Scm and Erp Software Implementation at Nike – from Failure to Success
Introduction: Nike was founded under the name Blue Ribbon Sports in 1964. In 1972 the first pair of sports shoes was sold and experienced enormous growth and achieved a 50% market share within the sports shoe market in the US only eight years later. After sluggish focus and growth in the 1980ies, Nike experienced strong growth in the 1990ies and cemented the position as global recognizable brand. The increased international focus created strains on the supply chain, which was consider inadequate to cater efficiently to the organization and the rapid changes consumer demands .
As a consequence of the afore mentioned supply chain problem Nike faced inefficient inventory management, problems in flow of goods and poor demand forecasting capabilities. In addition Nike was facing though competition in Asia, which as a region performed worse than expected. Given this it is clear that both external, internal and situational factors were the catalysts behind the Organizational Buying Behavior (OBB) of Nike catalyzing the mammoth project of implementing global supply chain management (SCM) software and an integrated ERP system.
Question 1: What are the failure factors for the first NIKE-i2 ERP-SCM implementation? Using conventional project management measurements it is clear the implementation of i2 was a colossal failure . I analyze the failure using a combination for factors from the OBB and analysis based on the five phase implementation framework. Nike states a clear vision of what they want to achieve with the i2 implementation: “Achieving greater flexibility in planning execution and delivery processes….. ooking for better forecasting and more profitable order fulfillment” . However, I believe Nike overall underestimated the SCM project as I see some indications that the main focus and resources were on the general ERP framework and implementation of the Single Instance Strategy (SIS). As a consequence the project management turned out to be weak. The lack of prioritization of the SCM project is also visible in the lack of external consultancy services obtained.
Both project management and appropriate usage of external consultants are evaluated as key critical success factors for successful implementation of large scale IT projects. (Appendix 3) So I see the project being initiated on the wrong foot, but would consider phase 2, 3 and 4 as the phases where the project fell apart. I strongly believe external consultants with expertise knowledge would have challenged a number of the technical issue and decisions made by the project management. The implementation of i2 on the legacy system is such example.
SIS required a large degree of integration and data migrations, so deploying the SCM software on the legacy system instead of as part of the SAP ERP is a strategic mistake. This specific decision later proves unwise when Nike begins to experience large problems in data integration as formats and outline of i2 didn’t match the other systems. Also in the data specification and parameterization external experts would have stepped in and limited the vast number of customization enquiries from Nike.
I believe this specific problem has its roots in the inadequate blueprinting of Nike. The missing blueprinting –the realignment of the long term business strategy with capabilities of the software – is not uncommon as it is estimated that 51 percent of failing IT projects, fail due to lack of understanding between IT and business departments” I believe there is evidence of that happening in this case as well. The fundamental idea behind the SCM software in terms of demand planning did not fit well with the business strategy of Nike.
Nike used a bottom-up demand process where the retailers committed to an order in advance before manufacturing. With i2 Nike changed this core process as the demand now was forecasted using a top-down approach. The combination of the changed process and lack of proper data integration lead to duplicated orders and overproduction. As the original i2 software did not support the many SKUs of Nike, heavy customization was required, which in turn diluted the quality of the software as the specifications were unclear.
McAfee of Harvard Business School has said: “What Nike and i2 Technologies Inc. began experiencing the problem actually is not the software itself… The culprit there was misspecification” Further on the subject of customization, Nike had great difficulties balancing customization with speed-to-market. I believe the external factors of significant competition, changing market place and resulting disappointing financial performance in growth markets lead Nike to rush the implementation and interfered with normal OBB.
The rushing meant that a guideline, templates and implementation methodology was discarded by Nike with the argument that the i2 provided material was too rigid. In general I would argue that Nike required technology that was not sufficiently available at the time. This pushed i2 to enter unknown software-territory and program-to-order disabling sufficient time for vendor/developer testing. The criticality of this was further boosted due to lack of testing from Nike, which clearly illustrates faults in phase 4 of the implementation as well. (Appendix 3)
Lastly, I find evidence that a global ERP and SCM software potentially would be difficult to manage successfully at the time due to the structural issue of underdeveloped bandwidth infrastructure , which could indicate Nike required a technical solution which was not complete available in 1999. As the SCM software required a big-bang implementation , the mistakes mentioned above considerably increased the risk of failure. So due to urgency Nike selected to implement a highly customized solution discarding advice from the vendor, avoiding third party/external consultations, neglecting testing and proper training of end-users.
As Steel says “Could we have taken more time with the roll-out? Properly. Could we have done a better job with software quality? Sure. Could the planners have been better prepared to use the system be it went live? You can never train enough! ” Question 2: How do you evaluate the role of i2 in this process? In believe both companies are to be blamed for the failed implementation. Looking isolated at i2’s role, I believe both tactical and strategic mistakes were made. As a vendor i2 had a responsibility to work together with Nike to create a common understanding of the capability of the software and the business management impact.
If the client was not adequately knowledgeable about the product delivered i2 should have made a point of this in the RFP, by stating that a certain level of technical knowhow and expertise was expected and required from the client as well, to secure a smooth implementation. Such point – or clause – would have created the necessary awareness at Nike and would have secured the necessary focus from Nike before engaging in the implementation. We learn from the case that Nike when they started working together with i2 already had tried several other solutions without being successful, which further underlines my point.
Philip Kotler describes a common pitfall in B2B transactions as the B2B market is dominated by fewer buyers than on the consumer market, which can provide an undesired purchasing power to large corporations. In addition Nike was on the forefront of the technology required, which eventually meant i2 was pressured to provide significant more customization to the software. The fact that the customization widely exceeded the 10-15% maximum customization recommendation from i2 illustrates the negotiation and purchasing power Nike had over i2.
I sincerely believe it was a tactical mistake from i2 to allow to the large degree of customization. i2 added further to the tactical mistakes by not highlighting potential issues with running the i2 on the legacy system hindering data integration effectually diminishing the usability – and in turn satisfaction – of the software. During the implementation phase i2 made another tactical mistake by not being close enough to Nike and co-manage the process or the rollout. To rollout without proper/any testing and training was a huge mistake committed by Nike, but i2 should have intervened.
I believe project management on both sides was weak, which allowed for these mistakes caused by poor communication and lack of managing expectations. Unfortunately for i2 the number of tactical mistake converted in a strategic issue damaging the reputation of i2, when Nike publically assigned the blame of the failure to them. i2 had in the cooperation with Nike a unique opportunity to position itself as a world leading SCM software vendor as the project was groundbreaking in terms of size and complexity.
However, instead of gaining this competitive advantage the failed implementation, the public statements by Nike and the following class-action lawsuits from the Nike shareholders labeled i2 as incompetent. i2 severely miscalculated the tactical benefits of pleasing the client versus the strategic gains of completing the project successfully. I believe i2 was too focused on the short-term completion, which made them cut corners and discard own recommendations in order not to have a conflict with the client.
Overall, I find it unfair to blame i2 entirely. After all, the vendor selection is always the responsibility of the buyer and proper evaluation and testing of the product for its functionality would have averted this kind of failure. “Implementing a supply-chain management solution is like crossing the street; High risk if you don’t look both ways, but low risk if you do. ” Question 3: Nike was one of the first companies to start using the SAP module Apparel and Footwear Solution (AFS). From NIKE viewpoint, do you think that is a good strategy?
In my opinion Nike took a chance when start using AFS. Being one of the first users of the AFS software, could potentially have been a risky endeavor as software in the initial stages can be prone to bugs and other dis-functionalities. However, Nike implemented the AFS to perfection, which meant that the risk was very well handled. Especially the meticulous testing, seeking external consultancy service and skeleton roll-out stands out as key steps for the success of this specific project.
To analyze if it was a good strategy we need to analyze Nike’s financial performance against the main competition . The aim is to analyze if Nike after the implementation of AFS was performing more efficiently – measured on key financial parameters – hence creating a competitive advantage. I find clear evidence that is the case. I believe Nike created a competitive advantage by being a first-mover in the usage of AFS. Nike had the key objective to manage and turn the inventory faster and more efficiently. In my research I find that in addition to turning the inventory 4. times versus 3. 5 of the competition, Nike has significant less cash tied up in inventory – $2. 7bln versus $3. 4bln – which is remarkable as Nike produces a larger revenue than Adidas. A final point showing great operational efficient at Nike, is the ability to create a cash flow from these activities, where Nike in 2011 generated $1. 8bln in cash versus the competitors $1. 6bln. The competitor’s gross profit margin only exceeds Nike’s in 2011 after Nike has clearly outperformed on this factor as well throughout the time period being analyzed.
It could be an indication that the competitors are closing in on Nike’s competitive advantage in the areas of software implementation. I believe it was a good strategic decision to be an AFS first-mover. Nike handled the implementation very well and thereby managed to balance the risk and reward to the benefit of Nike against the competition. We see that Nike has in terms of gross profit margin continuously with exception of the last year in the analysis. I argue that the outperformance is based on primarily the relative efficiency of the supply chain.
The main indication of Nike’s superior supply chain is the inventory and inventory turn rate. We see below that Adidas has significantly higher holding of inventory relative to Nike and that Nike turns its inventory faster. In more efficient supply chain and hence business operation is reflected in the ability to generate cash from the operating activities. Nike evidently creates a larger cash flow than Adidas. The financial markets also recognize Nike’s competitive advantage as the stock shows a significant better performance than Adidas. (+171% vs. +86%, 2007-)
