From Factory to Footwear

Nike’s lean manufacturing model has kept its production costs low, but disruptive technology may soon force the company to reconsider its strategy.

To put it simply, Nike is treading all over its competition. Ranked as the world’s most valuable sports brand and worth a whopping $15 billion, the company employs over 74,000 people worldwide. Its largest revenue source is, unsurprisingly, footwear, which eclipses apparel and sports equipment by a sizeable margin.

Shoes are fairly labor-intensive to manufacture, which, given the high cost of labor in the United States, makes their domestic production more or less untenable. It’s no wonder, then, that 99% of all shoes sold in the United States are manufactured abroad. Nike takes this a step further: not only does the company manufacture all of its shoes overseas, it also delivers around 85% of its footwear over lean manufacturing lines. Here’s how it works.

Minimizing Manufacturing Overhead

Nike’s lean supply chain saves the company $0.15 per unit compared to a traditional distribution model. For a company that moves over 900 million units per year, these savings amount to a serious competitive edge.

The key to Nike’s efficiency is its low overhead manufacturing costs. Instead of owning and operating its own factories, Nike’s footwear division solicits the services of independent contract manufacturers located in fourteen countries around the world. The bulk of the independent factories — 96% — are in Vietnam, China, and Indonesia, though no single facility accounts for any more than 5% of Nike’s total footwear output.

Beyond the manufacturing process itself, Nike also relies heavily upon independent contractors to source the raw materials for its shoes from the countries in which they’re produced. This enables Nike to consolidate its intermediate costs by limiting the number of vendors with whom it must negotiate contracts.

Redirecting Distribution Efforts

Once the shoes have been manufactured, they are shipped to 57 distribution centers around the globe. In the United States, the company operates five primary distribution centers in Memphis, Tennessee.

Though sales-to-wholesalers continue to comprise the vast majority of Nike’s revenue, the company is making a serious effort to expand its presence in other sales channels, especially direct-to-consumer (DTC) sales. In 2012, 83.3% of Nike’s revenue came from wholesaler business, while 16.2% came from DTC sales; by the next year these figures had shifted to 79.2% and 20.3%, respectively. While progress is certainly being made, Nike still has a considerable amount of work to do in order to match the DTC revenue shares achieved by competitors like Under Armour (25.3%) and Adidas (25.4%).

DTC sales enable companies like Nike to interact directly with consumers, provide improved customer service, and get a better feel for what people really want. That being said, increased DTC sales also mean that Nike must become increasingly responsive to the fashion whims of the general public.

Not only does this put pressure on Nike to remain on the cutting-edge from a product design perspective, it also requires that the company become more familiar with the reverse logistics relating to secondary markets. When a primary retailer — in a DTC context, a Nike store itself — fails to sell its entire inventory of a particular shoe, the unsold units are often moved to secondary outlets ranging from secondhand stores and salvage dealers to thrift stores and value retailers. Shoes that are returned by consumers in a condition below Nike’s retail standards often meet the same fate.

Orchestrating the sale of unsold or unwanted units to secondary markets is an entirely different logistical challenge, and as Nike continues to pivot toward DTC sales (and in doing so, almost certainly increases its reliance on secondary markets), it will have to augment its current approach to footwear distribution.