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.

If You Have a Game Plan, You Can Snag the Rebound

Another thing that makes Wolfram angry (his already ruddy complexion going completely red) is the widespread assumption that Nike was betting on algorithms and changed course when that didn’t work out. Wolfram says that, on the contrary, i2’s demand-planning software was never intended to be the hero of Nike’s supply chain project?one of the most ambitious ever attempted by a company its size. It was (and still is), he claims, part of a wider strategy to integrate ERP, 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 (EMEA). "Frankly," he asserts, "we pretty much stayed the course."

Nike made a bold early bet on the risky and difficult strategy of creating a single, giant, integrated database within its SAP ERP system for every employee in North America and EMEA. (Nike’s Asia-Pacific division will be on a separate instance of the software.) This meant getting everyone to agree on business practices and common data definitions before the software went in?a rarity in ERP project management.

The difficulty of integrating information across a distributed company has brought down many ERP projects, such as drugstore chain FoxMeyer’s SAP ERP system in the late ’90s and Tri-Valley Growers’ 1997 choice of Oracle’s ill-fated ERP package for the consumer packaged-good industry. Neither company ever got its systems working properly and that contributed to both eventually shutting their doors. Other companies gave up on the vision of total information integration and installed many different versions of their ERP systems?as many as 400 different versions, or instances, of a single vendor’s ERP system at some really large companies, according to AMR.

But Nike claims it has never wavered from its single-instance strategy, even when problems with the first piece of that strategy, the i2 system, hit the news on Feb. 26, 2001. The same project leaders who were in place at the time of the i2 problems (CIO Steele and the business lead, Shelley Dewey, Nike’s vice president of supply chain) are still running the project today. The reason Steele and Dewey survived was because when their system failed, they had a lifeline to hang onto: a clear business case for the overall supply chain project. If achieved, they claim it will save the company a lot more than Knight’s $400 million and the $100 million in wayward sneakers.

Nike’s supply chain project is supposed to drive the manufacturing cycle for a sneaker down from nine months to six. Cutting out that three months would match Nike’s manufacturing cycle to its retailers’ ordering schedule?they order 90 percent of their sneakers six months in advance of delivery. This means Nike could begin manufacturing its sneakers to order rather than three months in advance and then hoping they can sell them. Converting the supply chain from make-to-sell to make-to-order is the dream of any company desirous of gaining competitive advantage through its supply chain. Dell has done it, famously, with PCs; Nike wants to do it just as famously with sneakers.

Nike hasn’t gotten there yet. And its business case relies on a nearly 30-year-old model that some analysts and retailers grumble is out of touch with the reality of today’s market. But it’s a business case Nike’s leaders believe in. This is how CIOs keep their jobs when a project goes off track and it’s how they keep getting funding to keep it going.

Like many truths, this one is simple yet profound: Projects that survive breakdowns do so because everyone in the business, not just IT, understands what the system is supposed to do for the company?and sees value in it. Indeed, after his infamous conference call outburst in 2001, Knight added that, "I think it will, in the long run, be a competitive advantage."

"We wish to God Phil [Knight] hadn’t said what he said," says Steele with a laugh. "But his belief in this project has never wavered. [When the i2 problems emerged], we sat down and talked about what the issues were and he said, OK, I understand, carry on." (Knight declined to be interviewed by CIO.)

How Nike Built a Robust Business Case

Knight, not normally known for self-control, has shown extraordinary patience with Nike’s supply chain project. And he’s needed it. "Once we got into this, we quickly realized that what we originally thought was going to be a two-to-three-year effort would be more like five to seven," says Wolfram.

It’s been six years now and counting, with the final stage of the project due to be finished sometime in 2006 at a total cost that has gone from a projected $400 million to $500 million, according to Wolfram.

The theme of Nike’s sneaker supply chain is centralization. All product design, factory contracting and delivery is planned and coordinated from Beaverton, Ore. The supply chain is built around a six-month order cycle, called the "Futures" program, that was developed in 1975 in response to the then-chaotic market for running shoes. In those days, the Far East sneaker supply chain was in its infancy, deliveries were spotty, inflation was high, and runners bought whatever shoes they could find regardless of brand. Nike won that market by guaranteeing delivery and an inflation-proof discount in return for getting its orders six months in advance. Retailers went along happily because runners didn’t much care about style or looks?they wanted technically advanced shoes that fit and were in steady supply. Retailers knew their Nike shoes would sell no matter how far in advance they ordered them.

But as Nike became increasingly global, its supply chain began to fragment. By 1998, Nike had 27 order management systems around the globe, all highly customized and poorly linked to Beaverton. To gain control over its nine-month manufacturing cycle, Nike decided that it needed systems as centralized as its planning processes. ERP software, specifically SAP’s R/3 software, would be the bedrock of Nike’s strategy, with i2 supply, demand and collaboration planner software applications and Siebel’s CRM software also knitted into the overall system using middleware from STC (now SeeBeyond).

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