The folks at NIKE have the lean spin down pat. I am sure some consultant somewhere has done well thoroughly indoctrinating them in the whole lean spiel. the problem is that, when you have a fundamentally flawed model to begin with, streamlining those processes with lean is inherently a waste of time.
You can read Nike waxing eloquently about empowering their workforce and engaging everyone in continuous improvement. It is right out of the lean handbook. And it is easy to be impressed with their lean rhetoric.
All they have done is drenched perhaps the second ugliest manufacturing pig in the world (even they cannot reach the bottom of the manufacturing sewer Apple owns) with a lot of very exotic perfume. No company is more obsessed with the pursuit of cheap labor than Nike, and it is hard to imagine anyone wastes more money doing it. They are very profitable to be sure, but they leave an incredible amount of money on the table.
"Virtually all of our footwear is produced by factories we contract with outside of the United States. In fiscal 2010, contract factories in Vietnam, China, Indonesia, Thailand, and India manufactured approximately 37%, 34%, 23%, 2%, and 1% of total NIKE Brand footwear respectively." They especially love Vietnam where the minimum wage is about 50 cents an hour. A primary focus of their lean strategy is the "elimination of lost time" – at four bucks a day they can't afford any slacking. According to NIKE, paying more than minimum wage is problematic, as well:
"Among the factors affecting the wage debate are the competing concerns of various constituents. Shareholders want to see strong returns on their investments. Consumers want products at competitive prices. Manufacturers need to earn a profit to sustain their business and grow. Governments want to attract and retain investment in order to fuel growth, jobs and revenue. Most important, workers want to earn wages that meet their basic needs and enable their families to take advantage of growing educational and economic opportunities." All of these stakeholders think paying folks a dime more than their mandated 50 cents would make or break the deal, huh?
I don't care what NIKE pays people. What I scratch my head at is the insanity of carrying $2 billion plus in inventory – turning 5 times a year – and that is the NIKE inventory, not counting all of the inventory sitting in retailers warehouses and on their shelves. I can't reconcile a lean strategy to improve quality that is targeted at factories in wretched corners of the globe (and NIKE knows full well how wretched they are which is why they boast of having no more than 5-7% of their production with any one contractor in order to mitigate the enormous company and country risk inherent in their business model). It is fundamentally impossible to achieve excellent quality with a process that entails a three month cycle time between creating defects in factories and having end customers find them. That process can only be minimally controlled through the waste of inspection.
I can't wrap my mind around a business model that pours enormous sums of money into information systems to manage 10,000 mile long supply chains encompassing 600 contract factories spead out among every backwater place on the globe, deploying armies of inspectors to try to minimize the sweatshop-type abuses that have plagued NIKE - and sees people wasting 50 cent an hour time as the biggest opportunity to eliminate waste.
Who cares about NIKE? Certainly not me. The moral of the story is that applying lean to a basically dumb business model defeats the purpose of lean. The business has to built on a foundation of common economic sense first, then the processes should be optimized. Walking past buildings full of massive computers and bursting with billions of dollars in inventory to apply lean to the pocket change labor cost in Ho Chi Minh City represents a waste of perfectly good lean knowledge and expertise.
Sam Hoskins says
Your comment “I don’t care what NIKE pays people. What I scratch my head at is the insanity of carrying $2 billion plus in inventory – turning 5 times a year – and that is the NIKE inventory, not counting all of the inventory sitting in retailers warehouses and on their shelves.” rings so true. All I have to do is substitute the name of the company that I am consulting for right now, and it would be a perfect description of their situation.
JM says
Bill, did you actually do the math on the labor? Let’s say every contract factory work makes $.50 USD per hour.
800,000 factory workers x $.50/hr x 50 hrs/week (conservative estimate) x 52 weeks per year = $1,040,000,000 in labor costs.
This doesn’t even include OT costs or other country-specific employer costs in the form of taxes, benefits, etc.
If I shave 10% of labor costs through improvement (for example, OT is lowered through better level loading in the plants), then this equals $104,000,000 per year in savings. Seems pretty significant to me.
I don’t disagree on the bloated inventory issue…it needs to be addressed, but your dismissal of their lean efforts in factory improvements is disappointing.
Bill Waddell says
Yeah, I did the math JM. NIKE’s cost of sales was a shade over $10 billion. Your billion or so in labor represents 10% of that total. I suggest NIKE worry more about the other 90%. Your 10% improvement in labor – while $100 million is a big number – repreents a 1% reduction in the cost of sales – some lean strategy goal!
JM says
Wait, now I’m confused. Isn’t Lean about making small, incremental improvements? In the context of Nike’s size, isn’t a 1% reduction a small improvement?
Bill Waddell says
Doesn’t sound like you are confused at all, JM. Sounds like you are cleverly trying to twist core lean principles to rationalize ignoring true waste and manage like it is 1955 – pounding on direct labor even though it is by and large value adding and by and large an insignificant cost element – all the while ignoring a bloated supply chain and the wasteful complexity of the computers and people required to support it.
In fact, the incremental improvements lean drives to achieve are reductions in cycle time, which will not happen by trying to squeeze a few pennies out of some Vietnamese guy.
JM says
Not trying to twist anything Bill. Maybe in your business labor is not a significant part of your cost, but in mine, it is.
And who said anything about pounding on labor? Is it a crime to try to make things more efficient? In my world we typically don’t improve productivity with the goal of slashing heads. It’s usually so that we can handle the additional volumes and new scopes of services with the existing workforce.
You’re too quick to judge and condemn others when they don’t do Lean the “right” way.
david foster says
“800,000 factory workers”…how on earth could it require EIGHT HUNDRED THOUSAND people to make Nike’s shoes and miscellaneous other products? Just intuitively, this sounds totally disproportionate…indeed, sounds like textile production prior to the industrial revolution.
If this number is for real, then it seems like there is huge labor productivity improvement potential at this company. Is it possible that the 50 cent per hour wage rate has acted as a deterrent from taking such productivity improvements seriously enough?
Anonymous says
Bill, coming across as a bit of a jerk in your comments here…
Bill Waddell says
David,
As usual, you hit on what is probably the most significant bit of data in the post. The productivity levels in the ‘low labor cost, third world countries is abysmal. Were the same work to be done in the USA, Canada, Australia, new Zealand or Western Europe, the 800,000 people figure would be 100,000 or less. American productivity levels are as much as 10X those of places like China, Vietnam and Thailand.
NIKE noted that one of the primary interests of the government n those countries is to grow employment levels – hence their focus on enforcing work week laws, but minimal concern about hourly wages. They make every effort to compel companies to employ more people, even at absurdly low hourly pay.
Someone with a keen sense of economics as you will realize that this makes the development of a middle class, consumer economy impossible. Advocates of the ‘Chinese miracle’ wax about the 100,000,000 consumers in China – leaving out the fact that China’s population is 1.3 billion. This means that over 90% of China’s population is not part of the ‘miracle’.
The conundrum is that the jobs are there because of low labor costs. Turning those people into better paid consumers requires commensurate productivity gains in order to keep the total cost for the likes of NIKE the same. Increasing pay without a corresponding increase in productivity will only drive the employers to countries with lower net labor costs. However, productivity gains mean fewer people working, which is counter to the objectives of the governments in those countries.
To be sure, productivity gains resulting in increased spending on the part of those working for higher wages will create more demand for manufactured goods, which will eventually create more jobs. But there is a lag between the two. If one could wave a magic wand in China and make everyone twice as productive and earning twice as much per hour, it would still be a matter of several years before that greater spending power translated into a corresponding level of demand for Chinese products.
As far as NIKE’s lean effort is concerned, productivity improvement will get little support from the government and the local culture. JM observed that, at his company, labor productivity gains are turned into higher volumes rather than fewer jobs. This is ideally the way to go, but it is counter to NIKE’s strategy. They boast that the 800,000 people are spread out over 600 factories, and that no single supplier provides more than 5-7% of the product in their category. This is to minimize the dependence NIKE has on any single source or country, which is not a bad idea in light of the risk these companies and their countries represent. A supplier who doubles productivity will not be allowed to double their volume of sales to NIKE. Productivity gains without increasing volumes can only mean fewer jobs.
Dan Markovitz says
Bill,
How do you handle the lack of domestic manufacturing skills? I used to work at Asics, and I know that the needed shoemaking skills aren’t available in the US anymore. I also know of a children’s apparel company that has to buy components from Mexico & Central America, because some sewing, stitching, and embroidery skills don’t exist in the US anymore.
Does this mean that to onshore production these companies would have to make a multi-year plan to develop the domestic manufacturing capability? Or something else?
Paul Todd says
Late to the discussion, but a couple of notes from my apparel industry past:
On the lack shoemaking skills in the US – nobody is born with these skills, they are trained. The workforce in Central America didn’t have the skills when my company moved production there, and quality was terrible until the necessary training and experience was transferred. I suspect the same happens when Nike shows up at an impoverished village – there has to be a robust training plan.
On the 800,000 figure – productivity aside, apparel and footwear asembly are labor-intensive even in the leanest environment. The amazing hand-eye coordination and dexterity that all humans are born with costs billions to replicate in a machine. The clothes we’re wearing are the product of great technology, but in the end it comes down to skilled hands joining pieces of fabric through an industrial sewing machine.