Floods swoosh through Nike’s supply chain
Global warming has forced Nike to adapt its supply chain to be more flexible to potential natural disasters.
In 2011, Thailand’s annual rainfall was higher than its 61-year precipitation record resulting in the country’s most damaging floods to date. The insured losses from the flood totaled $12 billion, making it the highest ranked fresh-water disaster worldwide1. A 2010 World Bank study found that a global temperature rise of 1.2 to 1.9°C would likely increase precipitation in Thailand by 2-3%. In addition, rising sea levels threatened to result in severe floods like the one in 2011 several times per decade2.
Nike Inc., the leading global retailer of footwear and sports apparel, has factories in 42 countries, many of which are in Southeast Asia3. During the 2011 Thailand flood (and previous floods), Nike was forced to shut down factories, leading to delays in production and massive disruptions to its global supply chain. In addition, there has been an increased frequency of droughts in areas where the company grows cotton for its production4. Droughts limit supply of cotton, resulting in higher prices and lower product margins.
Given the increased prevalence of unfavorable weather conditions due to climate change, Nike has taken precautionary measures to prevent future supply chain disruptions. The top four materials used in Nike production are cotton, polyester, leather and synthetic leather. With disruptions to cotton sourcing, Nike is increasingly exploring how to use polyester, specifically recycled polyester, to produce high performance products. For example, the Legend Pant and Nike Pro Bra were among the first to make use of recycled polyester. In addition, the Flyknit shoe utilizes recycled polyester with new sewing technology to reduce waste by 60% on average. These improvements in production have not sacrificed quality or profitability, as the Flyknit has grown from one model to 28 in three years3.
Another way in which Nike is adapting to climate change, specifically the regulatory environment, is by reducing the carbon footprint of its facilities. From 2011 to 2015, Nike’s absolute carbon emissions increased by 14%. In 2015, Nike set out a plan to use 100% renewable energy by the end of 2025. A major caveat to this is that the plan only applies to its owned or operated facilities because these are the only facilities that Nike is able to directly control. However, owned or operated facilities comprise only a small portion of their carbon footprint. Thus, despite the improvement, it likely will not impact overall emissions. The company is also making significant investments in lighting and energy managements systems in their retail stores with the goal of using 40% less energy. Again, however, Nike only operates 930 stores though its product is sold at 110,000 retail locations so the overall impact of this change will be minimal3.
While Nike is taking critical steps towards managing its operating model in light of climate change, I believe that there is more Nike can do. First, from a supply chain management perspective, Nike should continue to produce in diverse locations to mitigate risk of natural disasters – to the extent that Nike can move production facilities out of regions that are more susceptible to these risks, it would make production management less complex. Another way to mitigate the risk of one-off events would be to hold additional inventory – since demand for Nike’s classic products is fairly predictable, the company could produce additional units to have on hand in case of production issues. While they would incur holding costs, it would be likely be cheaper than the lost revenue from unfulfilled demand.
With respect to reducing its carbon footprint, I believe that Nike should force its third-party managed factories to comply with high standards of energy efficiency. Given the volume of production Nike contributes to these factories, the company should have significant bargaining power to change operations. From the factories’ perspective, losing Nike’s business would be a more significant hit than the cost to improve energy efficiency.
1 Gale, Emma and Saunders, Mark. “The 2011 Thailand flood: climate causes and return periods.” Royal Meteorological Society, September 2013. http://onlinelibrary.wiley.com/store/10.1002/wea.2133/asset/wea2133.pdf?v=1&t=iv47pmdt&s=beaf52c556acd22568da9bbb0687ea3ec6ecb5a0, accessed November 2016.
2 Jeff Masters, “Thailand’s flood gradually subsiding; climate change increasing Thai flood risk,” Wunderblog, Weather Underground, November 14, 2011, https://www.wunderground.com/blog/JeffMasters/thailands-flood-gradually-subsiding-climate-change-increasing-thai-f, accessed November 2016.
3 Nike Inc. 2015 Sustainable Business Report.
4 Davenport, Coral. “Industry Awakens to Threat of Climate Change.” New York Times, January 23, 2014. http://www.nytimes.com/2014/01/24/science/earth/threat-to-bottom-line-spurs-action-on-climate.html?_r=4.
Student comments on Floods swoosh through Nike’s supply chain
I agree that Nike should require the factories it works with to comply with high standards of energy efficiency. Nike has historically concealed its commitment to sustainability from its customers, worrying it would negatively affect their products’ perception. Perhaps it’s time to make sustainability a part of the customer-facing Nike story. Nike should create an advertising campaign to convince customers that sustainability is an important part of the Nike they love. This might help Nike further mitigate the risks associated with climate change as it relates to their supply chain. If a product is in short supply because sustainably sourced cotton wasn’t available, the customer might be more willing to wait for the product to become available again than switch to another brand (because they love that Nike prioritizes sustainability).
Speaking of another brand, Adidas is using sustainability in its marketing. Has Nike lost its chance to use this as a part of its messaging?
I also agree that Nike should be using its bargaining power further to require its supply chain partners to adopt more sustainable practices. I suspect that Nike is maintaining its policy of concealing its commitment to sustainability from its customers because it is not entirely genuine in these efforts. While the reuse of materials for their flyknit shows is great for sustainability, it also likely results in huge cost savings for Nike. Requiring its supply chain partners to adopt more sustainable practices would likely increase costs for Nike, so it is quite convenient for Nike that they have not put this requirement on their suppliers. I will believe in Nike’s commitment to sustainability when their bottom line takes a noticeable hit as a result of a change in their operating practices for sustainability.
I actually push back a bit on the assumption that Nike can force their manufacturing partners to meet high energy efficiency benchmarks. According to Nike’s online manufacturing map (link below), “virtually all” of their products are made in independent factories that also work with other global firms. They currently work with 666 factories in 43 countries, all of which work within highly varying regulatory environments. What’s the right energy efficiency benchmarks they should be using for each factory, especially since many of them are located in less regulated, developing nations? How would increasing costs at the factories impact the other global brands they produce for, who may not want or be able to absorb higher pricing?
Nike works with independent factories rather than investing in their own to reduce their costs and increase flexibility in production. Forcing factories to invest in energy efficient efforts (particularly if trying to meet a standard that exceeds local regulatory requirements) would undoubtedly be expensive. Unless Nike is willing to partner on the investment costs and provide some sort of assurance of partnership longevity, it is unlikely that factories would be able to achieve high energy efficiency. On the other hand, these sorts of financial and relationship commitments undermines the benefits of working with independent factories, so may not be desirable from Nike’s perspective. You make the assumption here that loss of Nike’s business would certainly outweigh the cost to improve energy efficiency, but I’m not sure that’s completely certain especially since so many of these factories are located in far-flung, developing locales. On the other hand, I do agree that it is misleading for Nike to claim their supply chain is energy efficient when so many energy inefficient steps are excluded as independent, so they’ll need to work with their production partners somehow to make improvements.
Interesting to see the impact of climate change on Nike. I agree with your point about Nike implementing standards for efficient energy use for both company owned and outsourced factories. The reputational risk of Nike factories being non-compliant is way too huge at a time when the climate change conversation holds meaning for consumers and several influential stakeholders globally. I found the below read comprehensive in streamlining the broader efforts by Nike including the move to eco-friendly raw materials, water-less dying technology and a manufacturing index evaluation system for contract factories.
Also, it’s good to see Nike partnership with MIT Sloan to introduce management innovation for a greener supply chain. Specifically initiatives like factory redesign, managerial training and improvement of product design processes would go a long way in cementing Nike’s commitment towards a greener supply chain. See link: http://mitsloan.mit.edu/sustainability/profile/nike.