SCM and ERP Software Implementation at Nike: From Failure to Success

Examine the role of accurate demand forecasting for usiness! Nike went in for extensi"e customi#ation of i$%s standard suppl& chain software' as it felt that the standard software was not offering the re(uired functionalities! )his was elie"ed to e one of the reasons for the failure of the pro*ect! Considering Nike%s case' e"aluate the pros and cons of implementing off+the+shelf ,standard- demand planning software "is+.+"is customi#ing the software! Role of accurate demand forecasting for usiness /emand forecasting has een descri ed as the acti"it& of estimating the (uantit& of a product or ser"ice that consumers will purchase! 0efore we start rel&ing on demand forecasting as a means to predict the future' it is extremel& important to understand that demand forecasting is different from sales forecasting' e"en if t&picall& historical sales data is used to create a demand forecast! 1lthough it is critical that stock should e matched to demand to maximise profita ilit&' rel&ing solel& in sales forecast is not the correct wa& to do so! /emand actuall& represents the 2"oice of the consumer% and information a out demand is not influenced & e"ents or stock a"aila ilit& 1ccurate demand forecasting re(uires that oth formal and informal e used to make a forecast 3 formal methods include anal&sing historical sales data as well as an& current data from test markets4 informal methods include 2educated guesses%' *udgment and experience! ,Nike%s reliance on a completel& historical data ased demand forecast in $555 is a case in point! Nike had to take a ma*or in"entor& write+off due to inaccurate forecasts from the automated s&stem! )he compan& was saddled with too much in"entor& of slow+mo"ing items and a ma*or shortage of popular sellers-! 1 relia le and accurate demand forecast influences ,as it should- a num er of planning and execution processes' like: + + + + Strategic Planning Merchandise planning 1ssortment planning Item planning o Replenishment o 1llocation o Space + 6arehouse la our planning /emand forecasts dri"e man& critical decisions! )he& form the asis for u&ing decisions and dri"e operational planning' such as replenishment and la or scheduling! Forecasts are also essential to financial planning and to all decision+making that flows from financial plans! 2/emand% actuall& represents the relationship etween an item and its intended purchase (uantit&! )here are man& "aria les that influence a consumer%s purchase decisions! 6ithout an accurate demand forecast' a compan& ma& e unprepared for the le"el of consumer demand' and

SCM and ERP Software Implementation at Nike: From Failure to Success ma& therefore ha"e insufficient in"entor& le"els' resulting in lost sales! 1lternati"el&' the compan& ma& in"est in excess le"els of in"entor&' there & significantl& raising the cost per item and conse(uentl& realising lower than anticipated re"enue! /emand forecasting also allows companies ,particularl& retailers- to make etter decisions a out which prices to ad*ust and when' which products to promote' and what promotional tactics to deplo&' in order to maximise their profits ,or more accuratel&' to achie"e their o *ecti"es-! /emand forecasts are actuall& rele"ant essentiall& ecause of the inherent time lag in"ol"ed in the entire process of creating and making the goods a"aila le to the customer! Most companies can not wait for a demand to arise and then decide to fulfill it! Instead' companies need to anticipate the demand' and e read& for it' so the& can fulfill the customer orders in a timel& fashion! 1 ma*orit& of the customers would not e willing to wait for their order to e processed within the entire suppl& chain! ,Dell is an exception' though e"en Dell has suffered from pileup of useless in"entor& when the& could not accuratel& forecast the demand for a specific machine configuration-! 1ccurate demand forecast helps to: Control costs & le"eling production (uantities Impro"e efficienc& of logistics operations + accurate forecast important as the as the suppl& chain grows more complex Minimises 2dead stock% and impro"es in"entor& turno"er rates Impro"e customer ser"ice and there & increase customer satisfaction 3 increasingl& rele"ant as customer eha"ior ecomes more demanding Impro"e planning' leading to etter asset utilisation Identif& new market opportunities /etermine appropriate pricing polic& Forecast financial re(uirements Plan man+power re(uirements 7entana8s $559 enchmark research co"ering sales and operational planning ,S:;P- has re"ealed that' among retailers' onl& one+fourth of participants that ha"e accurac& of more than <5 percent in their demand plans said the& ha"e orders cancelled fre(uentl& or sometimes! In contrast' more than half of those that ha"e a less accurate demand planning process experience cancellations more often!= ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + ecomes ecomes increasingl&

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SCM and ERP Software Implementation at Nike: From Failure to Success Pros and Cons of implementing off+the+shelf ,standard- demand planning software "is+.+"is customi#ing the software 1d"antages of off+the+shelf demand planning software: +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ ;ne of the iggest ad"antages is the price! 1n off+the+shelf product is usuall& reasona l& priced whereas a customised product will e relati"el& expensi"e to uild! )he reason is apportionment! )he compan& ordering the customisation will normall& e expected to ear the entire cost of customisation' as opposed to the standard "ersion' the cost of which would ha"e een distri uted across all the licenses sold! )he higher cost kicks in not onl& during initial ac(uisition ut also each time a ma*or upgrade or re"ision is ordered! Standard "ersion allows a compan& to e up and running in a much shorter period of time! Not onl& there is the time in"ol"ed in writing the extra code' there is also significant period of time in"ol"ed in integration and testing! /on%t forget that the standard "ersion would normall& ha"e een exhausti"el& tested in the past' so re(uiring a much smaller testing time post installation! ;ff+the+shelf software t&picall& has &ears of testing and &ears of production use' as well as feed ack and impro"ement' gi"ing confidence that it actuall& works! Customised software does carr& with it some real and imminent danger:

)he customised features might not actuall& work! )he features might work ut still not meet the actual needs ,usa ilit& of software usuall& ecomes apparent onl& after extensi"e li"e usage-! )he customised features might interact wrongl& with other customised or standard features' e"en though the& work in isolation ,integration issues-$!

)here is also the issue of patches and upgrades! )he patches are usuall& written for the standard "ersion! Implementing these' without ade(uate thought and care' can actuall& replace the customised code which ma& ha"e taken a lot of time and mone& to de"elop! Software that has undergone extensi"e modifications will normall& e expensi"e to implement and difficult to maintain and upgrade!

)he Militar& Sealift Command ,MSC- successfull& implemented ;racle%s ERP solution! ;ne rule the& cite for achie"ing ERP success is that agencies must find an ERP package that mirrors their usiness practices as closel& as possi le' then resol"e to implement the package without significant modifications! MSC managers made a ke& decision to minimi#e the risk of ERP implementation & taking a ?"anilla@ approach: )he& committed to installing the software as it was packaged' without an& modifications! )he MSC put together ='555 re(uirements the optimal software would fulfill! )here were onl& == areas where their processes didn%t match the software and the commander made the decision to modif& MSC processes to fit the ;racle software!

SCM and ERP Software Implementation at Nike: From Failure to Success 1d"antages of customising the software: ++++++++++++++++++++++++++++++++++++++++++++++++ Customised software mimics the current processes in the compan& as closel& as is practica le ,depending of+course on the extent of customisation-! )here is no re(uirement to change an& processes! Asers can usuall& adopt the software within a few da&s! Customised software also pro"ides flexi ilit& to the organisation to tinker around with the software and fine tune it for etter performance! Nothing off the shelf can e"er fit a usiness as closel& as a custom designed application! )he usiness processes that a compan& uses' which ma& ha"e taken &ears to de"elop' can onl& e tightl& integrated and mapped+in to a custom de"eloped software ,or at least a customised "ersion-! Customisation can enhance the "alue of off+the+shelf software' letting the compan& add more "alue for their customers B oth internal and external! Customising maximises automation and reduces the need for staff re+training! )he algorithms of a demand forecasting software are usuall& (uite standard and same for all software products! So it doesn%t make much sense to make undue changes to the otherwise well tested code ase! It is the changes which usuall& make the product unsta le C unrelia le! For a usiness process application' there ma& e some ad"antages to customisation so that the application follows the exiting processes more closel&! For a demand forecasting module howe"er' attempting to tweak the existing algorithms will most likel& result in the need for a long and thorough testing c&cle 3 a luxur& that is not readil& a"aila le in most instances!

SCM and ERP Software Implementation at Nike: From Failure to Success

1nal&#e the reasons that led to Nike%s failure to in implementing SCM software and its success in implementing ERP software! 6hat lessons can e learnt & other companies from Nike%s experience! Reasons for Nike%s failure in implementing SCM software /uring the =D<5%s' Nike%s demand forecasting s&stem consisted of recei"ing orders from retailers at least six months efore the promised deli"er& date! Nike then passed these orders to its manufacturers in South East 1sia! )he s&stem' though it worked well at the time' was not sustaina le' as the lead time of six months was too long a period for the footwear and apparel industr&! 1s Nike%s usiness grew and it ecame the de+facto leader in the footwear usiness in the =DD5%s' increasing demand from customers and the ensuing complexit& of suppl& chain' made Nike%s existing wa& of working somewhat o solete! Nike%s suppl& chain ecame uncontrolled and the existing demand forecast s&stem came under se"ere pressure! 1t this time Nike opted to re"amp its s&stem & implementing the new demand forecasting and suppl& chain s&stem software from i$! ,Issue no! = 3 i$%s product had ne"er till then een used or tested in the footwear industr&-! )he primar& o *ecti"e of the new s&stem was to pro"ide accurate demand forecasts which Nike could then use effecti"el& to control the stock le"els and mo"ement of the raw materials ,ru er' can"as etc!- used for its shoe manufacturing process! Soon after implementing the new s&stems' Nike disco"ered howe"er that the applications were not performing according to its re(uirements! Nike and i$ then decided to make significant changes to the applications to tr& and make the s&stem output more rele"ant to Nike%s existing usiness processes! ,Issue no! $ 3 2customising% a large application 2on+the+fl&% is a sure recipe for disaster! 1 rapidl& customised solution will often throw up i#arre results 3 something that reinforces the need to exhausti"el& test the s&stem' in its entiret&' efore implementation-! 0& the time the changes were made howe"er' the in"entor& issues had egun to accumulate! ;ther issues that contri uted to the large scale failure include: + i$%s demand forecasting module uses completel& mathematical algorithms' lea"ing no room for factoring in user experience or ground realit&! It is now eing increasingl& accepted that an accurate demand forecast is est created & com ining the power of historical data and trends with 2human intelligence%! Nike was also us& implementing other large pro*ects like ERP from S1P' lea"ing inade(uate resources for complete focus on the i$ pro*ect! Nike was going through a oom' with increased sales' and the extra workload put an undul& high demand on its resources! Nike tried to forecast too far ahead + the accurac& of forecast diminishes rapidl& when the timeline is stretched! It is possi le that oth Nike and i$ were not full& aware of' or appreciati"e of' the complexit& of the pro*ect! Nike demanded from i$ a completel& unrealistic le"el of

+ + + +

SCM and ERP Software Implementation at Nike: From Failure to Success customisation! i$ on the other hand did not exhi it sufficient maturit& as a software "endor when it failed to highlight the possi le dangers of customisation at this stage' and instead allowed itself to e pressurised & Nike! + 1 sence of a third part& integrator is another contri utor& factor to failure in this pro*ect! Such an integrator could ha"e made a more o *ecti"e anal&sis of the situation and also possi l& helped in impro"ing communication etween the two parties ,Nike and i$ reportedl& failed to ha"e sufficient re"iew meetings to *ointl& anal&se how things were mo"ing along-! Nike decided to install i$ while it was still using its legac& s&stems' rather than deplo& i$ as part of its S1P ERP pro*ect! Integration with legac& s&stems created ma*or ottlenecks in the order processing s&stem' leading to the need for extra customisation and the associated dela&s and ugs! No pilot test was conducted to assess the feasi ilit& of the pro*ect and to foresee an& potential issues! Nike also did not prepare for an& possi le failure in implementation! Ead an ade(uate risk anal&sis een done' the se"erit& of failure could possi l& ha"e een reduced!

Nike%s initial e"aluation re"ealed that the issues with the i$ implementation were largel& short term in nature! 1ccording to the compan&' the software performance was somewhat lower than anticipated ,application was slow and had some initial integration pro lems with other existing Nike s&stems-' and Nike%s planners were not full& trained in the use of the software efore it went li"e! ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + Reasons for Nike%s success in implementing ERP software Anlike the i$ implementation' Nike took its training responsi ilities "er& seriousl& for the ERP implementation ,Nike%s A!S! customer ser"ice representati"es recei"ed =F5 to =<5 hours of training from highl& trained fellow Nike 2super users%! Emplo&ees were not allowed to use the s&stem until the& had completed their re(uisite training-! )he ERP pro*ect was not rushed through! Nike adopted a phased ,parallel- approach to implementing the ERP s&stem' as opposed to the plunge method the& had used for the earlier i$ pro*ect! )he phased approach is more suita le to large pro*ects' particularl& those that are spread across large geographical areas! 6hile rashness' inade(uate training' unsta le software' inade(uate and insufficient testing derailed and dragged on Nike%s i$ pro*ect for &ears' Nike intensiGed its efforts and paid due attention to those areas at the time of rolling out S1P RCH! Nike was a le to use the learning from the mistakes to its ad"antage and emerged successful with the RCH implementationH!

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SCM and ERP Software Implementation at Nike: From Failure to Success Nike minimised the extent of customisation the& ordered for their ERP package! It is etter to take
an off+the+shelf package and modif& the usiness processes where"er an& mismatch is encountered! Rampant customisation can lead to scope creep with ine"ita le dela&s and unforeseen glitches

)he lesson of Nike%s failure and su se(uent re ound also lies in the fact that the compan& essentiall& had a usiness plan that was widel& understood and accepted at e"er& le"el of the compan&! Ii"en the resilienc& that it afforded the compan&' in the end the i$ failure turned out to e' indeed' *ust a Jspeed ump!J ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + 6hat lessons can e learnt & other companies from Nike%s experience It is important' in case of large scale software solutions' that the product is e"aluated comprehensi"el& efore deciding in its fa"our! )he product should match the existing usiness processes as closel& as possi le! If not' either the processes or the application will need to undergo massi"e changes' something that will in"aria l& ring a out some undesira le conse(uences! ,In Nike%s case' it is not difficult to see that the i$ s&stem was not designed to handle the large amount of products that Nike sells!)he implications of customising should not e underestimated! Karge scale customisation will alwa&s in"ol"e a huge cost' longer de"elopment time and a difficult implementation! Implementation of an& large I) pro*ect can not e taken lightl&! Nike did the mistake of eing complacent a out the i$ implementation ecause the scope of the i$ pro*ects appeared smaller than the soon+to+follow S1P ERP pro*ect! )ake sufficient time for rollout! ERP or similar pro*ects can not e time condensed! )his is tantamount to 2cutting corners% with all its conse(uent implications! Aser training is "ital to the pro*ect%s success! Sufficient time and opportunit& needs to e allowed to all potential users to e completel& comforta le with the s&stem! No compromise is possi le with this phase of the pro*ect! Anwa"ering support from the top leadership is "ital for success of an ERP pro*ect! 1s in the case of Nike' the CE; firml& supported the pro*ect e"en after the initial de acle' which was a powerful factor for its e"entual success! 6ithout complete support at the highest le"els of the compan&' the pro a ilit& of success diminishes "er& rapidl&! )he compan& ma& often need to tweak its usiness processes to align these with the demands of the software application! Companies should e willing to do this' and' can in fact take the opportunit& to criticall& re"iew their existing s&stems and carr& out whate"er reengineering that is necessar& for e"entual success! 1 ma*or factor in the success of these s&stems is to ensure that e"er&one' including the rank and file emplo&ees' must e full& in"ol"ed in the pro*ect , u& in-! Nike enshrined the usiness plan of the compan& to the point where e"er&one knew it and supported it!

SCM and ERP Software Implementation at Nike: From Failure to Success )oo often' the ERP pro*ect ecomes an I) pro*ect and insufficient attention is paid to the usiness implications! In order for ERP s&stems to e successfull& implemented' senior management must understand how the& want to change their usiness processes! In case ERP and SCM softwares are eing implemented separatel&' then ideall& SCM should e implemented after ERP implementation as it relies on the information that is stored normall& in the ERP software! ERP integrates all the information in a single data ase and the suppl& chain software eneGts from ha"ing a single ma*or source to get accurate and up+to+date information rather than getting it from "arious legac& s&stems!

SCM and ERP Software Implementation at Nike: From Failure to Success

References =! 0eware the Promises of /emand Forecasting S&stems+ 0& 0en 6orthen4 www!cio!com $! NILE + Ieneration III 0&: Parastou Moussefi' Ear"ard Ani"ersit& H! 2/emand Forecasting% 3 Ra"i Meena F! /emand forecasting toda&4 www!managementparadise!com N! 2Nike Re ounds: Eow ,and 6h&- Nike Reco"ered from Its Suppl& Chain /isaster%4 www!cio!com 9! i$+Nike fallout a cautionar& tale 0& Melanie 1ustria Farmer and Erich Kuening4 www!cnet!com