Question

Established in 1964, Nike Inc. (Nike) is one of the world’s leading designer, marketer and distributor of athletic footwear, apparel, equipment and accessories for sports and other fitness activities. The wholly owned subsidiaries of Nike include Converse Inc, Bauer Inc., Cole Haan, Hurley International LLC, and Exeter Brands Group LLC. In January 2006, Fortune magazine listed Nike as one of the 100 best companies to work for in the US. 2005 was a record year for sales and profitability at Nike. The company's revenues grew to $13.740 billion from $9.489 billion in 2001 and $12.253 billion in 2004. Footwear revenues were up by 11%, whereas apparel and equipment revenues grew by 10% and 15% respectively. Accurate demand forecasting was cited as one of the primary reasons for this success. But the situation was quite different in 2001. That year, Nike spent $40 million on a demand projection model developed by i2 Technologies Inc. (i2) but its profits for spring (Jan-March) 2001 were around $48 million below forecasts, at $97 million.

Nike had a well-set demand forecasting system that had been performing quite well throughout the 1980s. In this system, orders from retailers were placed six months ahead of delivery. Once these orders were placed, Nike would pass them to their contract manufacturers in the Far East. The system was running fine until Nike made the transition from being the 12th largest shoe manufacturer (in 1984) to the undisputed leader in the footwear industry (by the mid-1990s). As a result of this transition, its manufacturing schedules became more complex. The company’s manufacturing schedules became busier and shipping dates tighter as the number of customers increased considerably. With 27 order management systems around the globe in 1998, Nike’s supply chain began to fragment. It became extremely difficult for Nike to make demand forecasts using its existing system.

Nike then decided to implement a new demand forecasting and supply chain management system provided by i2. The software solution was supposed to reduce the inventory for rubber, canvas and other materials that Nike required to manufacture shoes. Also, i2’s solution was expected to help Nike align production to focus on its more popular selling brands. Though the problems started to manifest within the very first few months of implementation of the demand forecasting solution, Nike and i2 tracked the problems down and tried to develop ways around them. The i2 software technicians tried to overcome the problems by changing operational procedures or by writing new software. But by the time modifications were made, the inventory problem had already started. Nike was over-manufacturing some products while struggling to meet the customer demand on other products. Because of Nike’s excessive reliance on the automated projections, it ended up ordering $90 million worth of shoes, such as the Air Garnett II, which were selling very poorly, from suppliers across the globe. On the other hand, there was also a shortfall of $80 million to $100 million on popular models, like the Air Force One.

Nike – Failure in Demand Forecasting To control the damage, Nike filled the back orders that had not been supplied and made moves to dispose of the excess inventory through discount distribution channels like Nike’s outlet stores. It even had to dump the excess shoes at ‘bargain basement prices. It took about 6 to 9 months for Nike to overcome the problem of incorrect proportions in its inventory, and more than two years to make up the financial loss. The inaccurate forecasts and losses they entailed resulted in a sharp fall in Nike’s share prices, and the company’s image as an innovative user of technology was tarnished. It cost Nike more than $100 million in lost sales, lowered its stock prices by about 20%, and led to a series of legal battles.

Experts across the globe analyzed the reasons for the huge mismatch between demand and supply. According to Karen Peterson, a Gartner Inc analyst, “i2's relative inexperience in

delivering supply-chain systems for the apparel and footwear industry and Nike's demands put the project at risk from the get-go.”6 This probably led to the software solution's inappropriate demand forecasting. But, most of the analysts had a different perspective. They opined that Nike was too busy with other costly projects like ERP and SAP at that point of time. Further, since Nike was going through a boom, the increasing sales and volume of work coupled with the added burden of a new software, and hence a new mode of demand forecasting, led to the failure of the system altogether.

Despite the fact that Nike issued public statements against i2, it continued to use i2 as its sole supplier of demand forecasting software for Nike’s small but growing apparel business (it stopped using i2's demand planner for short and medium-range planning for sneaker’s). Nike gradually shifted its demand planning to SAP and ERP systems, which depended more on orders and invoices than predictive algorithms. Learning from experience, Nike combined the earlier demand forecasting techniques that were chiefly based on intuition with the modern integrated computerized system so that a reasonable logical result could be obtained. In the words of Roland Wolfram, Nike’s vice president of operations and technology, “Demand planning strategy was and will be a mixture of art and technology.” The company also decided to give more importance to the opinions of retailer’s for demand forecasting. Phil Knite, CEO of Nike, said, ‘I think it will be profitable in the long run.” Nike also converted its supply chain from 'make-to-sell' to 'make-to order'. These continuous efforts of Nike to mend the damage bore results and the company regained its image and posted record sales in 2005.

Answer the following questions

What was the forecasting approach practiced at Nike prior to implementing i2’s demand forecasting and supply chain management system? What reasons prompted Nike to change its demand forecasting techniques? What was the outcome of this change?

What were the likely reasons that resulted in such a huge gap between demand and supply at Nike? What, in your opinion, could have been done to avoid this situation?

Answer 1

1. Nike had a well-set demand forecasting system that had been performing quite well throughout the 1980s. In this system, orders from retailers were placed six months ahead of delivery. Once these orders were placed, Nike would pass them to their contract manufacturers in the Far East. The system was running fine until Nike made the transition from being the 12th largest shoe manufacturer (in 1984) to the undisputed leader in the footwear industry (by the mid-1990s.

The outcome of this change was Nike was over-manufacturing some products while struggling to meet the customer demand on other products. Because of Nike’s excessive reliance on the automated projections, it ended up ordering $90 million worth of shoes, such as the Air Garnett II, which were selling very poorly, from suppliers across the globe. On the other hand, there was also a shortfall of $80 million to $100 million on popular models, like the Air Force One.

2. i2's relative inexperience in delivering supply-chain systems for the apparel and footwear industry and Nike's demands put the project at risk from the get-go.This probably led to the software solution's inappropriate demand forecasting. But, most of the analysts had a different perspective. They opined that Nike was too busy with other costly projects like ERP and SAP at that point of time. Further, since Nike was going through a boom, the increasing sales and volume of work coupled with the added burden of a new software, and hence a new mode of demand forecasting, led to the failure of the system altogether.

Inorder to avoid such situation I would have decided to give more importance to the opinions of retailer’s for demand forecasting. Like wise, I would have also gone for market survey directly from the people and would have forecasted te demand based on that.