Nike – Inventory Operational Management Issue

1 Executive Summary

The present paper analysed the case of Nike in order to identify the operational management issues present in the company. It was observed that inventory management is the main cause of concern for the corporation since it has observed to face severe issues because of the problems. The company suffered a severe loss of profit in 2001 because of the failure of the system designed for specific purpose. The paper also identified the errors of Nike and recommended a change in their strategies of operation management. It is also recommended to the company to focus on testing the systems before implementing it practically for operations management.

2 Introduction

This report aims to indicate the operations management of Nike, which is working across the world as a multinational company. This report focuses on the major operations management issue affecting its growth process, which is associated with the inventory management and/or control (Waller and Conaway 2010, pp.83-106).

2.1 Nike

Nike organisation is engaged in different kinds of designing, development, manufacturing, and marketing activities in order to grow (Merk 2011, pp.73-95). Its major products are associated with the street fashions and sports equipment. The concerned company was first founded in 1964 and the founders were William J. “Bill” Bower man and Philip H. Knight (GalbRaith 2014. pp. 2-13). In 1978, its official establishment as a Nike Inc was found. Its sponsors are high-profile athletes and sports teams (Huang, Moore and McCarthy 2014, p.125). Nike has low-cost leadership strategies to gain a market competitive advantage. Conversely, the major characteristics of this company’ system consist of continuous innovation, quality improvement, worker participation and self-management (Clancy 2000. pp. 1-15).

2.2 Mission

Nike has the mission of being successful as the most dynamic and market-responsive organisation, where the core product of this company would remain footwear.

2.3 Vision

To be a dynamic, innovative, and market-driven manufacturer as well as distributor, the respected organisation is maintaining a commitment to the environment in which it operates. Furthermore, it wants to bring inspiration to every athlete in the world.

2.4 Explanation of Process Map

This section describes the fundamental processes involved in the products’ manufacturing in Nike Company. The process map or the process of manufacturing the products of this organisation depends on some significant steps (Tien 2011, pp.129-154).
Overall, this process map is called “ Cold Cement construction process,” which is given below with Nike’s designated areas.

2.4.1 Cold Cement construction process

1. The process map initiates by deciding the design of the shoe and selection of the material considering factors of physical qualities of the materials, the total energy forfeited, environmental impacts and availability of the materials, and the aesthetic appealing look of the shoe.

2. Following this stage, different components of footwear (shoe) are cut by using animal leather or some other synthetic material (Karel 2008. pp. 514-520).

3. In the process of stitching, all the components of a product are sewn together along with shaping the shoes with the process of moulding through the help of tooling.

4. Later the upper stitched components and treated soles are joined together to the assemblage (Edwards 2000. pp. 1-9).

5. One this road map is accomplished then the products, all the orders are received and assembled since the factories of Nike are placed in different places and then shipped forward (referred in figure 1) (Dojan 2014, pp. 1-15).

Figure SEQ Figure* ARABIC 1: Systematic Cold Cement Construction Process Map

Figure 2: Process Map (2014, pp. 1-15)

2.5 Key Issue

By considering the mission, vision, and achievements of the organisation, it would not be wrong to say that this has become one of the world’s largest suppliers of athletic shoes.

Similarly, it is the major manufacturer of sports equipment. Therefore, it found excess revenues in the fiscal year 2012, which were of US$24.1 billion. At the same time, this company is also trying to expand its business by employing more employees worldwide (Waller and Conaway 2010, pp.83-106). Recently, it has employed 44,000 cross-cultural individuals. Furthermore, the management believes that the production of inventory can meet the needs or demands of the customers. Therefore, this organisation adopted a system of inventory production in the previous decade (Dojan 2014).

Additionally, the manufacturing process under consideration indicates that the Cold cement is the modern style of shoe construction adopted by the respected firm. It allows using modern lightweight plastic, foam, and mesh materials. Conversely, such kinds of manufacturing needs proper management whether it is associated with the management of workers, material, demands, and/or production process (Stevenson 2009) . Furthermore, process map mentioned above shows a sequential order and interconnectedness of operation, which was observed to not follow in 2001 particularly, when management became ineffective because of the system failure that was designed for inventory management.

Technology is required to bring innovation, which is also the mission of the respected organisation. However, inventory management issues are caused by frequent equipment failure resulted in many bottlenecks due to the cost minimisation consideration (Waller and Conaway 2010, pp.83-106). For the production of inventory management and control is also required, which was observed trembling within this organisation when the company failed to test the newly developed inventory management system before practically applying it on the business. Therefore, inventory management became the main problem of the company, which caused low profits (Waller and Conaway 2010, pp.83-106).

The reason behind this barrier was to be cost-effective, which resulted in the late production and deliveries, as technology, management, and quality depend on the huge investment ( DeTienne and Lee 2005. pp. 359-376). The company managers did not test the system considering the cost and in order to become cost-effective. The decision of not testing the system resulted in a huge economical catastrophe for Nike since the system showed an increase in the demand for the wrong shoe ( Carey, R. 2005. Pp. 1-14) . This culminated a loss of $100 million in sales due to inventory management problems (Waller and Conaway 2010, pp.83-106).

The situation if Nike indicated that even the company entails efficient machinery and the capability that assists in controlling inventory production in a limited time however, cost minimisation process affects the production process that creates the problems of waiting times between operations. However, all these aspects are somehow related to the management, which seemed helpless in dealing with the situation and contributed to the increasing challenges of inventory management (Williams 2004. pp. 755-774).

3 Improvements in Quality and Customer Requirements due to Potential Changes

3.1 Quality

An appropriate planning would ensure the elegant delivery of products. For instance, workers would have enough time to produce the best products in an efficient manner.

Additionally, if workforce would be motivated towards the work then their hesitation and negative attitude would be reduced and it will maintain the attention. The investment on making the people highly skilled and trained would also help in fulfilling the customers’ requirements. In other words, the TQM concept applies to the management of inventory aspects of Nike. For instance, the quality of design, materials, and production would be improved in the form of buying, receiving, and inspecting the raw materials.

3.2 Speed

An appropriate planning of employees and orders would enable the company’s labour force to swiftly respond to the customers’ demands (Lock 2007, pp. 3-31). Similarly, minimum time waiting for the orders’ delivery will make people more satisfied towards the quality of products as well as services.

3.3 Flexibility and Dependability

By managing the areas of capacity, quality, and constraints of the organisation associated with the resources, the volume of flexibility would be improved. Customers would be offered for a variety of quality products. Moreover, delivery of the services or products would be done on time that reduces the dependability on other sources to faster the production process. Constraint theory also supports this argument.

3.4 Cost

If the potential change in the industry were identified as the increased capacity then the cost would be influenced positively. For instance, smart utilisation or sources for managing inventories would not only reduce the cost but also will generate the profitability, which has been accepted by the mathematical theory of inventory and production.

3.5 Customers

Nike can be a more customer-oriented organisation by understanding the needs of customers. As the needs form significant consideration over quality; thus, the potential positive changes towards quality will ultimately help in managing people’s demands (Ramaswamy 2008, pp.9-14). Shoes designed according to customer needs indicate the quality shoes. There are implicit customer requirements, which can be captured via focusing on the product quality, as it included reliability aesthetics performance. In addition, the eight dimensions of product quality would be followed.

These dimensions include performance (durable and comfortable), features (high heeled, Velcro and canvas), reliability (Stress tests), conformance (different sizes for men, women, and disabled), durability (standard international tests), Serviceability (defective shoes returns policy), Aesthetics (upper finishes e.g. crocodile, pig), and perceived quality (different brands). Technological advancement can also be seen after the potential changes within the organisation that assist workforce as well. For instance, the investment in machinery and workplace intervention programmes satisfy customers, employees and other stakeholders or shareholders that evidently support the quality products.

3.6 Continuous Improvement

Overall, it can be said that a continuous improvement can be seen after the potential changes within this organisation concerning inventory management. The major contribution would be observed in the quality improvement. It is a continued and sustained process and/or effort to drive continuous improvement. A setting of quality goals, implementation of changes, and proper planning for checking advocates the use of TQM in Nike that provides a platform for perpetual learning and a framework for effectively maintaining TQM ( Richard 2003, pp. 40).

4 Operations Theories

4.1 Theory of Inventory Management Based on Demand Forecasting

The theory of inventory management is given by Kot et al., (2014, pp.148-156), which states that efficient management of the supply chain is another factor on which the quality depends since it is associated with the quality and the minimisation of cost. However, this quality is not only associated with the product but also with the management of customer service. Excessive inventory levels are the key cause of the constantly increasing cost throughout the chain because of the maladjustment of the supply levels in terms of the demand in the market resulting in stock surplus (Landvater 2000).

This theory, therefore, within the operation management, suggests that the initial point for the inventory level reduction is the forecasting of demand, which influences the quality of a product in the market with the help of market prospects along with all the associated supply chain links. Therefore, the theory of inventory management is related to demand forecasting, which is necessary for the prediction of demand and the quality of a product (Kot, Grondys and Szopa 2014, pp.148-156). The considerable significance of the forecast of demands is related to the phenomena level of previous incidents since fluctuation or change in the demand could affect the quality of the product.

4.2 Theory of Constraints (TOC)

The theory of constraints is given by Godratt (1990) , which is considered as a general theory in the management of operations. According to the theory of constraints, any manageable system is restricted to achieve its objectives because of the fewer constraints present. The theory suggests that for achieving a goal, a minimum of one constraint is necessarily present however they could extend to a few. Therefore, TOC focuses on the identification of the constraints and restructuring of the organisation’s operations according to it (Gupta and Boyd 2008, pp.991-1012).

A constraint in this theory is defined as a hindrance that precludes the system from obtaining the desired objective. Constraints could be in many ways, which could be either internal or external. The theory, therefore, highlights that these constraints are the main factors on which the quality dependants. An internal constraint is definite when the demand of the market exceeds from what the system could deliver. Internal constraints are of three types that include equipment, people, and policy. An external constraint, on the other hand, could be identified when a system could surplus stock compared to the demand (Ronen 2005) .

Theories of Constraints follow five steps in order to resolve an issue

1. Identify the System Constraint: Identification of the problem causing constraint

2. Decide How to Exploit the Constraint: Decision of how to solve the issue without experiencing costly changes or upgrades.

3. Subordinate Everything Else: The non-constraint element of the constraint system should be adjusted to a setting that would allow the constraint to function effectively.

4. Elevate the Constraint: Take the necessary action for the removal of constraint

5. Return to Step One, But Beware of “Inertia”: Analyse the system again to see if any other elements has turned out to be the constraint 5 A Comparison of the Theory with the Process Nike faced a serious concern related to its inventory management issue, which made the company suffer a loss of $100 million in sales (Kumar 2012).

The reason behind this issue was observed to become cost-effective by not testing the newly designed software for inventory management, which resulted in wrong productions and deliveries along with a surplus of products, quality majorly depending on technology, management, and the huge investment. The inventory issues encountered by Nike are dependent on identifying the demand of the market in specific time for meeting it.

According to the theory of inventory management based on demand forecasting, the issue of inventory management is the reduction in the cost and the lack of the ability to handle the stock that results in extended lead-time directing towards the deterioration of the quality (Michalski 2009, pp.213-222).

This was observed in the case of Nike as well, whereby the prediction of the demand resulted in the surplus of wrong product. This was because the process map of the inventory management system does not include the software or management of the software, which would have lead to better demand forecasting.

The process map initiates directly from design however, the map should have included an element of demand forecasting before reaching on to the design stage. The system used for the inventory management and operations management resulted in the increased demand of low selling shoes and inadequate stock of Air Jordans, which were actually demanded. This resulted in an unanalysed loss of profits in 2001 of $100 million (Kumar 2012).

This was also observed that similar inventory issues were evident later in the company indicating a consistent need of a proper solution to inventory issues because of not identifying the constraint . Considering the theory of constraints, this could be observed that the inventory problems were due to the lack of skilled people in Nike, who did not test the system effectively (Russell and Taylor 2011) . As per theory of constraints, it is necessary to follow the five steps in order to resolve the constraints. However, in the case of Nike, employee did not identify the issue, which was both in the system and in the process map.

The internal issue in the case of Nike that created a discrepancy in the company’s operations were equipment and the people. The equipment in an internal constraint is defined as the system, which could produce more sales. However, in Nike, the same system of supply chain software resulted in a failure of sales and profit together. By following the stages of TOC in order to identify the issues in the process map and the skilled labour would have been suitable for Nike.

It was also observed that the reason behind the failure of the system during that period and until now is the people associated with the jobs (Hillier and Lieberman 2010) . The company suffered a huge loss because the designated employees assigned on the job did not test the system in advance accurately. The lack of skilled people limited the achievement of the desired goal of Nike causing serious inventory issues. Therefore, it is necessary that an exact record of the data is present, which could be taken into consideration for the quality of the products (Khan Daha 2012) .

6 Conclusion and Recommendation

The present paper is concerned related to the inventory issues highlighted in Nike, which is considered a weak spot of Nike since the company has suffered huge losses because of it. The main causes behind these issues are the aim of being a cost effective corporation without the implementation of the appropriate strategies. Therefore, this paper focuses on presenting relevant recommendations for Nike in order to obtain the goals set by the company.

6.1 Recommendation

The research identifies that although Nike has improved its inventory management concerns, some of the issues are causing its failures in production process. It has been mentioned in the section of theoretical framework that the major issue in this organisation is associated with the inventory management, in which lack of skilled people is also contributing as a cause of business failures (Demand Forecasting 2016) . For instance, the skilled labour could work effectively for production. At the same time, Nike failed in predicting the accurate demand of the market while skilled staff could be beneficial for demand forecasting. Conversely, this issue caused the inconsistent production of inventory that resulted in an extreme reduction of the profits.

In order to forecast the precise demand, Nike has to implement appropriate solutions (IBM 2006) . For instance, the uses of different relevant algorithms and forecasting models are a proper solution for the inventory management and comprehending the demand (Gilliland, Sglavo and Tashman 2015) . It has been discussed previously that internal constraints including equipment, labours, and policy must be focused within an organisation in order to deal with uncertainties.

Thus, in the case of Nike, inventory management problem as well as the software discrepancy can also be managed by following the constraints of efficient workers or staffs.

Furthermore, the software can be used as an equipment to produce more sales, but the need of some significant policies is essential. For instance, the organisation’ management must plan the type of software needed to be implement in a specific situation of inventory management that can deal with a huge number of orders at a point time.

The process map of the products within this company also indicated that all the steps (designing, selection, cutting, stitching, moulding, bonding, receiving orders, assembling, and shipping) are sequenced, but there is no consideration on the technology management. For instance, no testing of the software system is focused during this whole process map, which caused the company’s loss in the past. By considering the overall problem, it can be said that there must be the incorporation of some new steps under this process map (Noriaki, Mitsuki, Katsunori and Keis 2016) .

It is, therefore, necessary that the company follow a proper approach of testing system before receiving the orders. In this way, it would be possible to remove the mechanical errors. Similarly, skilled labour testing is also essential, which is required to check forecasted demand and desired production by revising the process map (referred below).

Reference

Carey, R. 2005. Techniques of selecting securities for a portfolio using buyback ratio and dividend yield. U.S. Patent No. 6,920,432. 19 Jul. 1-15

Clancy, M, 2000. Sweating the swoosh: Nike, the globalization of sneakers, and the question of sweatshop labor. Institute for the Study of Diplomacy.

School of Foreign Service, Georgetown University, 1-15 Dell, 2016. Demand Forecasting.

DeTienne, K, and Lee W. 2005. The pragmatic and ethical barriers to corporate social responsibility disclosure: The Nike case. Journal of Business Ethics. 60(4), 359-376.

Dojan, F 2014. Article of footwear incorporating floating tensile strands’, Dojan, Frederick J.

“Article of footwear incorporating floating tensile strands. 1-15.
Edwards, D, 2000. Combined shoe bottom and periphery. U.S. Patent No. D424,287. 9 May 2000, 1-9.

Fiestras-Janeiro, M., García-Jurado, I., Meca, A. and Mosquera, M., 2011. Cooperative game theory and inventory management. European Journal of Operational Research , 210 (3), 459-466.

GalbRaith, R. 2014. Organizational design challenges resulting from big data.Journal of Organization Design 3(1), 2-13.

Gilliland, M., Sglavo, U. and Tashman, L., 2015. Business Forecasting: Practical Problems and Solutions . North Carolina: SAS Institute Inc.

Goldratt, E.M., 1990. Theory of constraints (TOC) . Time n Cash.
Gupta, M. and Boyd, L., 2008. Theory of constraints: a theory for operations management. Int Jrnl of Op & Prod Mnagemnt , 28 (10), 991-1012.

Huang, L., Moore, S. and McCarthy, P., 2014. Managing for business sustainability in China: a case study of Shoetown Footwear Co., Ltd. IJISD , 8 (2), 125.

Hillier, F. and Lieberman, G., 2010. Introduction to Operations Research . 9th ed. McGraw-Hill Global Education.

IBM, 2006. Demand management: The next generation of forecasting . IBM Global Business Services.

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