BY

Prof.A.Selvarasu
Questions for Case discussion

 What is the prime issue in the case?

 Is it production, sourcing, marketing?
 What is the key concept…New…?

 Can you track the case events?

 What is next????
Athletic shoes for…
US$11.6b/1992
 Basketball
 Jogging
 Fitness
 Tennis
 Golf and
 For everyday wear

Market size Increased three times in ten years

Leading players… Branded FW


Oregon based Nike, Inc., …. 31.8% share

 Massachusetts based Reebok Intl Ltd. 21.1%

 SOURCE: SPORTING GOODS INTELLIGENCE

Other players

 Keds
 La Gear
 Converse
 Fila
 ASICS
 Adidas
 K-SWISS
 Avia
 New Balance
Return on Investments

 Return on Equity (ROE)

 NIKE … 24.5%
 Reebok… 27.2%

 Brand Equity
 Nike… US$3.5 billion
 Reebok… US$2.3 billion
Business Focus

 Concentration on
 PRODUCT DESIGN
 PRODUCT MARKETING

 DID NOT ACTUALLY PRODUCE

NETWORK OF CONTRACTORS

 SOUTH KOREA
 TAIWAN
 CHINA
 INDONESIA
 THAILAND
 PHILIPPINES
SUCCESSFUL SUPPLIERS…???

 YES

 EXACT SPECIFICATIONS
 HIGH QUALITY SHOES
 PRECISE DELIVERY SCHEDULES


KEEP COSTS DOWN
Free from…???

 Manufacturing operations
 No tie up working capital in raw material
 & Work in process inventory

 Only inventory in their book was finished goods

COST BREAKDOWN…Average Athletic
Shoe
 Labour (approx. 20%) $2.28
 Materials (approx. 60%) $6.84
 Overhead (approx. 20%) $2.28
 Total Cost of Sale: S11.40
 Approx. average wholesale price: $19.60
 Average price at retail $31.00
ASIAN CONTRACTORS…???

 WORKER EXPLOITATION
 HUMAN RIGHTS
 NEWS in the media by Journalist and Industry
‘Watchdog’….
 Working conditions
 Low wages
 Long hours
INTERNATIONAL SOURCING…???

 LOW COST LABOUR &

 FLEXIBLE CONTRACTOR RELATIONSHIPS

 = Respecting the right of workers???????

 Primary attraction was low cost labour
Philip H Knight…NIKE’s
Founder
 TRACK SHOES

 SUCCESS OF JAPANESE CAMERA in ‘50s

against higher-priced German Models

 Can this replicate…Footwear???

Nike’s approach

 Posting a Technician at the Factory site to

collaborate with local managers

 Instead of accepting or rejecting the product

at the end of the three months pipe-line
Share of Asian Contractors in
’80s
 Nike’s… sourcing
 South Korea 70%
 Taiwan 16%

 Thailand
 Hong Kong
 & Philipines 7%

 Manufacturing in US 7%
SAMYANG TONGSANG…SUPPLIER

 BUILT FACTORIES
 BOUGHT RAW MATERIALS
OTHER INPUTS RUBBER & LEATHER
 Hired Trained workers

 Set local wages and working conditions

 MANAGED the operations

SHOE…

 Labour intensive process

 Transformed rubber, leather and plastic into
high-quality shoes
 Main parts
 The outsole
 The midsole
 The Upper
Process…work done by Hand
 Rubber mixed with chemicals and pigments was rolled and pressed
into sheets, then cut to form the shoe’s outsole

 Polyurethane or Ethylene-vinylacetate mixed with chemicals and

pigments rolled into sheets and foamed in an oven, then cut to
create the shoe’s midsole

 Outsole and midsoles were glued together to form a complete sole

unit
 The shoe’s upper consisted of several parts cut from leather or
plastic and sewn together
 The upper was then joined to the sole unit using glue and air
pressure, to form a complete unit

 Finally, Shoe was trimmed, polished, labelled and packaged

SUPPLIER NETWORK

 100 new styles and colours

 Designs were relayed by satellite to their
contractors’ CAD/CAM systems in Taiwan

 Prototypes were developed and tested

 Once approved, blueprints faxed to factories
in South Korea and elsewhere in Asia
 Production begins almost at once
Factories in several
Countries?
 More flexible
 National pricing change
 Supply conditions change
 No plant ownership
Is it true for all
brands???
 Majority of them relied on overseas
manufacturing only

 New Balance Athletic Shoe Inc. a niche

producer four US plants

 Wage $7.50 an hour with benefits to $8 to $12

per hour. It was unable to profitably produce
Changing phases of Nike
 Form Nike’s Founder thro’…..
 …buy only at low cost
 … incentives to move operations to countries to
low labour cost
 … take the uncertainty in change in production
 …bringing management worked well
 Taiwanese contractors moved to China
 Managed by Chinese low cost labour
 South Koreans moved to Indonesia
 Sourced from six Indonesian Factories
Changing phases of Nike
 Orders shifted based on the cheapest cost
among six of them
 Indonesian minimum wages raised as a policy
 Lower basic pay, food allowance and
incentive payments
 Nike had no responsibility on production and
labour practices
Changing phases of Nike

 Nike’s MOU…to certify their compliance with

‘all applicable local laws’ for labour
regulations, for occupational safety and
health and for worker insurance
 Forced labour and did not discriminate on the
basis of gender, race, other differences
 Adhere to Nike’s Environmental standards
Changing Phases of Reebok

 Reebok CEO…continue to buy only productivity

boosted
 Reebok’s Human Rights Award
 Reebok Human Rights Production Standards
 On-site inspection, audits of contractors
 Investigate travel costs, training of contractors,
financial incentives to upgrade facilities
 Inspect workspace, living quarters, cafeterias at
45 separate factories
Answers for Case discussion

 Free from production

 Changing International Sourcing destinations
 Network Contractors
 From Low cost sourcing…MOU to be
maintained in the form documents on
demand …Nike
 Human Rights awards and additional
Production policies
 What is next????
LABOUR PRODUCTIVITY

COUNTRY LADIES GENTS LADIES LADIES TROUSERS

BLOUSE SHIRTS DRESSES SKIRTS
HONK 20.6 20.9 20.2 19.3 19.3
KONG
TAIWAN 18.9 18.2 12.4 16.6 16.1
THAILAND 17.0 19.8 12.2 20.5 13.1
S.KOREA 14.6 17.4 8.8 17.5 15.6
CHINA 10.6 14.0 7.8 13.0 6.7
INDIA 10.2 9.1 6.3 9.6 6.8
DIFF. % 102 130 221 114 184
BETWEEN
INDIA AND
THE BEST
LABOUR PRODUCTIVITY IN
INDIA
 A MISNOMER
 LARGE DIFFERENCE IN PRODUCTIVITY
WAGE COST
COUNTRY US CENTS/HOUR INDEX
INDIA 62 100
BANGLADESH 27 44
INDONESIA 52 84
EGYPT 60 97
CHINA 57 92
PAKISTAN 39 63
VIETNAM 29 47
EMPLOYMENT

 APPRENTICES
 CASUAL
 CONTRACT
 SUB-CONTRACT
WAGE

 Rs.350/day
 Rs.50 to Rs.400
 All India average Rs.120
LABOUR FORCE

Fair Day Work

Fair Day Wage