Nike Rebounds: How (and Why) Nike Recovered from Its Supply Chain Disaster

"I thought we weren’t going to talk about i2," growls Roland Wolfram, Nike’s vice president of global operations and technology, his eyes flashing at his PR manager with ill-concealed ire.

Wolfram, who was promoted in April to vice president and general manager of the Asia-Pacific division, is all Nike. His complexion is ruddy, his lips cracked from working out or working hard, or both. He’s casually dressed, but with a typical Nike sharpness to his turtleneck and slacks, a sharpness reflected also in his urgent, aggressive defense of his company?a Nike pride that would seem arrogant were not the company so dominant in its industry.

Wolfram calls the i2 problem?a software glitch that cost Nike more than $100 million in lost sales, depressed its stock price by 20 percent, triggered a flurry of class-action lawsuits, and caused its chairman, president and CEO, Phil Knight, to lament famously, "This is what you get for $400 million, huh?"?a "speed bump." Some speed bump. In the athletic footwear business, only Nike, with a 32 percent worldwide market share (almost double Adidas, its nearest rival) and a $20 billion market cap that’s more than the rest of the manufacturers and retailers in the industry combined, could afford to talk about $100 million like that.

It drives Wolfram crazy that while the rest of the world knows his company for its swooshbuckling marketing and its association with the world’s most famous athletes, the IT world thinks of Nike as the company that screwed up its supply chain?specifically, the i2 demand-planning engine that, in 2000, spat out orders for thousands more Air Garnett sneakers than the market had appetite for and called for thousands fewer Air Jordans than were needed.

"For the people who follow this sort of thing, we became a poster child [for failed implementations]," Wolfram says.

But there was a lesson too for people who do, in fact, follow "this sort of thing," specifically CIOs. The lesson of Nike’s failure and subsequent rebound lies in the fact that it had a business plan that was widely understood and accepted at every level of the company. Given that, and the resiliency it afforded the company, in the end the i2 failure turned out to be, indeed, just a "speed bump."

The i2 Failure: Tactical or Strategic?

Nike’s June 2000 problems with its i2 system reflect the double whammy typical of high-profile enterprise computing failures. First, there’s a software problem closely tied to a core business process?in this case, factory orders. Then the glitch sends a ripple through product delivery that grows into a wave crashing on the balance sheet. The wave is big enough that the company must reveal the losses at a quarterly conference call with analysts or risk the wrath of the Securities and Exchange Commission, shareholders or both. And that’s when it hits the pages of The Wall Street Journal, inspiring articles and white papers on the general subject of IT’s hubris, limitations, value and cost.

The idea that something so mundane as a computer glitch could affect the performance of a huge company is still so novel that it makes headlines. But what doesn’t usually enter the analysis is whether the problem was tactical (and fixable) or strategic (meaning the company should never have bought the software in the first place and most likely won’t ever get any value from it). The latter is a goof worthy of a poster; the former is a speed bump.

Nike claims that the problems with its i2 demand-planning software were tactical and therefore fixable. It was too slow, didn’t integrate well, had some bugs, and Nike’s planners were inadequately trained in how to use the system before it went live. Nike says all these problems were fixed by fall 2000. And the company asserts that its business wasn’t affected after that quarter. Indeed, at press time, Nike had just announced that its third-quarter 2003 profit margins were its highest ever.

If there was a strategic failure in Nike’s supply chain project, it was that Nike had bought in to software designed to crystal ball demand. Throwing a bunch of historical sales numbers into a program and waiting for a magic number to emerge from the algorithm?the basic concept behind demand-planning software?doesn’t work well anywhere, and in this case didn’t even support Nike’s business model. Nike depends upon tightly controlling the athletic footwear supply chain and getting retailers to commit to orders far in advance. There’s not much room for a crystal ball in that scenario.

Indeed, Nike confirms that it stopped using i2’s demand planner for its short- and medium-range sneaker planning (it’s still used for Nike’s small but growing apparel business) in the spring of 2001, moving those functions into its SAP ERP system, which is grounded more in orders and invoices than in predictive algorithms. "This allows us to simplify some of our integration requirements," says Nike CIO Gordon Steele.

Wolfram says Nike’s demand-planning strategy was and continues to be a mixture of art and technology. Nike sells too many products (120,000) in too many cycles (four per year) to do things by intuition alone. "We’ve tuned our system so we do our runs against [historical models], and then people look at it to make sure it makes sense," he says. The computer models are trusted more when the product is a reliable seller (that is, just about anything with Michael Jordan’s name on it) and the planners’ intuition plays a bigger role in new or more volatile products. In this case, says Wolfram, talking with retailers does more good than consulting the system.

"There’s been a change in the technology for demand planning," says AMR Research Vice President Bill Swanton, who declined to address the Nike case specifically. "In the late ’90s, companies said all we need is the data and we can plan everything perfectly. Today, companies are trying to do consensus planning rather than demand planning." That means moving away from the crystal ball and toward sharing information up and down the supply chain with customers, retailers, distributors and manufacturers. "If you can share information faster and more accurately among a lot of people, you will see trends a lot sooner, and that’s where the true value of supply chain projects are," Swanton says.

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