Phalguni Soni
Traditionally innovative: A must-know investor’s guide to NIKE (Part 5 of 22)
The cogs in NIKE’s supply chain
Delivery precision in a multi-product and multi-jurisdictional company like NIKE, Inc. (NKE) is critical. It improves profit margins, reduces inventories, minimizes price markdowns, and ensures that the customer receives the right product assortment on time. NIKE moved ~900 million units through its supply chain last year. Its manufacturing network consists of over 700 factories in 42 countries. Each product moves from 57 distribution centers across a network of 18,500 accounts and 140,000 retail doors.
Yet NIKE owns no factories for manufacturing its footwear and apparel, which make up ~88% of its revenues. Instead, manufacturing is outsourced to third parties because of the cost advantages of doing so. Most raw materials in NIKE’s supply chain are sourced in the manufacturing host country by independent contractors. Overseas manufacturing of products features in the strategies of rivals Under Armour Inc. (UA), VF Corporation (VFC), Lululemon Athletica Inc. (LULU), and Adidas AG (ADDYY) as well.
NIKE’s manufacturers
NIKE is one of the pioneers of the industry-defining manufacturing outsourcing strategy. It’s now exploring innovative ways of manufacturing so it can customize products on an unprecedented scale.
Key manufacturing thrusts
Lean manufacturing – By the end of fiscal year 2013, between 70% and 76% of its apparel and 85% of its footwear products were manufactured on lean lines. This delivered additional savings of $0.15 per unit through better labor productivity and lower waste
Material consolidation – Reducing the number of vendors through which NIKE sources materials and also reducing the materials used in manufacturing products
Manufacturing innovation and modernization
Footwear manufacturers
NIKE’s footwear is manufactured outside the US by independent contract manufacturers that often operate multiple factories. In fiscal year 2014, the company was supplied by ~150 footwear factories in 14 countries. Contract factories in Vietnam, China, and Indonesia respectively manufactured approximately 43%, 28%, and 25% of total NIKE’s footwear. The largest single footwear factory accounted for ~5% of total NIKE brand footwear production.
Apparel manufacturers
Like footwear, all of NIKE’s apparel is manufactured outside the US by independent contract manufacturers. In fiscal year 2014, NIKE was supplied by ~430 apparel factories operating in 41 countries. China, Vietnam, Thailand, Indonesia, Sri Lanka, Pakistan, and Malaysia accounted for most of the apparel production. The top five apparel contract manufacturers together accounted for ~34% of NIKE’s apparel production. One apparel contract manufacturer accounted for over 10% of production.
Third-party licenses
NKE also has license agreements that permit unaffiliated parties to manufacture and sell using NIKE-owned trademarks, certain apparel, digital devices and applications, and other equipment designed for sports activities.
NIKE’s distribution centers
NIKE has five primary distribution centers in the US located in Memphis, Tennessee, three of which operate on a leased basis. The company had 16 distribution centers outside the US at the end of fiscal year 2014. NIKE brand apparel and equipment products are also shipped from its distribution center in Foothill Ranch, California. Converse and Hurley products are shipped primarily from Ontario, California.
Browse this series on Market Realist:
