and Adidas’ first attempt at implementing WMS software resulted in massive market share losses in 1996 when the system failed to work and could not process orders (Supply Chain Digest, 2006).
5.2.1 Mass Customisation
Pillar et al (2004) see information technology, along with flexible manufacturing practices as facilitators of mass customization and its promise to deliver goods and services that meet individual customer needs with near mass production efficiency. Adidas and Nike’s approach to mass customization provides a good example of the trade off between the increased complexity of mass customization and supply chain economies of scale. The mi Adidas concept offers a full range of shoe customization options in regard to fit, functionality and aesthetic design. In contrast, Nike’s NikeId program, in line with its highly centralized approach, limits customer integration and feedback by only offering the different colour choices of a shoe’s components (Piller, Moeslein & Stotko, 2004). Relative to Nike, the degree of product, process and information complexity is much higher for Adidas thus incurring increased supply chain costs. However the costs are offset by higher premiums charged – up to 50% – compared to the customized shoes of Nike (between 5% and 10%) (ibid).
Adidas develops a learning relationship with consumers through the brand interaction, increasing the revenue from each transaction because as well as the actual product benefits, the simplified purchasing decision process entices repeat purchase, thus creating loyalty (Piller, Moeslein & Stotko, 2004) and deepening customer relationships. The mass consumption concept can also help generate better customer service and relationship management, as Adidas gains ‘sticky’ knowledge about its consumers; valuable market research which could help inform more efficient planning for new products for the mass market segment (ibid).
6. KEY FACTOR ANALYSIS
Coyle, Bardi & Langley (2003) argue that the key factors of successful supply chain management include inventory, cost, information, and customer service and collaboration relationships.
Based on the above inventory management, financial measurement and performance measures, Nike’s tightly controlled, centralized supply chain management practices appear to have the advantage over Adidas; in fact, Nike was recognized as being one of the top 25 companies that exhibit superior supply chain capabilities and performance (AMR, 2007).
Such performance indicators strongly suggest that Adidas has a continued need to improve operating efficiency, inventory management and also seek to deploy assets in more profitable avenues (Datamonitor, 2007).
Adidas’ relatively poor financial performance (compared to industry leader Nike) was recorded across the 2002-2006 period, during which the company began to implement substantial changes across its supply chain management processes. Adidas has significantly centralized and automated elements of its supply chain, boosting efficiency and effectiveness of the processes by reducing errors and increasing productivity. At the same time it seems better equipped to accommodate consumers’ individualized demands through the more sophisticated mass customization practices, and increased collaborative relationships. Although Nike has strong collaborative relationships across its supply chain, its highly centralized processes seems less flexible in terms of demand management and customization which could affect its future competitive advantage.
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