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IBS Center For Management Research: Nike - Failure in Demand Forecasting

Nike experienced a failure in demand forecasting in 2001 that resulted in significant financial losses. At the time, Nike implemented a new demand forecasting and supply chain management system from i2 Technologies to help manage its complex global operations. However, the i2 system proved inaccurate, resulting in excess inventory of some products and shortages of popular products. This led to $100 million in lost sales and a 20% drop in Nike's stock price. While Nike blamed i2, experts believed Nike was also at fault for relying too heavily on the new automated system during a period of rapid growth. Nike later regained success by combining automated forecasting with input from retailers and learning from the experience.

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130 views

IBS Center For Management Research: Nike - Failure in Demand Forecasting

Nike experienced a failure in demand forecasting in 2001 that resulted in significant financial losses. At the time, Nike implemented a new demand forecasting and supply chain management system from i2 Technologies to help manage its complex global operations. However, the i2 system proved inaccurate, resulting in excess inventory of some products and shortages of popular products. This led to $100 million in lost sales and a 20% drop in Nike's stock price. While Nike blamed i2, experts believed Nike was also at fault for relying too heavily on the new automated system during a period of rapid growth. Nike later regained success by combining automated forecasting with input from retailers and learning from the experience.

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Yash Mehta
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Download as PDF, TXT or read online on Scribd
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CLOM/008

IBS Center for Management Research

Nike – Failure in Demand Forecasting


This caselet was written by Mimon Datta, under the guidance of Jitesh Nair, IBS Center for Management Research. It was
compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either
effective or ineffective handling of a management situation.

 2006, IBS Center for Management Research. All rights reserved.

To order copies, call +91-08417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus,
Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: info@icmrindia.org

www.icmrindia.org

License to use for IBS Campuses only. Sem I, Class of 2014-16


CLOM/008

Nike – Failure in Demand Forecasting


Established in 1964, Nike Inc. (Nike) is one of the world’s leading designer, marketer and
distributor of athletic footwear, apparel, equipment and accessories for sports and other fitness
activities. The wholly-owned subsidiaries of Nike include Converse Inc, Bauer Inc., Cole Haan,
Hurley International LLC, and Exeter Brands Group LLC. In January 2006, Fortune magazine1
listed Nike as one of the 100 best companies to work for in the US. 2005 was a record year for
sales and profitability at Nike. The company's revenues grew to $13.740 billion from $9.489
billion in 2001 and $12.253 billion in 2004. Footwear revenues were up by 11%, whereas apparel
and equipment revenues grew by 10% and 15% respectively.2 Accurate demand forecasting was
cited as one of the primary reasons for this success. But the situation was quite different in 2001.
That year, Nike spent $40 million on a demand projection model developed by i2 Technologies
Inc. (i2)3 but its profits for spring (Jan-March) 2001 were around $48 million below forecasts, at
$97 million.
Nike had a well-set demand forecasting system that had been performing quite well throughout the
1980s. In this system, orders from retailers were placed six months ahead of delivery. Once these
orders were placed, Nike would pass them to their contract manufacturers in the Far East. The
system was running fine until Nike made the transition from being the 12th largest shoe
manufacturer (in 1984) to the undisputed leader in the footwear industry (by the mid 1990s). As a
result of this transition, its manufacturing schedules became more complex. The company's
manufacturing schedules became busier and shipping dates tighter as the number of customers
increased considerably. With 27 order management systems around the globe in 1998, Nike’s
supply chain began to fragment. It became extremely difficult for Nike to make demand forecasts
using its existing system.
Nike then decided to implement a new demand forecasting and supply chain management system
provided by i2. The software solution was supposed to reduce the inventory for rubber, canvas and
other materials that Nike required to manufacture shoes. Also, i2’s solution was expected to help
Nike align production to focus on its more popular selling brands. Though the problems started to
manifest within the very first few months of implementation of the demand forecasting solution,
Nike and i2 tracked the problems down and tried to develop ways around them. The i2 software
technicians tried to overcome the problems by changing operational procedures or by writing new
software. But by the time modifications were made, the inventory problem had already started.
Nike was over-manufacturing some products while struggling to meet the customer demand on
other products. On account of Nike’s excessive reliance on the automated projections, it ended up
ordering $90 million worth of shoes, such as the Air Garnett II, which were selling very poorly,
from suppliers across the globe. On the other hand, there was also a shortfall of $80 million to
$100 million4 on popular models, like the Air Force One.

1
Fortune is a well-known American biweekly business magazine. It is part of the Time Warner Group.
2
www.nike.com/nikebiz/investors/ annual_report/ar_05/docs/2005_annual_report.pdf.
3
Christopher Koch, “How and Why Nike Recovered from its Supply Chain Disaster,”
www.cio.com/archive/061504/nike.html, June 15, 2004.
4
Worthen, Ben. “Future Results Not Guaranteed.” CIO. July15, 2003

License to use for IBS Campuses only. Sem I, Class of 2014-16


Nike – Failure in Demand Forecasting

To control the damage, Nike filled the back orders that had not been supplied and made moves to
dispose off the excess inventory through discount distribution channels like Nike’s outlet stores. It
even had to dump the excess shoes at ‘bargain basement prices’. It took about 6 to 9 months for
Nike to overcome the problem of incorrect proportions in its inventory, and more than two years to
make up the financial loss. The inaccurate forecasts and losses they entailed resulted in a sharp fall
in Nike’s share prices, and the company’s image as an innovative user of technology was
tarnished. It cost Nike more than $100 million in lost sales, lowered its stock prices by about 20%,5
and led to a series of legal battles.
Experts across the globe analyzed the reasons for the huge mismatch between demand and supply.
According to Karen Peterson, a Gartner Inc analyst, “i2's relative inexperience in delivering
supply-chain systems for the apparel and footwear industry and Nike's demands put the project at
risk from the get-go.”6 This probably led to the software solution's inappropriate demand
forecasting. But, most of the analysts had a different perspective. They opined that Nike was too
busy with other costly projects like ERP and SAP at that point of time. Further, since Nike was
going through a boom, the increasing sales and volume of work coupled with the added burden of
a new software, and hence a new mode of demand forecasting, led to the failure of the system
altogether.
Despite the fact that Nike issued public statements against i2, it continued to use i2 as its sole
supplier of demand forecasting software for Nike’s small but growing apparel business (it stopped
using i2's demand planner for short and medium-range planning for sneaker’s). Nike gradually
shifted its demand planning to SAP and ERP systems, which depended more on orders and
invoices than predictive algorithms. Learning from experience, Nike combined the earlier demand
forecasting techniques that were chiefly based on intuition with the modern integrated
computerized system so that a reasonable logical result could be obtained. In the words of Roland
Wolfram, Nike’s vice president of operations and technology, “Demand planning strategy was and
will be a mixture of art and technology.” The company also decided to give more importance to
the opinions of retailer’s for demand forecasting. Phil Knite, CEO of Nike, said, ‘I think it will be
profitable in the long run.” Nike also converted its supply chain from 'make-to-sell' to 'make-to-
order'. These continuous efforts of Nike to mend the damage bore results and the company
regained its image and posted record sales in 2005.

Questions for Discussion:

1. What was the forecasting approach practiced at Nike prior to implementing i2’s demand
forecasting and supply chain management system? What reasons prompted Nike to change its
demand forecasting techniques? What was the outcome of this change?
2. What were the likely reasons that resulted in such a huge gap between demand and supply at
Nike? What, in your opinion, could have been done to avoid this situation?

5
Wilson,Tim. “Nike: i2 Software Just Didn't Do It.” InternetWeek. March 01,2001.
6
Larry Barrett, “Long Strange Trip: Nike Finally Regains Footing,” Baseline, November, 2003.

License to use for IBS Campuses only. Sem I, Class of 2014-16


Nike – Failure in Demand Forecasting

Additional Readings & References:

1. Ben Worthen, “Future Results Not Guaranteed,” CIO, July15, 2003.


2. Larry Barret, “Long Strange Trip: Nike Finally Regains Footing,” Baseline, November,
2003.
3. http://www.nike.com/nikebiz/nikebiz.jhtml?page=3&item=facts#nike.
4. Tim Wilson, “Nike: i2 Software Just Didn't Do It,” InternetWeek,
www.techweb.com/wire/story/TWB20010301S0009, March 01, 2001.
5. Christopher Koch, “How and Why Nike Recovered from its Supply Chain Disaster,”
www.cio.com/archive/061504/nike.html, June 15, 2004.
6. Christopher Koch, “Nike Rebounds,” CIO, June 15, 2004.
7. http://www.i2.com.

License to use for IBS Campuses only. Sem I, Class of 2014-16

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