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?

1. Calculate descriptive statistics for the variable Height by Gender. Sort the data by gender by clicking on Data and then Sort. Copy the heights of the males form the data file into the Descriptive Statistics worksheet of the week 1 Excel file. Type the standard deviations below. These are sample data. Then from the data file, copy and paste the female data into the Descriptive Statistics workbook and do the same.

   Height (inches)
   75
   74
   74
   73
   73
   71
   71
   71
   70
   70
   70
   70
   70
   69
   69
   69
   69
   69
   69
   69
   68
   68
   67
   67
   67
   67
   66
   66
   65
   65
   64
   63
   63
   62
   61

   Gender

   M

   M

   M

   F

   M

   M

   M

   M

   F

   F

   F

   F

   M

   M

   M

   M

   F

   M

   F

   M

   M

   M

   M

   F

   F

   F

   F

   M

   F

   F

   F

   F

   F

   F

   M

Your professor wants to know if all tests are created equal.

What is the F-Stat? Use Excel.

1. Koby Co Ltd is involved in the research and development of a new type of three-finned surfboard. For this R & D it has incurred the following expenditure:

• $60,000 obtaining a general understanding of water-flow dynamics
• $30,000 on understanding what local surfers expect from a surfboard
• $80,000 on testing and refining a certain type of fin
• $150,000 on developing and testing a full prototype of the three-finned board, to be called the ‘trident’.

There is expected to be a very large market for the product, which will generate many millions of dollars in revenue.

Required:

As per AASB 138 Intangible Assets, determine the correct accounting treatment for each of the above expenditure as:

1. research costs or development costs, and
2. expensed or capitalised.

Energy Ltd is involved in the research and development of a new type of three-finned surfboard. For this R & D it has incurred the following expenditure:

• $50 000 obtaining a general understanding of water-flow dynamics

• $30 000 on understanding what local surfers expect from a surfboard

• $90000 on testing and refining a certain type of fin

• $190 000 on developing and testing a full prototype of the three-finned board, to be called the 'thruster'.

There is expected to be a very large market for the product, which will generate many millions of dollars in revenue.

REQUIRED: - Determine how the above expenditure would be treated for accounting purposes

PLEASE DO NOT COPY OTHERS ANSWER AND PLEASE EXPLAIN IN DETAIL

Two mutually exclusive alternatives are bring considered: A and B. Both alternatives cost $1,200 at the present. However, the pattern of revenue from them is different. Alternative A has the potential to bring more revenues later in the project life. The expected revenues of alternative A are: $350, $500, and $850 by the ends of years one to three, respectively. Alternative B promises more immediate cash inflow which is expected to diminish with time: $750, $300, and $100 by the ends of years one to three, respectively. Use MARR=8%.

a) Calculate the Internal Rate of Return of each alternative.

b) Which alternatives are feasible?

c) Calculate the Net Present Worth of each alternative and compare them.

Two mutually exclusive alternatives are bring considered: A and B. Both alternatives cost $1,200 at the present. However, the pattern of revenue from them is different. Alternative A has the potential to bring more revenues later in the project life. The expected revenues of alternative A are: $350, $500, and $850 by the ends of years one to three, respectively. Alternative B promises more immediate cash inflow which is expected to diminish with time: $750, $300, and $100 by the ends of years one to three, respectively. Use MARR=8%.

a) Calculate the Internal Rate of Return of each alternative.

b) Which alternatives are feasible?

c) Calculate the Net Present Worth of each alternative and compare them.

LTE Services provides maintenance work on LTE Craftworks products and on machinery produced by others. It is a lucrative business that provides 40% of LTE’s revenue (via dividends and distributions).

LTE Services has the following issues:

1. Willy’s Woodworking Workshop (“W3”) sued LTE Services, alleging that LTE Services’ salesperson who sold W3 a three-year service contract, lied about the terms of the service contract, and that LTE Services provided poor service. W3 paid for the first year, but refused to pay for years two and three of the contract. LTE Services counterclaimed for the unpaid sum due on the contract, and denied W3’s allegations.

Define:

Issue

Ruling

Application

      Blore Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Blore would like you to value this target and has provided you with the following information:

• Blore expects to keep the target for three years, at which time it expects to sell the firm for 300 million Malaysian ringgit (MYR) after any taxes.
• Blore expects a strong Malaysian economy. The estimates for revenue for the next year are MYR200 million. Revenues are expected to increase by 8% in each of the following two years.
• Cost of goods sold is expected to be 50% of revenue.
• Selling and administrative expenses are expected to be MYR30 million in each of the next three years.
• Depreciation expenses are expected to be MYR20 million per year for each of the next three years.
• No other fixed costs are expected.
• The Malaysian tax rate on the target's earnings is expected to be 35 percent.
• The target will need MYR7 million in cash each year to support existing operations.
• The target's stock price is currently MYR30 per share. The target has 9 million shares outstanding.
• Any remaining cash flows will be remitted by the target to Blore Inc. Blore uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.25.
• Blore's required rate of return on similar projects is 20 percent.

1. Prepare a worksheet to estimate the value of the Malaysian target based on the information provided.
2. Prepare a worksheet to estimate the value of the acquisition assuming the Ringitt depreciates to$.20/ringitt in years 2 and 3.