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Long Strange Trip: Nike Finally Regains Footing

By Larry Barrett  |  Posted 2003-11-01 Print this article Print

Nike is back on its feet, after the supply-chain snafu that cost it $100 million in sales.

Nike could not "just do it" when it tried to straighten out a newly installed system for speeding materials through its factories and into the marketplace.

In fact, it has taken nearly three years for the shoemaker's profits and shares to rebound after its 2001 disclosure of difficulties with its deployment of supply-chain software.

Yes, the Beaverton, Ore., firm said on Sept. 18 its ability to closely watch the movement of goods from raw materials through factories to retailers is finally paying off—not only has the company reduced inventory in the pipeline, but the effort has also boosted gross margins and net profits in the first quarter of its current fiscal year.

Gross margins reached 43.0%, up from 41.4% a year ago. Net income rose to $261 million, from a loss of $49 million. "The positive effects of the tighter supply chain and cleaner inventories drove 75% of the improvement" in gross profit margins, says chief financial officer Donald Blair.

In the spring of 2001, Nike blamed i2 Technologies for a massive sales-and-earnings shortfall. Nike posted a profit of only $97 million that quarter—at least $48 million below forecast. Nike said the culprit was i2's demand-forecasting and supply-chain-management systems.

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The supply-chain software was supposed to reduce the amount of rubber, canvas and other materials that Nike needed to produce its shoes. It was also supposed to help make sure Nike built more of the shoes customers wanted and fewer of the ones they didn't.

Instead, Nike was left with far too many of the wrong shoes and not nearly enough pairs of its hottest sellers.

While i2 executives stayed silent, Nike chief executive officer Phil Knight erupted. During one infamous conference call, he incredulously complained, "This is what we get for our $400 million, huh?"

Well, actually, Phil, the total cost of i2's demand-forecasting and supply-chain-management software was only about $40 million. The other $360 million alluded to was being spent over five years—on customer-relationship and enterprise-planning software from SAP.

Managing and integrating two projects of this magnitude may have been dicier than Nike had anticipated.

Nike says it continued to work with both SAP and i2. But Gartner Inc. analyst Karen Peterson says 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.

Nike officials decline at this point to comment on the i2 meltdown. Yet, despite the inventory glut and contentious public posturing, Nike continues to use i2 as its sole sup-plier of supply-chain and demand-forecasting software.

"The biggest lesson we learned was that we need to have more communication with the customer before we begin designing the supply-chain software," says i2 president of solutions operations, Pallab Chatterjee. "We're supply-chain experts, not shoe experts."

Nike's technology team had built and maintained its own demand-management system. In practice, the system meant that shoe orders from retailers were placed six months ahead of delivery. Once those orders were placed, Nike would pass them along to its contract manufacturers in the Far East.

This system worked just fine throughout the 1980s, when Nike made its remarkable transition from an also-ran in the athletic-shoe industry—it was just the 12th-largest shoe manufacturer in 1984—to the undisputed leader.

By 2000, Nike's annual sales had surged to $9 billion and the complexity of its manufacturing system expanded in lockstep. Some of the more fashionable shoes, such as Nike's flagship Air Jordan sneaker, required as many as 136 individual manufacturing steps.

As Nike grew, its programmers had made thousands of adjustments to already-customized software in order to accommodate busier manufacturing schedules, tighter shipping dates, and the exponential growth in its customer list.

When the i2 implementation began in March 1999, Nike had to customize the new system to accommodate years of idiosyncratic modifications of its original demand-forecasting system. Analysts say these modifications bogged down the system, leaving users waiting as long as three minutes for a single screen to load.

At the same time, Nike was installing SAP software to help take orders from customers and get those orders through manufacturing. Because it had difficulty matching up information from SAP and i2, Nike was sending inaccurate orders to manufacturers and was unable to uncover the errors until it was too late.

Tens of thousands of shoes were sitting at the end of assembly lines in Asia that no retailer wanted. In the end, Nike had to dump these excess shoes at bargain-basement prices, eroding profits and forestalling orders for its hottest brands, such as Air Jordan sneakers.

"Trends are what makes this industry so unpredictable," says John Shanley, an analyst at Wells Fargo Securities. "Not having the right shoes in the stores in that short window of opportunity is disastrous."

Senior Writer
Larry, of San Carlos, Calif., was a senior writer and editor at CNet, writing analysis, breaking news and opinion stories. He was technology reporter at the San Jose Business Journal from 1996-1997. He graduated with a B.A. from San Jose State University where he was also executive editor of the daily student newspaper.
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