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Inventory Problems At Nike Case Study

In the early 2000s, Nike had some major inventory management problems. The company lost around $100 million in sales due to these issues. It may be difficult to imagine that such a well-established corporation could have a massive operational failure like this, but they did. As they learned from this experience, inventory control can be difficult for a business of any size.

Fortunately, following this failure, Nike developed an improved inventory management solution to solve their problems rapidly. Here’s what happened to Nike and how the company recovered:

In 2001, Nike implemented an updated version of their inventory management software. The idea of this newly implemented inventory control software was to help predict which products they would sell the most, and thus prepare the right amount of supply to meet the demand. First they would produce a demand forecast and based on that forecast, they would prepare a manufacturing plan. That’s how most big corporations (and some small businesses) make their operational business decisions. Here is the process in a nutshell –

Based on historical sales data of different products, and based on some market growth estimates, Nike would first prepare a demand forecast for different families of products. This demand forecast is then used to determine optimal inventory levels, reorder points, material lead times etc. And the entire manufacturing plan for months is determined using these numbers produced by the inventory management software.

In Nike’s situation, however, they ran into some serious software implementation issues  – bugs, and data errors – which resulted in incorrect demand forecast.  The predictions the software made were totally off, so Nike didn’t produce enough of certain products that consumers were interested in buying.  Conversely, they overproduced other skus. This erroneous manufacturing plan eventually resulted in lost sales worth millions of dollars.

Nike’s case illustrates just how crucial it is to manage your inventory and your inventory management system properly, irrespective of whether you are a small, medium or large business. When choosing an inventory management solution it is extremely important to ensure the quality of software that your vendor provides. It is equally important to make sure that you enter all the requisite data and double check everything! Especially if you are a small business owner and can’t withstand a massive loss in sales!

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Product details

IBS Center for Management Research (2004)
This case deals with the problems experienced by Nike, the leading manufacturer of shoes and other sports equipment in the world, in implementing a new software application to streamline its supply chain and manufacturing processes. Nike sourced its products from manufacturing facilities located in the developing Asian countries like Taiwan and Korea. Consequently, the company had a complicated supply chain system where orders were placed by retailers six months ahead of delivery dates. These orders had to be forwarded to the factories in Asia and the final product had to be shipped back to the retailers. In 1999, the company embarked on a massive IT project costing $400 million, to implement a new supply chain system along with some other customer relationship management (CRM) applications. i2 Technologies Inc was contracted to implement the supply chain software. The project was still in its initial stages in early 2000, when Nike started using the new software to input data. By late 2000, Nike had a major inventory problem on its hands. Analysts said that, among several other reasons, the most important reason for the problem was that Nike and i2 did not communicate well with each other. Both companies were also hasty in taking steps and did not bother to test the software rigorously. Eventually, the problems were sorted out and, by mid-2003, Nike was obtaining considerable advantages from the new system. The teaching objectives of this case are: (1) to appreciate the importance of an effective supply chain system, especially for a manufacturing company operating in a highly competitive and trend- driven industry; (2) to understand the importance of integrating new systems with legacy systems and processes in the organization for their effective functioning; (3) to understand the risks involved in taking up projects of considerable magnitude without establishing effective control systems; (4) to examine the importance of a good working relationship between partners and the sharing of responsibility in implementing critical projects; and (5) to study how a failure in the supply chain can affect a company's position and reputation in the market. The case is meant for MBA/PGDBM students and is intended to be part of the production and operations management curriculum.
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