III. Design The Future

Manufacturing

Introduction

See the Transform Manufacturing dashboard for an update on our performance

We believe in putting our energy where we have the most impact. Our footprinting work has confirmed that the finished goods manufacturing part of our value chain is where many of our biggest impacts on people and the environment are felt. Our systems mapping has helped us understand the interrelationships and identify our points of leverage in the complex manufacturing supply chain.

Our overall goal is to raise the bar for performance in our contract footwear, apparel and equipment manufacturing. We are working in our own supply base and we share our experiences in order to be a catalyst for positive change across the industry. We are on track to meet our manufacturing commitments and have begun to look ahead, redefining what manufacturing will look like for NIKE in the future.


Transforming Relationships

During FY12 and FY13 we made progress in transforming our relationships with contract factories by using our Manufacturing Index (MI) to help determine whether to buy from them. A component of the MI is the Sourcing & Manufacturing Sustainability Index (SMSI), which combines ratings for lean manufacturing, labor and health, safety and environment. Our FY20 target is for all contract factories from which we source to be at the bronze level or above on the SMSI. The MI also assesses strategic metrics including country risk, leadership planning and development, and transparency in which we have included public reporting on labor and environment at the factory group level as one of the criteria for gold-level status. 

Scoring Factories

Decisions about whether to source from a factory are complex. Our indices provide a way to score factories on a diverse set of factors, providing a valuable decision-making tool and helping to improve the efficiency of the sourcing process (See how we measure sustainabilty in sourcing & manufacturing). During FY13, 33 factories entered the source selection process and 70% were approved. The average time a factory spent in NIKE’s sourcing selection process was 152 days, down from 246 days in FY12. 

The SMSI also gives us a platform to incentivize performance improvements. Factories rated below the bronze level are required to pay for third-party audits until their performance improves. Bronze or better factories receive audits from NIKE and third-party auditors. During FY12 and FY13 we began offering beyond-compliance assessments to contract factories to help them measure and achieve higher levels of performance, and also began to advise bronze-rated contract factories on a range of topics, including energy, water and human resource management. 


MEASURING SUSTAINABILITY IN SOURCING & MANUFACTURING

Sustainability is incorporated into NIKE, Inc.'s Manufacturing Index (MI), a tool used in selecting and assessing the performance of contract manufacturers. As one component of the MI, we assess sustainability through our Sourcing & Manufacturing Sustainability Index (SMSI). Our target of sourcing all product from factories reaching a minimum bronze standard on our SMSI requires alignment with our Code of Conduct.


PROFILE OF NIKE, INC. CONTRACT FACTORY RATINGS ON NIKE SOURCING & MANUFACTURING SUSTAINABILITY INDEX
BY PRODUCT ENGINE
Global
Rating FY11 FY12 FY13
Gold 0 0 0
Silver 0 0 1
Bronze 441 639 535
Yellow 336 193 156
Red 46 51 77
Not rated 59 27 16
Total 882 910 785

Footwear
Rating FY11 FY12 FY13
Gold 0 0 0
Silver 0 0 1
Bronze 88 131 126
Yellow 60 24 20
Red 16 13 12
Not rated 6 10 7
Total 170 178 166

Apparel
Rating FY11 FY12 FY13
Gold 0 0 0
Silver 0 0 0
Bronze 262 368 309
Yellow 184 114 93
Red 21 25 43
Not rated 30 10 7
Total 497 517 452

Equipment
Rating FY11 FY12 FY13
Gold 0 0 0
Silver 0 0 0
Bronze 91 140 100
Yellow 92 55 43
Red 9 13 22
Not rated 23 7 2
Total 215 215 167

NOTE: As of the last day of the fiscal year. Factory count includes NIKE, Inc. contracted manufacturing. These figures include Affiliates, prior to divestiture, and NIKE Brand licensees. For more details and updated information, see NIKE’s interactive manufacturing map, available online at manufacturingmap.nikeinc.com.

The SMSI also gives us a platform to incentivize performance improvements. Factories rated below the bronze level are required to pay for third-party audits until their performance improves. Bronze or better factories receive audits from NIKE and third-party auditors. During FY12 and FY13 we began offering beyond-compliance assessments to contract factories to help them measure and achieve higher levels of performance, and also began to advise bronze-rated contract factories on a range of topics, including energy, water and human resource management. 

At the end of FY13, 68% of factories had attained the bronze level or above, a slight decline from the 70% level in FY12. We expect that progress will not always be linear, but will generally improve over the longer term as factories learn the new system and we are able to apply the tool consistently across all regions. We remain confident that we are on track to meet our FY20 target to source from factories that are bronze-rated or above. Those rated below bronze – yellow or red when found to have serious or critical violations – undergo management review and assessment and establish remediation plans. 

We have continued our focus on Human Resources Management (HRM) by providing training. At the end of FY12 this training had extended to factories that employ 61% of the workers in our manufacturing supply chain and produce 91% of NIKE Brand footwear product and 44% of NIKE Brand apparel product by volume. The training was valuable in raising awareness of HRM issues and approaches among factory management. We now see an opportunity to help contract factory management develop the capabilities to put theory into practice and recognize workers as the key to success in lean manufacturing. 

HRM, together with lean, comprise what we call “Lean 2.0.” Research conducted in 2014 by MIT Researchers*, Does Lean Improve Labor Standards? Capability Building and Social Performance in the Nike Supply Chain, found adoption of lean manufacturing at NIKE contracted factories resulted in a 15% reduction in serious labor violations at more than 300 contracted factories from 2009-2013 on average, the first quantitative evidence of lean practices delivering factory-based improvement for workers. HRM training has now been incorporated into our broader lean manufacturing program. 

The Manufacturing Revolution

New manufacturing approaches are needed because the challenges in our supply chain are changing. Increasing costs for labor and logistics, fluctuating materials costs and availability, changing consumer expectations and the rapid pace of innovation are among the factors making our supply chain ever more complex. To maintain our leading position, we’re looking to a range of innovations we collectively call the “manufacturing revolution.” This revolution is focused on better products and better production. 

Our manufacturing revolution portfolio of initiatives aim to redefine how our products are made and what they are made from. Focus areas include waste reduction of all kinds and more efficient use of materials and labor in a more resource-constrained world. This approach could bring manufacturing closer to market as well as create a more sustainable, stable source base committed to workers as a source of innovation, and drive profitable growth for the company. Our manufacturing revolution initiatives encompass three broad areas: 

  • Sustainable manufacturing excellence. Through lean manufacturing and our work to meet our targets, we’re seeing dramatic improvements in waste reduction (see Waste) and water efficiency (see Water). At the end of FY13, 76% of our NIKE Brand apparel and 85% of our NIKE Brand footwear was made on certified lean lines. 
  • Manufacturing modernization. This entails making the value-added steps in the manufacturing process more efficient through processes such as automated cutting and stitching. It also means eliminating or reducing non-value-added work such as moving materials around a factory. 
  • Manufacturing innovation. In this space we’re looking at entirely new ways of making products. NIKE Flyknit (see Making Today Better While Designing the Future) is an example of this kind of game-changing innovation. 


NIKE, INC.'S GLOBAL FACTORY VISITS/AUDITS
FY13
Audits* 609 / 61%
3rd Party 391 / 39%


NOTE: Contract factory count includes NIKE, Inc. contract manufacturing. These figures include Affiliates, prior to divestiture, and NIKE Brand licensees. Audits include annual assessments and compliance visits which includes use of HSE and Labor audit tools. Some factories have visits or assessments more than once in a given year. Active factory counts change during the year and totaled 1,000; figures reflect that change. At the start of FY13, the audit frequency was changed to a minimum once every 12 months (from 18 months) and a new third-party system was implemented so comparable figures are not available for FY12. Third parties conducting audits are approved for use by NIKE, but contracted by factories and use the same audit tools.

Workers in the Supply Chain

These kinds of changes have implications for workers in the supply chain. More automation could mean a greater need for higher-skilled workers and a shift toward higher-skilled positions, which, along with growing labor shortages, creates incentives for factories to reduce turnover. That’s why HRM is an integral part of Lean 2.0, and why we’re looking at developing new metrics to assess factories’ approach to people-management and enable them to upskill their employee base.

NIKE believes lean can also empower workers and teams. The company’s journey toward incentivizing lean manufacturing in contract factories has helped reinforce the need for a deeper understanding by factory management of the cultural differences between management and workers. The success of the lean approach depends on:

  • leadership – factory leaders use lean to drive business performance
  • people – workers are engaged and enabled to drive business success through continuous improvement
  • 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 will continue to bring learnings from our manufacturing pilot program into our approach to lean manufacturing; and we will work with those contract factories that demonstrably extend this approach throughout the supply chain and help managers to unlock greater value from their factories, with a valued workforce. (See case study.)

Extending Our Focus

Another important shift in how we approach the role of manufacturing in our value chain is our increasing focus on our material vendors – that is, the suppliers that manufacture the more than 80,000 materials available for use in our products. 

We recognize that our goal to transform manufacturing requires collaboration with contract manufacturers and others. During FY12 and FY13, we continued important work to advance solutions across the industry. With the Fair Labor Association (FLA), we played a key role in the development of the Sustainable Compliance Initiative (SCI) methodology and assessment tool, which we piloted in 2011/12. This tool focuses on factory capabilities to manage working conditions and reduce risks. NIKE is also facilitating discussions between the Sustainable Apparel Coalition and the FLA on collaboration opportunities between their organizations regarding tools. 

To help others learn from our experience, we cooperated with both Harvard Business School and Stanford Graduate School of Business, which released case studies that examine NIKE’s sustainable innovation journey over the past 15 years. 

IN FOCUS
NIKE IN BANGLADESH

On April 24, 2013, the Rana Plaza garment factory in Bangladesh collapsed, killing 1,129 people and injuring more than 2,500. This disaster – the worst in the history of the garment industry – showed that, despite decades of work by many institutions and individuals, some workers in the industry still face unacceptable conditions. 

NIKE has never sourced from Rana Plaza. However, NIKE sources product from four contract factories in Bangladesh (see NIKE's Manufacturing Map). All four factories are in facilities purpose-built for light industrial occupancy and located in export processing zones – unlike the Rana Plaza facility that fulfilled orders for many major apparel brands that source from hundreds of factories across Bangladesh. The NIKE-contracted facilities have undergone fire, safety and structural audits and those findings have been independently verified by an outside firm. 

Since mid-2012, NIKE has participated in developing a strategy for a Fair Labor Association-led global fire safety training and certification. The pilot, launched in October of 2013, is being accredited by the Institution of Occupational Safety and Health (IOSH) to provide formal and globally recognized certification in fire and safety training. The initial training, with MAS Holdings at the MAS Institute of Management and Technology in Sri Lanka, included participants from Bangladesh, Sri Lanka, Indonesia and India. 

In addition, NIKE has worked with contract factory management on the following measures: supplemental inspections and training, including fire and electrical safety audits; third-party building safety inspections covering fire prevention and protection, electrical safety and lighting, ventilation and indoor air quality; and emergency-procedure training with workers. 

There is important work to be done in Bangladesh, and NIKE remains part of those conversations by continuing dialogue and engagement with stakeholders. We firmly believe that responsibility for long-lasting, systemic change must be shared by governments, manufacturers, NGOs, brands, unions and factory workers. 

Notes

*Greg Distelhorst, University of Toronto Rotman School of Management and Massachusetts Institute of Technology (MIT) Department of Science; Jens Hainmueller, Stanford University Department of Political Science and Stanford Graduate School of Business; Richard M. Locke, Brown University and Massachusetts Institute of Technology (MIT) Department of Political Science
NOTE: Access full report at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2337601.

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