II. How We Do Business

Manufacturing

Introduction

Our value chain is global:

  • More than 900 contract factories
  • More than 1 million workers
  • More than 500,000 different products – each with its own environmental and social footprint

Our ability to improve our own footprint and shape sustainability solutions at scale relies on fundamentally changing the nature of our relationships across the value chain, including – importantly – with the factories that make our products. Like many global companies that outsource production, our supply chain is complex, fragmented and often influenced by factors beyond our power and purview. That’s what makes our work so challenging. We do not own these factories, so we cannot simply mandate change. Instead, we must build and influence positive change through our contracts.

As we work to maximize the positive impact of our influence, we also seek to help the contract factories and others in our value chain understand and take seriously their own impacts. We collaborate to address the issues central to our industry, issues that matter to Nike: worker rights and protections, living conditions for workers, wages and the environmental impacts of manufacturing processes. We’ve spent more than 15 years working with contract factories on these issues, setting high expectations for workers and the environment, providing training and tools to help factories meet those expectations, and assessing their performance. This approach has created clear baseline standards, improved oversight and helped some factories to move beyond compliance, especially in environmental performance and worker safety.

At the same time, some problems persist. While some factories meet or beat all of our standards, certain issues continue to arise. Issues around working hours, overtime and associated wages have made up the vast majority of violations found by audits of footwear, apparel and equipment factories. We’ve found ourselves devoting a lot of time and resources to addressing these types of issues in the poorer-performing factories, while having less time to engage with the higher-performing factories. That’s why we have evolved our approach to building relationships with contract factories and why we have developed a new manufacturing vision.

Through this journey we have learned that monitoring does not bring about sustainable change. Often, it only reinforces a pattern of hiding problems. We have also recognized that one of the major barriers to factories embracing change is a lack of knowledge and relevant systems. So while compliance auditing with core standards is still a central feature of our relationship with factories, we are now moving from monitoring for minimum compliance against our Code of Conduct and Code Leadership Standards toward a model that rewards factories for their management practices, performance controls and commitment to continuous improvement. This represents a fundamental shift from a risk-reduction focus – which devotes time and attention on the lowest factory performers – to a strategy that invests time and attention to strengthening relationships with the factories operating at the highest levels of performance. Overall, our aim is to build business partnerships characterized by long-term, trust-based, transparent interactions.

Our Manufacturing Vision

To enable this evolution in our supply chain relationships, we have articulated a new manufacturing vision: to create and to deliver great products through a sustainable, NIKE, Inc.-wide sourcing base. Our definition of a sustainable supply chain is one that’s lean, green, equitable and empowered:

  • Lean with regard to our manufacturing philosophy
  • Green in our approach to design, product creation and sourcing
  • Equitable in our commitment to balance people and profit
  • Empowered by building a workforce that knows and can advocate for its rights 

This vision is at the core of how we plan to source product moving forward. It is deeply rooted in what we have learned about the vital link between a factory’s human resources management and environmental practices, and its overall performance. We are working to achieve this vision by:

  • Elevating product excellence and innovation at the factory level
  • Helping to lead industry efforts to integrate sustainability into product creation and manufacturing
  • Managing sourcing through a balanced approach, taking into account environmental, social, quality and cost impacts
  • Developing and testing new models of manufacturing that serve to improve worker compensation, skills and livelihood
  • Consulting with, coaching and building capacity with contract factories to optimize labor and environmental capabilities

In the past our processes were not consistent, which sometimes led us to make decisions in the wrong order. Our intention was to audit, then remediate, then source. However, at worst, we sourced, then audited, then remediated. To remedy this, during FY10 and FY11 we developed the “lean, green, equitable and empowered” strategic framework needed to drive consistent consideration of – and expectation for – total performance in sourcing decision making. Now, we are assessing minimum standards up front and rooting out issues at the start of the sourcing process, in line with our Code of Conduct. These decisions are not made separately from our other business decisions; they’re now made as part of the business process.

We have also been developing tools and approaches to provide contract factories with tangible business incentives to aim for higher performance and stronger management practices. Just as important, we’re sharing with our contract factories what we’ve learned about how a sustainable business model can and must also be a successful business model.

Nike’s Sustainable Manufacturing Evolution

When we began working to create a sustainable supply chain, the global manufacturing landscape was very different. Companies kept sourcing decisions highly confidential, and there was little public transparency about conditions for workers or environmental impacts.

Our sustainable manufacturing efforts have evolved through several “generations” (see graphic below). We’ve had some notable successes. We know better the factories we work with, and they know better what we expect of them. We’ve defined our expectations clearly and regularly raise the bar.

Nike continues to push the rest of the industry to provide transparency about factories and facilitate more collaboration among multiple parties to support sound working conditions, strong environmental performance and resilient communities in the global supply chain. Through the Fair Labor Association (FLA), the Fair Factories Clearinghouse (FFC) and pilot projects of the Better Work Initiative, leading companies are converging on codes of conduct, common assessments and mechanisms for sharing performance data among each other and publicly. 

Profile of Contract Factories

At the end of FY11, NIKE, Inc.’s three product engines – footwear, apparel and equipment – source product from more than 900 contract factories that employ more than 1 million workers in 50 countries. Factories represented are “above-the-line” NIKE, Inc. contract factories. Above-the-line refers to all product manufacturing sites directly contracted by NIKE, Inc., licensees or agents delivering finished goods ready for retail and/or public consumption bearing the NIKE, Inc. brand logos and marks. Excluded, for example, are material suppliers. We began including Affiliate data in FY09; we formerly reported only on NIKE Brand data.

Globally, we have made progress in optimizing our factory base by focusing on rigorous screening and by assessing the performance of contract factories. We have moved toward establishing long-term relationships with fewer factories as trusted partners, rather than having short-term transactional relationships with a larger number of factories. In fact, across Nike, we have reduced the number of contract factories by just over 10 percent since FY09, while increasing revenues nearly 9 percent over the same period.

We have worked to create a consistent approach across the NIKE, Inc. portfolio to assess on equal terms the performance of all contract factories. In FY09, just under half of factories across all of our brands were audited. By the end of FY11, 80 percent were. Auditing is the first step toward working to improve factories that may meet minimum compliance standards but have opportunities to improve their sustainability performance. It’s also the first step toward eliminating from our supply base those factories with serious, recurring violations.

By the time our tools and processes are fully implemented (over the next three years), we anticipate that our approach will have evolved significantly:

  • All factories that supply our product needs (for footwear, apparel and equipment) will be selected and assessed using an integrated and consistent approach.
  • Social and environmental sustainability will be systematically considered using a balanced scorecard that also weighs cost, delivery and quality and is the fundamental tool in our sourcing strategy. We will move from enforcing minimum compliance standards to defining a model of “good, better and best” with incentives for our contract factories, and from monitoring performance against the Code of Conduct to collaborating with factories as business partners.
  • Principles of sustainable manufacturing and sourcing will be further embedded in product creation, and will be part of ongoing reviews of factory performance.

Even as we have focused on our own supply chain, we have not forgotten the bigger picture. We know that we cannot, on our own, drive all the changes needed to achieve large-scale improvements for workers and the environment. We are still one player among many in our huge industry. That’s why we have practiced and advocated for transparency and collaboration, including the sharing of data and tools. (See case study)

Destination: A Truly Sustainable Supply Chain

We have developed innovative processes and tools to move our supply chain vision toward reality. That’s the how, discussed later in this section. But first, let’s take a closer look at exactly what we mean by a “sustainable supply chain.” Each of the following four elements, when taken together, form our sustainable supply chain vision. 

Lean: Better Manufacturing

Lean manufacturing has been a hallmark of our approach with factories and is the foundation of how we advance sustainable manufacturing. Lean manufacturing is a business system and continuous improvement philosophy that aims to deliver the highest-quality product while eliminating waste, including lost time and material. At Nike, we also believe lean can empower workers and teams. Our journey toward lean manufacturing has helped reinforce the need for a deeper understanding by factory management of the cultural differences between management and the predominantly female workers in the workplace. Worker surveys indicate a significant increase in the satisfaction of workers in factories that have implemented lean manufacturing, which we attribute to increased awareness among factory managers of what good human resources (HR) management looks like and better capacity to implement it.

The success of the lean approach depends on the implementation of physical changes to production processes, increased leadership capabilities and the development of an empowered workforce. Lean manufacturing 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.

Since FY09, Nike has provided resources to contract factories to support their transition to the lean approach, including training, coaching and technical assistance (see the Labor section for a discussion of progress in this area). By the end of FY11, within the NIKE Brand, 80 percent of footwear, 57 percent of apparel and 11 percent of equipment was made using processes meeting our minimum baseline definition of lean.

Green: Improving Performance at Every Step

Factories that make footwear, apparel and sports equipment have a wide variety of environmental impacts, including their use of energy, water and diverse materials; the related creation of waste, greenhouse gases and other emissions; and the use and release of toxins. Many of these environmental issues are also social issues. Water used in footwear manufacturing, for example, could compete with local community needs in water-scarce areas.

We expect the factories that make our products to comply with all legal and Nike requirements set out in our Code of Conduct and Code Leadership Standards and to be good stewards of the environment. As natural resources come under increasing pressure, a factory’s capability to use resources efficiently and reduce its environmental footprint is an indicator of its potential for long-term success.

We have worked with contract factories for several years to improve their management of energy, water, waste, toxic materials and water discharges, as described in the Impact Areas sections of this report. Recently, we committed to a goal of zero discharge of hazardous chemicals* by our material vendors and contract manufacturers by 2020. We measure and report on our contract manufacturing base’s performance across environmental impacts such as greenhouse gas emissions and waste generation – recognizing that their impacts are part of our own.

Equitable: Toward Economic Security

Wage concerns among workers continue to be among the top issues identified in our factory audits. We believe this is an important issue, and we’ve spent years studying and exploring total compensation, including pay and benefits, that workers in contract factories receive.

In many cases, jobs in Nike contract factories are among the most sought-after locally. But more can be done. Achieving an equitable supply chain is a key piece of our sustainable manufacturing vision. We encourage contract factory management to view workers as valued partners who can help achieve the factory’s business goals. Working with contract factories to help their workforce gain valuable skills is also consistent with our long-term strategy. We sell high-performance products, and to grow sustainably, we need access to an experienced and motivated workforce. We believe that a highly valued workforce can improve quality and productivity by reducing turnover and absenteeism. In turn, higher worker productivity – measured in skill, craftsmanship and quality, not just units produced – may enable higher compensation for workers.

Equity is about each party – workers, contract factories and Nike – investing in manufacturing and getting a return. Nike wants to invest because it is both a smart business move and the right thing to do. Factories that invest in their workers can reduce turnover and increase their ability to produce quality products, profitably.

We recognize that, to date, factory workers are not consistently recognized as a valuable part of the business value chain. And we know some workers feel that they are not fairly compensated in return for their work and this can lead to a lack of morale, low self-esteem and reduced productivity. To address this, we are exploring ways that our contract factories can reward their workers for obtaining higher skill levels through supported training and more focused investment at the factory level. We believe this will lead to an increase in productivity that will allow factory partners to transition to a more complex wage model and still maintain profitability.

In the communities where our contract factories are located (and where their workforce lives), poverty can be pervasive despite the availability of local jobs, and it affects the quality of life of everyone in the community. To contribute to solutions, we are piloting a new approach that we hope will begin to get at the fundamental local drivers that affect poverty in these communities. We are studying approaches to address issues beyond compensation that affect quality of life, such as access to basic services, personal financial management tools and payment vehicles, and the kinds of training and services that might improve workers’ lives.

These approaches link directly to our increasing focus on helping contract factories build their capacity for good management practices. Our aims include coaching factories to better address workers’ needs, training workers for high levels of performance, and aligning pay to the skills that workers bring to the job rather than just the number of hours worked. We have developed additional expectations for factories around these areas, as described in the Labor section of this report. And we will be sharing more of our journey as we continue to study and test responses to these issues.

Empowered: Workers Unlock Value

As brands that believe in the power of human potential, we believe that one of the greatest impacts we can have is to help give a voice to the million people who work in our supply chain. For many years, footwear and apparel manufacturing was considered an inherently low-tech, low-skill and low-wage job. The move to lean manufacturing models challenges that assumption: To participate in lean production, workers need knowledge, skills and decision-making authority. However, when we first started working with our contract manufacturing partners on the implementation of lean manufacturing principles, many factories lacked the capability to develop these skills in their workforce.

In FY07, we began to offer human resources management (HRM) training and other support to our contract factories to help them invest in the potential of their people. Research shows that satisfied workers are more productive workers, and that investments in workers will yield long-term value for factory owners. We are now transitioning to an integrated training model – Sustainable Manufacturing Training – that addresses a full range of issues, including lean manufacturing, HRM, health and safety, environmental compliance, energy management, environmental sustainability and freedom of association. Worker surveys are an essential part of this model and help to establish feedback loops between factory management and workers.

We believe this training to be some of the most important work going on in our industry’s supply chain. As noted above, worker surveys suggest that increasing awareness among factory managers of what good HR management looks like and helping them develop related capabilities leads to significant increases in worker satisfaction in those factories. As of June 2011, contract factories employing nearly half the workers in our manufacturing base have benefited from participation in our HRM program, which includes training on freedom of association and worker survey responses. The Labor section of this summary and our online report provide further detail on the HRM program (see graphic).

HRM Global

How We Will Build a Sustainable Supply Chain

Achieving our vision of a sustainable supply chain requires fundamentally rethinking every stage of our relationship with factories: how we choose which factories to work with, what we ask of them, how we engage with them and how we assess their performance. Some of this work has been accomplished already, and some is underway. Ultimately, we seek to do business with self-governing factories, capable of monitoring and assessing their own performance, that function more effectively across a range of business practices.

Setting Consistent Expectations

We have defined and implemented expectations for the factories with which we contract, through a companywide Code of Conduct. The Code covers working conditions, health and safety, and environmental performance. Our Code Leadership Standards (CLSs), available on this site and widely to the industry, describe those expectations in much more detail. Both the Code and the CLSs have been translated into multiple languages.

In FY11 and FY12, we introduced a new version of the Code and the CLSs, bringing them more closely in line with Fair Labor Association standards. The revisions reflect a significant evolution, as shown in the table below. In FY11, for the first time, all NIKE Affiliate Brands began using the same Code and CLSs, with preambles tailored to each brand’s strong and unique culture. The revised Code and CLSs – which continue to be updated and communicated to factories – provide a baseline, while encouraging factories to do more.

Defining What “Good” Looks Like: Our Manufacturing Index

In FY11, we developed a single evaluation system across all types of products and all of our brands that redefines what “good” looks like for factories that supply to NIKE, Inc. A new Manufacturing Index (MI) is being implemented in 2012 that integrates scores from key performance areas into a single dashboard rating that groups factories as Gold, Silver, Bronze, Yellow or Red. Contract factories that are able to consistently exceed Nike requirements in the equally weighted areas of Quality, Cost, Delivery and Sustainability performance management, and show consistent performance leadership in the industry, will achieve a Silver rating in the MI. Contract factories that go beyond our industry and are demonstrating innovation and benchmark performance within the broader manufacturing landscape will achieve Gold. At a minimum, factories in our supply chain will be expected to achieve and sustain a Bronze rating, indicating that they meet our baseline standards and can self-govern through integrated systems and a lean approach.

The Manufacturing Index creates one overall score for each contract factory, enabling a consistent and comprehensive conversation about Nike’s business with that factory. We are developing incentives and sanctions based on the MI ratings. For example, Silver- and Gold-rated factories will be able to self-audit and calibrate with Nike staff and will have access to a range of Nike technical assistance, leadership and education resources, as well as possible innovation or community co-investment,and priority consideration for orders.

Importantly, the MI will provide a consistent, transparent, objective rating for use in sourcing decisions. The MI itself will evolve and improve over time as we learn more through implementation and as the tools that feed the Index evolve.

Defining What Sustainability Looks Like: Our Sourcing & Manufacturing Sustainability Index

To measure factory sustainability performance, we have established a Sourcing & Manufacturing Sustainability Index (SMSI). The SMSI is a component of the MI, and it gives us clear metrics for how to evaluate the extent to which a factory is lean, green, equitable and empowered (see the graphic for index components and the tools that rate them). Like the MI, the new SMSI is beginning to be implemented in 2012.

Those factories that score Yellow or Red on the SMSI will need to fund third-party audits until they can achieve and sustain compliance to Nike’s Code of Conduct standards (i.e., Bronze-level performance). Noncompliant factories may receive sanctions and will have a defined period of time to achieve compliance. Failure to achieve compliance on a clearly defined timeline can result in further sanctions, up to and including the loss of business contracts with Nike.

Making Sustainable Sourcing Decisions

Along with development of the MI and SMSI, we have established a new source-selection process that embeds consideration of risk indicators (through a Risk Index) and performance indicators (using the MI metrics) into the process of evaluating potential new suppliers and contracting with factories already in the supply base.

The Risk Index identifies countries with the highest risk and most potential for low factory performance on our MI metrics. It assesses four key areas, including political risk, social/compliance risk, economic risk and infrastructure and climate risk, weighting each one equally with 25 percent of the total score. While a work-in-progress and subject to further refinement, the Risk Index is being implemented across all NIKE, Inc. brands. It is our hope that, over time, the Risk Index will evolve and lead to more consistent decisions at the outset of sourcing, with the ultimate goal of identifying low-risk, high-quality factories to make our products. Eventually, we expect this more-strategic sourcing approach to significantly reduce the time required to reach sourcing decisions. See Risk Index online.

Assessing Performance

Even as we have been developing our MI, SMSI and Risk Index, we have continued to monitor factory performance in labor, health, and safety and environment areas against our Code of Conduct and Code Leadership Standards. Our team of auditors includes about 70 Nike employees and a set of approved third-party auditors, who audit factories every 12 to 18 months based on our schedule of audits. That schedule takes into account timing considerations, relative risk associated with individual factories and their overall ratings.

In FY10 and FY11, factories received a letter grade based on the lowest result observed, reflecting all relevant information about their compliance performance and progress in resolving items identified for remediation, including previous audit results.

If a factory received a C (noncompliant/serious) or D (noncompliant/critical) rating, we worked with them to improve their performance and rating through specific steps outlined in a master action plan that we developed together with the factory leadership. If they failed to make progress against that plan, we elevated these concerns with Nike senior leadership in Manufacturing and Sourcing as part of reassessing our business relationship. As we implement the new SMSI standards in FY12 and FY13, factories formerly rated C or D would typically fall below our Bronze requirement which equates to full compliance with all standards. These factories will move into the Yellow or Red rating, which will require them to pay for their own third-party audits and demonstrate an ability to achieve and sustain Bronze-level performance.

In FY11, C ratings made up 37 percent of total factory scores, while D ratings made up 5.5 percent. These numbers have increased compared to FY09, owing largely to the work involved in getting all Affiliate Brands aligned on a single Code of Conduct standard and conducting audits at factories across all brands.

Achieving Consistency across Our Brands

Achieving our vision of a sustainable supply chain requires us to bring our Affiliate Brands and licensees under the same manufacturing strategy and processes we’ve developed for the NIKE Brand. During FY10 and FY11, one of our major areas of concentration was addressing our sourcing practices across the entire business. This transition includes the steps discussed above – aligning our Code and CLSs, using the MI and SMSI as tools for identifying and engaging with factories, and utilizing the Risk Index and new source-selection process.

Over the past few years, we laid the groundwork for this transition by working with our Affiliate Brands to establish consistent sustainability ratings for their factories. The Affiliate Brands have made a fairly rapid transition into auditing and addressing noncompliances, facilitated by a focus within Converse and the addition of Nike-trained resources at Hurley. Differing business models, some with higher concentrations of licensees, have added to the complexity of this transition. Once factory ratings are complete, each brand can participate fully in our sustainable sourcing strategy and its implementation.

From FY09 to FY11, we reduced the number of factories working under contract for our Affiliate Brands by nearly 17 percent, while revenues among our other businesses, which includes our Affiliate Brands, grew by more than 13 percent. We also worked to audit these factories using a consistent approach across NIKE, Inc. The numbers tell the story here: E ratings at our Affiliates, indicating “no information available,” went down from 350 in FY09 to 36 in FY11.


Notes

*Hazardous chemicals are those that show intrinsically hazardous properties (persistent, bio-accumulative and toxic; very persistent and very bio-accumulative; carcinogenic, mutagenic and toxic for reproduction; endocrine disruptors; or equivalent concern), not just those that have been regulated or restricted in other regions.

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