II. Make Today Better

Labor

Introduction

See the Empower Workers dashboard for an update on our performance

With a total footprint of more than 2.5 million people across our value chain and 1 million people in the contract factories we source from directly, labor remains among our greatest areas of human impact and opportunities to help bring about real change.

At the end of FY13, just more than 1 million people – with an average age of 32 – worked in the 785 factories that we source from directly. We believe another half million people work in the factories that make the materials used in our products, and more than 1 million people work in raw material production. (Some factories are vertically integrated, and play more than one of these roles.)

We believe that a successful contract factory can achieve even more success though more active engagement with workers as a source of innovation and quality, which also presents an opportunity for workers to benefit. This approach is part of the way we seek to do business through the progression of lean as a component of our “manufacturing revolution” (see Manufacturing Revolution).


GLOBAL CONTRACT WORKER AND FACTORY COUNT
FY12-13


NOTE: As of last day of fiscal year, May 31. Factory, country and worker count includes NIKE, Inc. contracted manufacturing. These figures include Affiliates, prior to divestiture, and NIKE Brand licensees.

Europe, Middle East & Africa includes Turkey, Bosnia, Bulgaria, Egypt, Hungary, Isreal, Italy, Moldova, the Netherlands, Poland, Portugal, South Africa, Spain and the United Kingdom
North Asia includes China, Taiwan, Hong Kong, Japan, the Philippines and Vietnam.
South Asia includes Thailand, Cambodia, Indonesia, India, Bangladesh, Pakistan, Sri Lanka, Malaysia, Singapore and Australia.

Contract Factory Performance

For years, we have been sourcing from factories that seek to meet our minimum standards for good labor performance. In FY11, we converted our contract factory evaluation and scoring system from a letter-based system to a new medal-based one in line with our Sourcing & Manufacturing Sustainability Index (SMSI). The SMSI is one component of the overall Manufacturing Index, which also assesses contract factory performance on quality, on-time delivery and costing in equal measure. At the end of FY11, 49% of contract factories scored bronze on the SMSI. By the end of FY13, 68% had reached that score. 

Our transition to the SMSI is part of a strategic shift away from a compliance-based “auditing and checking” relationship with our contract manufacturers and toward cooperation around lean manufacturing as a means to achieve greater efficiency, built on a stable, agile, engaged and motivated workforce. Because an engaged workforce is an empowered workforce. We’re spending more time with, and have processes in place to direct more business to high-performing factories (i.e., bronze or better). At the same time, we are requiring lower-performing factories to pay for their own audits and to remediate any issues found. Factories that fail to achieve bronze level performance within a defined timeframe are reviewed by senior leadership and are assessed penalties, such as a reduction in orders and are even considered for removal from our contract factory base. 


FACTORY RATINGS AND TRENDS - NIKE, INC.
FY11 FY12 FY13
Gold  Gold 0 0 0
Silver  Silver 0 0 <1% / 1
Bronze  Bronze 50% / 441 70% / 639 68% / 535
Yellow  Yellow 38% / 336 21% / 193 20% / 156
Red  Red* 5% / 46 6% / 51 10% / 77
No Rating  No Rating 7% / 59 3% / 27 2% / 16
Total 100% / 882 100% / 910 100% / 785

NOTE: Contract factory count includes NIKE, Inc. contracted manufacturing. These figures include Affiliates, prior to divestiture, and NIKE Brand licensees.
*In FY13, we tightened compliance requirements, reducing the time period that contract factories could remain yellow before dropping to red status (to two consecutive quarters). This change resulted in an increase of red rating at the end of FY13.
SCORING METHODOLOGY: Bronze indicates full compliance with NIKE Code of Conduct and adherence to the 227 requirements in the Code Leadership Standards (CLS) as measured by our Health, Safety & Environment and Labor tools (available online). Silver and gold reflect an additional commitment to lean manufacturing and progressive achievement in performance management, management systems and scoring on assessments tools covering lean manufacturing, Human Resources Management, Energy & Carbon, Health & Safety and Environmental Sustainability. Gold demonstrates global leading manufacturing performance across all industries. Factories rated yellow or red indicate performance out of compliance with our Code and CLSs, where red indicates critical issues of noncompliance. No rating indicates a lack of data.

Audits & Compliance

While our focus has become more strategic, audits and monitoring remain an important component of how we know that our Code of Conduct is enforced, and helps get factories to bronze status. We assess contracted factories to review their ability to meet our high standards of social and environmental performance both before and during their work with us. These assessments take the form of audit visits by both internal and external parties, who gather information on the Code Leadership Standards that amplify our Code of Conduct. 

In FY13, 94% of factories went through a full assessment of labor, health, safety and environmental compliance. The remainder reflect the ongoing shift of factories that were in the process of moving out of our supply chain during the year. In FY13, violations were recorded in 16% of factories, a drop from 29% in FY12, due in part to our decision to reduce our contract factory base. The top issues found in FY13 were hours and wages. Among the top violations were issues with paperwork or documentation, as well as overtime (considered hours between 60 and 72 per week). Incidents of excessive overtime dropped from 116 in FY12 to 55 in FY13, due in part to our reduced contract factory base. The percentage of factories reporting no incidents also improved, increasing from 87% to 93%. 


TOP ISSUES OF LABOR NONCOMPLIANCE IN CONTRACT FACTORIES - NIKE, INC.
FY11 FY12 FY13
Age 1% <1% 2%
Freedom of Association and Collective Bargaining 2% <1% 1%
Harassment 3% 4% 1%
Hiring 4% 2% 2%
Hours 41% 44% 42%
Other 13% 13% 8%
Wages 36% 37% 39%
Totals 100% 100% 100%

NOTE: More detailed discussion of factory performance trends is available in the “Manufacturing” section of this report and on-line. Contract factory count includes NIKE, Inc. contracted manufacturing. These figures include Affiliates, prior to divestiture, and NIKE Brand licensee. Percentages are used to show the relative rate of type of incident.

Three areas in our supply chain that remain a priority for our industry are freedom of association, excessive overtime and wages. We continue to work with experienced organizations on these important issues. NIKE is a participating brand in the Play Fair Freedom of Association Protocol in Indonesia where training of factory management and workers is providing the platform for greater engagement in this area. As a member of the business caucus of the Fair Labor Association (FLA), NIKE has a seat on the organization’s Compensation Code Element Working Group that will provide recommendations to the FLA on how to move forward with a standard for its members. 

We continue our work with contract factories to address and eliminate excessive overtime from the supply chain. Although this is an industry-wide issue, we believe that lean manufacturing provides an approach that will not only unlock greater value for NIKE and the factories we work with, but when implemented effectively will significantly reduce excessive working hours. See further discussion online with deeper background on these and other issues. 

Worker Voice & Lean

We continued to work with factories to help them enhance their capacity around human resources management (HRM). Through the end of FY12, we provided training to management at contract factories producing 91% of NIKE Brand footwear product and 44% of NIKE Brand apparel product by volume, covering 531,000 workers (61% of total workers in the supply chain). This included surveying contract factory workers. This training was integral to our lean manufacturing approach in which we work with contract factory management to engage employees in problem solving and continuous improvement and is now incorporated with our lean approach overall. 

One worker protection requirement is that contract factories establish grievance systems. At the end of FY13, 82% of contract factories had such systems in place and were in compliance with NIKE standards. Of those in compliance, 70% of factories reported use of their systems, which is comparable to the rate in FY12. We recognize that having and using systems alone is not enough to secure workers’ capability to communicate with factory management. We continue to include training and approaches to raising worker voices as part of the lean manufacturing approach we encourage factories to take

NIKE believes lean can empower workers and teams. The company’s journey with contract factories toward lean manufacturing has helped reinforce the need for factory owners to have a deeper understanding of the cultural differences between management and workers’ priorities and perceptions, as well as the need to enhance communication and engagement with workers directly on problem solving. 

The success of the lean approach depends on three things: 

  • Leadership – factory leaders use lean to understand the levers that lead to better business performance 
  • People – workers are engaged and enabled to drive business success through continuous improvement and a more collaborative work environment 
  • Process – factory processes are predictable and agile in response to customer demand 

The lean approach also seeks to engage the minds of those closest to the work to solve the problems that prevent them from delivering quality product on time, every time. 

We require a commitment to lean as part of being accepted into our source base, and a minimum commitment and progression for positive ratings including measures in our Sourcing and Manufacturing Sustainability Index. Some of the standard metrics we use to assess adoption include productivity, HRM assessments, turnover, absenteeism and factory implementation of and results from worker engagement and well-being surveys. 

Valued Workers

We believe that a valued contract factory workforce means better business for the factories and for NIKE, and better well-being for individual workers. Factories that value their workers – investing in their skill building, listening to their ideas on how to improve factory processes, communicating about issues that matter to them, facilitating aspects of their lives that help them show up every day at the factory healthy and on time – can build a skilled, productive and engaged workforce. 

As part of this approach, we designed two pilot programs in Indonesia and learned that to enable engagement of the contract factory workforce, we needed contract factories to first stabilize production lines. Within these pilots we worked with factories to improve data quality, and to study and assess absenteeism, worker engagement and well-being, factory management and supervisor skills. Each of these areas has shown to contribute to worker well-being and to individual and factory productivity. Though early, results of well-being surveys in both footwear and apparel pilot factories show that production pilot lines addressing these areas outperform the control lines on both measures of production efficiency and worker engagement. 

Although we are still piloting this work, we want to be sure that success in production efficiency and enhancements in contract factory performance does not come at the cost of worker engagement and well-being, as some lean studies at other contract factories have shown in the past. 

Taken alone, these areas do not tell the whole story of worker well-being. We also know that many workers want to improve their earnings, and compensation systems can incentivize increased performance. We are working with contract factories to explore and test such systems as part of this work. 

In addition, many factors outside the factory affect workers’ ability to show up on time and in good health every day. As part of our efforts, we are exploring how we can catalyze third-party investment in products and services that could support workers’ daily needs. Many of the factories in our supply base invest in providing support to their workers through on-site health clinics or financial literacy training, though these efforts are not consistently aimed at addressing worker needs. We are developing a scalable and systemic approach to address these and other issues through commercially viable ecosystems of services and products to support worker needs. 

We anticipate sharing more of our journey of exploring, testing, assessing and scaling as we learn more through this work.

Taken alone, these areas do not tell the whole story of worker well-being. We also know that many workers want to improve their earnings, and compensation systems can incentivize increased performance without reliance on excessive overtime. We are working with contract factories to explore and test such systems as part of this work. 

In addition, many factors outside the factory affect workers’ ability to show up on time and in good health every day. As part of our efforts, we are exploring how we can catalyze third-party investment in products and services that could support workers’ daily needs. Many of the factories in our supply base invest in providing support to their workers through on-site health clinics or financial literacy training, though these efforts are not consistently aimed at addressing worker needs. We are developing a scalable and systemic approach to address these and other issues through commercially viable ecosystems of services and products to support worker needs. 

We anticipate sharing more of our journey of exploring, testing, assessing and scaling as we learn more through this work. 


MOST FREQUENTLY IDENTIFIED INCIDENTS OF HEALTH, SAFETY
AND ENVIRONMENT NONCOMPLIANCE AMONG CONTRACT FACTORIES
FY11 FY12 FY13
1. Electrical safety 1. Underground storage tanks 1. Hazardous materials
2. Underground storage tanks 2. Hazardous materials 2. Hazardous waste
3. Hazardous materials 3. Electrical safety 3. Control of hazards
4. Hazardous waste 4. Hazardous waste 4. Energy use
5. Contractor safety 5. Confined spaces 5. Underground storage tanks

Health & Safety

We also score contract factories on 35 health and safety factors. In FY12 and FY13, the average contract factory score was 72% on our scorecard, which measures compliance, performance and risk mitigation. The average score improved from 69% in FY11. 

During FY13 we worked with the Fair Labor Association to launch an accredited fire safety train-the-trainer program. The program began with national trainers from Sri Lanka, Bangladesh, Indonesia and India, with a target to cascade globally (See our Bangladesh case study).  

Looking at the Systems

Through our systems innovation lens we are also further exploring the labor system to better understand our points of leverage and opportunities for innovation. We are developing a deeper understanding of all the elements that affect labor, at every point in the process from governments to brands, factory owners to unions to workers. We will review this work with external stakeholders and then apply it to specific geographies. 

This work has helped us focus more on opportunities to influence worker well-being outside the contract factory. Some elements outside the factories include lack of access to affordable and effective ways to manage money. As a result workers employed by our contract factories may pay more than necessary for basic goods and services such as energy, water and credit. Health care and child care are also concerns for workers. We are looking at how we can collaborate with other organizations and factory owners to support workers in their lives outside the contract factory. 

CASE STUDY: PILOTING NEW WAYS OF WORKING

We believe factories that successfully address the well-being of their workers by engaging with them directly to understand their needs will improve factory performance. We also believe that factories need strong human resource management (HRM) programs to increase understanding among factory workers and management. Contract factories that do both of these things – address worker needs by listening and have a strong HRM program – will improve their business and our products. 

We wanted to know how contract factories within our own supply chain could do this, what impact it would have, and how to scale this learning, so we started pilots in 2012 with two Indonesian factories. 

OUR APPROACH 

We built the pilots on the principles of lean manufacturing. We had already incorporated lean into our work with contracted factories in previous years and built an enhanced vision of lean that includes both environmental and labor improvements alongside process efficiencies. Likewise, we introduced training at factories in 2009 to increase factory management awareness and understanding of HRM. The factories mostly succeeded at process improvements and we had the opportunity to build up the people and leadership components of lean. 

For the pilot, we established an external advisory board to confirm we were measuring the right factors. We recruited a range of thought leaders and experts in labor and manufacturing to provide input, including academics, think-tank members and independent consultants from Asia, Europe and the US. 

PREPARING TO PILOT 

We approached two factories – one footwear and one apparel – based on their commitment to lean, completion of human resources management training, and achievement in surpassing minimum compliance on our Sustainable Manufacturing and Sourcing assessments. The factories felt that they needed robust baseline data on empowerment and well-being measures, as well as basic factory production metrics to show the impact of new approaches. The two factories both trained managers and used lean approaches – ones that focus on continuous improvement processes – that reached out to and included factory workers. Additionally, both factories were unionized and both had adopted lean practices, set up pilot and control lines, established baselines and measured changes. Though the factories had similarities, we found very different results. 

PILOT IN ACTION: SETBACKS & SUCCESSES 

Soon after we started the pilot, the teams identified opportunities to improve and expand their data capabilities. Once data collection was stable we established a baseline for the pilot period over five months. 

The footwear factory assigned leaders who assessed worker feedback from surveys conducted, determined which projects to undertake, assigned teams to tackle them, set up approaches and ran the programs. Productivity increased in the factory as a whole as well as on the pilot line, however so did conflict. Though workers were involved in fixing the issues arising out of surveys and proposing solutions to identified problem areas, surveys indicated they did not feel motivated. Survey results showed a decline in perceived levels of motivation after six months, but slight improvements in perceptions of some areas of well-being and pay among those participating in the factory-led pilot. More data and a comparison over time will provide better perspective on these results. 

During the footwear factory pilot we received reports of some egregious behavior by line managers that violated our Code of Conduct regarding harassment and abuse. We believe the root causes of this behavior were due to competing priorities among supervisors and a lack of alignment between the factory group chairman, factory management and supervisory levels. We determined these conditions would make it difficult to effectively measure the impact of the pilot and we decided to stop our engagement in the pilot work with them. We worked with factory ownership and management to help them establish a remediation plan which included running factory worker engagement audits, developing a stronger relationship with union leaders, establishing community outreach programs and building leadership competencies. The factory also underwent a mutual trust and respect training that included more than 9,000 factory workers (including line supervisors and managers). 

In contrast, the apparel factory management created conditions for workers and management to review survey results and together they assessed the best issues to tackle and then worked together to address them. The factory management quickly realized that workers had good ideas and could significantly help the business, and that they had not been tapping into this vital resource. The apparel factory workers had suggestions around a number of issues including factory transportation and supervisor/worker communication. Workers were given time and attention when sharing their views, and the worker-led priorities became the initial focus for pilot work rather than factory management priorities. Line supervisors and factory management participated and were responsible for enacting the worker recommendations. Factory management also enacted management changes based on their understanding of cultural, generational and gender issues between themselves, who tend to be middle-age and male, and line workers who tend to be women. 

During the pilots the national minimum wages in Indonesia increased 50% to 70%, factory production growth rates continued to increase, and tensions between some unions and factories escalated across the country. These external factors did not have a significant impact on the apparel factory’s ability to carry out the pilot. 

WHAT WE’VE LEARNED 

Through this piloting exercise we have learned a great deal about how factories can enable worker engagement and well-being. We now have evidence from within our own supply chain that factories investing in and listening to their workers and involving them in production discussions makes business sense, as measured by increased productivity and worker well-being. 

We determined that additional things must be in place for a pilot to succeed, including different data systems and approaches to data. We also know contract factories must build a baseline of strong human resources capacity as a crucial foundation to improve worker well-being. 

As we expand our pilot work to additional factories and countries, we will test more factors around engagement and well-being both inside and outside the factory. Together with factories, we have a better understanding of what factories need to have accomplished before participating in a pilot, and how to gauge factory performance. Together we learned more direct involvement is required at all levels of factory management to support problem solving and worker engagement, and engagement and oversight throughout the production function is critical. Additionally, we know management capabilities are critical, especially the management systems used and the behavior of line supervisors and factory management. 

Some measures we are assessing include: 

  • DATA QUALITY – 6 measures including validity based on cross-checking, occurrence of errors, team member participation in providing input 
  • LEAN – 21 measures including production efficiency, percentage of rejects and rework, skill levels, absenteeism 
  • WORKER ENGAGEMENT AND WELL-BEING – 40 measures including employee turnover, problems raised/resolved (production and social), motivation, stress, exhaustion, ability to voice opinions, feeling of well-being inside and outside the factory 
  • OUTSIDE THE FACTORY – 10 measures including worker sentiment, participation, impact on turnover or absenteeism 

We are reviewing the results of the pilots and are more aware of how our approach to sourcing and developing new frameworks and protocols should work together to incentivize good behavior and practices by management at contract factories. 

We know that under the right conditions, contract factories can make significant improvements that encourage, engage and involve workers as valued contributors. We believe this work is too important to delay and that moving to new models of working will require many improvements along the way, from all sides – including our own. 

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