Outsourcing Supply Chain Management Nike

When developing a sourcing strategy, businesses sometimes face the question of whether to produce some product or service internally (insource) or to source it from an outside supply chain partner (outsource). This is called the make-or-buy decision. – Bozarth & Handfield, 2012.

"Outsourcing is the selection of suppliers with expertise in a particular area of business to produce and deliver a component part or service to another company" - Verma & Boyer, 2010.

“Outsourcing is the use of supply chain partners to provide products or services” – Bozarth & Handfield, 2012.

Over the past decade, outsourcing of noncore production and service activities to external suppliers has become a common method of streamlining and improving processes.

The use of outsourcing has increased for two primary reasons:
1. The total quality management movement in the 1980s helped increase companies' awareness that it is difficult to be "world class" in multiple activities and that settling for second-best products produced "in-house" just to maintain the work within a single organization is not the best approach.
2. The rapid increase in the in the capabilities of information technologies and other communication devices has made managing multitier supply chains much easier.

As one can see in the chart above Nike kept its general positions such as Marketing, Accounting, Promotion, General Management and Product Development in house. 

http://han.hszuyd.nl/han/MarketlineAdvantage/advantage.marketline.com/Product?pid=8E563969-FC1C-4D3A-8EEE-F9D79F81F0C3

The 12 countries in blue indicate production places for Nike footwear, which is being outsourced to low labour cost countries.

The countries are:

• Argentina
• Bosnia
• Brazil
• China
• India
• Indonesia
• Italy
• Japan
• Korea
• Mexico
• Taiwan
• Vietnam

 Source: http://nikeinc.com/pages/manufacturing-map

Nike.  Explanation of how it works in the organisation and supply chain.

Nike is not a production company and outsourcers almost all its shoes. Nike’s headquarters is located in Beaverton, United States, which designs, develops and markets all the footwear.

Subcontractors are located in Taiwan and Korea and contract to other Asian countries for production. Assembly factories that produce the footwear are located in Taiwan, Korea, China, Indonesia and Vietnam.

The manufacturing and assembly of their shoes is outsourced to third parties in Asia. The manufacturers obtain the required raw materials by purchasing them from suppliers.

Nike made a conscious decision to retain the design and the marketing of the shoes because Nike excels at product innovation and marketing of their shoes. Companies should try to insource processes that are core competencies. These are usually organizational strengths and abilities, which are developed over a long period, that customers find valuable and competitors find difficult or oven impossible to copy (C. Bozarth & B. Handfield, 2012)

After the product is marketed the shoes will be sold to the customers by the Sporting goods department and shoe stores, online, catalogue and other retailers, which are not owned by Nike. The shoes will also be sold by Nike branded stores, which are owned by Nike. Customers give feedback to Nike and this data will be used in the development of the new products.

http://www.emeraldinsight.com/journals.htm?articleid=1733216&show=html

Production outsourcing

Advantages

One of the main advantages that comes with outsourcing production to low labour cost countries is the low-cost production. Because of this Nike can produce more efficiently and reduce costs. As a positive consequence of this Nike can lower the selling prices or increase their profit margins, which gives them a competitive advantage over their competitors.

By using an outsourcing strategy Nike has lower investment risk then by using an insourcing strategy, because they do not have to invest in a production facility, so less investment is needed up front. This gives them also more strategic flexibility and access to state-of-the-art products and processes. The market or technologies could change in the future. In this case it is often easier to change supply chain partners than internal processes.  

Disadvantages

A major disadvantage is that there is always the possibility of choosing a bad supply chain partner. The partner might not meet Nike’s expectations on capabilities or quality. If badly produced shoes are being sold, it will have a bad effect on Nike’s brand image. Outsourcing can also be bad for the brand image in the case the brand is related to child labour and sweatshops. Furthermore, when outsourcing production, Nike’s degree of control and coordination over processes and core technologies could decrease.

If they would have insourced their production, they could have increased their degree of control and ability to oversee the entire production process. Next to that, the business volume necessary to achieve economies of scale could be achieved more easily. But a higher investment would be required and their strategic flexibility could be reduced by this.

Conclusion

Nike outsources the production of the footwear in 12 countries worldwide. They made a conscious decision to retain the design and the marketing of the shoes because Nike excels at product innovation and marketing of their shoes. Even though they got lots of criticism about their outsource activities e.g. child labour in Asia and sweatshops, we think that Nike hugely benefits from its outsource strategy with reduced labour costs as main pinpoint.  

Written by:

Ahmed Bairi, 1325157

Jan-Niklas Schmücker, 1325150

Kevin Doutzenberg, 1325152

Paul Erven, 1325142