Operation Management in the Supply Chain Context - Case Study Example

Operation Management in the Supply Chain Context Name Institution Course Date Contents Contents 2 Introduction 2 Challenges facing Nike 4 Harm Caused to Company 5 Literature Review 6 The Concept of Lean 6 Lean Principles 7 Lean Implementation Framework 7 Just-In-Time 8 Total Quality Management 9 Human Resource Management 9 Total Productive Maintenance 10 Operational Benefits of Lean Management 10 Future of Lean Manufacturing 11 Reducing Supplier Lead-Time 12 Eliminating Obsolete Inventory 12 Just-in-Time Inventory Control 13 Continuous Inventory Reduction Analysis 13 Conclusion 13 References 15 Introduction In today’s challenging business environment, companies need to come up with ways to improve their supply chain operations. One way of doing this is to implement the concept of lean supply chain management. The idea behind “lean” has been around for sometimes and has recently gained popularity as a means of improving operations by eliminating “waste” and non-value activities (Holweg, 2007). The aim of this report is to address the issue of “waste” in Nike Inc. The paper will offer the description of the company and the challenge that exist regarding supply chain operations. It will explain the potential harm the company experiences due to the problem and will provide a project plan covering what could be done to change the situation. The paper will also review the literature on lean management to gain insights into the issue. Description of Nike Inc. Nike Inc. is a multinational company located in the United Stated that take part in the manufacturing, development, marketing and design of footwear and accessories. It is one of the leading suppliers of athletic shoes and manufacturer of sports equipment (Casey and Byington, 2013). Other main products of Nike Inc. include jerseys for various sports such as basketball, tennis and football, cleats, baselayers, apparels and running shoes. The most popular line of shoes produced by the company includes Air Max, Air Zoom Yorker, and Air Jordan. Nike Inc. has categorized its customers into three main groups; women, young athletes and runners (Casey and Byington, 2013). The company offers women apparel such as sports bra and tights and offbeat commodities such as skirts and jerseys. The women’s lines make up about $2 billion annually. The company also focuses on children who play sports which has increased its sale. The company allows young athletes to wear its products and partners with professional athletes as a means of marketing its brand. Most products offered by Nike focus on running category (Casey and Byington, 2013). The company offers running shoes and running apparels to this market segment and sponsors running events to reach its intended customers. The order qualifiers for Nike Inc. include the high standard of quality, brand image, and product design. Customers are loyal to Nike as a result of the quality of its product and the image it has throughout the world. On the other hand, the order winners for the company include the fact that it has core capabilities and high level of expertise which boosts the ability of the firm to satisfy its customers’ needs (Casey and Byington, 2013). Also, the company benefits from product customization and constant supply of its products to the customers which differentiate it from the competitors. Challenges facing Nike The transformation process of Nike can be represented by ITO Model as shown below. Inputs Transforming Activities Outputs Capital Material Equipment Facilities Labor Suppliers Knowledge Time Alteration Manufacturing Transportation Storage Inspection Monitoring and Control High quality products Customer satisfaction High profitability Excess inventory Nike supply chain involves the flow of commodities from suppliers, manufacturing, distribution, retailers to the customers. Inputs such as suppliers and capital are transformed through manufacturing, transportation and storage etc. to yield outputs including high quality products and excess inventory. Although Nike is known for its high quality products, it outputs entails excess inventory which is considered a “waste” Excess inventory exists when an organization inaccurately orders inventory more than what is demanded and is left with extras (Scholossberg, 2016). This is bad for business since a lot of money is associated with managing excess inventory. As one of the largest athletics brand, Nike is expected to manage a lot of products. It has been unable to fully control its inventory over the years which have led to excess inventory. In the 2000s, the company implemented the inventory management software after losing about $100 million in sales as a result of the inventory problem. The software promised better inventory management, but data errors led to incorrect forecasts and sales lost (Scholossberg, 2016). For sometimes now, Nike Inc. suffers from excess inventory that has affected its sales growth and gross margins. For instance, in 2016, the excess inventory caused the gross margins to drop by 30 points. Nike has built extra storage spaces where excess inventory is kept before clearance (Scholossberg, 2016). However, since more space is used for storage of excess inventory, less space is available for demanded products. The 2017 fiscal years report showed 8% increase in revenue to $ 9.1 billion. However, the balance sheet reflected an inventory pile up which led to shares falling by 4.2%. With excess inventory, Nike may end up putting the products on clearance to induce high purchases due to low price which may damage the company’s profitability and control (Scholossberg, 2016). Harm Caused to Company Although excess inventory assures a constant supply of products to the customers, it has led to adverse effects on Nike Inc. Excess inventory can potentially result in deterioration and obsolescence (Scholossberg, 2016). Nike risks the possibility of quality degradation of its products due to keeping excess inventory at hand. Also, some Nike products such as customized jerseys and sports shoes may become obsolete overtime. Keeping excess of such products may expose the company to risks of losses since customers may not be willing to buy out-dated products at profitable prices. Nike Inc. has suffered from an excess cost of warehousing. The cost of warehousing entails things like utilities, labor, and maintenance cost and warehouse space. Nike has used extra space to store its inventory which increases its spending. The company has also suffered from a shift in demand (Casey and Byington, 2013). Typically, Nike stores excess inventory to ensure a constant supply to the customer. However, market demands for running wears and apparels have gone down over the years which have reduced its ability to get rid of excess products. This has left the company with a lot of products at hand which has taken up a lot of storage space(Casey and Byington, 2013). Literature Review The Concept of Lean Lean manufacturing entails the reduction of waste in the supply chain, and the increase in value-added activities. According to Shah and Ward (2007), organizations should focus on each product to differentiate between activities that create values and those that develop waste. Not only is lean a system, but it is also a way of thinking. Taj (2008) report that the concept of lean eliminates the traditional way of thinking about roles of employees and focussing on customer values and core competencies. Rachna et al. (2007) carried out a research about lean implementation in manufacturing companies. The authors reported that companies are faced with the challenge of quality management and inventory control that may affect their operation. In order to eliminate these issues, they should implement lean supply chain operation. The purpose of lean manufacturing is to eradicate waste by diminishing inconsistency related to customers, suppliers and employees. Lean management is more than a technique. It is a long-term strategy that eliminates waste and delivers outcomes that meets customer value (Czabke, Hansen and Doolen, 2008). Lean Principles Lean manufacturing is founded on the principle of “eliminating waste.” According to Taj (2008), waste covers material, time, energy and excess inventory, etc. that are essential in adding value. If the operations of an organization do not add value to customers, they need to be eradicated or modified. Minimizing waste and eliminating zero-value-added activities ensures low production costs, high performance, and efficiency. Pattanaik and Sharma (2009) argue that one way of reducing waste is to manage the inventory. The traditional ways that involved surplus production are inefficient since they may lead to excess inventory. Therefore, value should flow from suppliers to consumers without any interruptions may be possible through a continuous flow through the supply chain instead of moving products in large batches. Also, to implement effective supply chain, employees should be involved and work jointly in establishing pre-determined goals (Taj, 2008). Lean manufacturing is possible when there is active participation of everyone from top management. Therefore, the key principles of lean manufacturing include employee engagement, waste elimination, continuous production flow and customer value alignment. Lean Implementation Framework Several research studies have offered various manufacturing activities linked to lean implementation including total quality management, human resource management, total productive maintenance and just-in-time. Just-In-Time Just-in-time is a strategy employed by companies to increase efficiency and reduce waste through manufacturing and delivery of exact quantity demanded at the right time. According to Grzechca (2013), just-in-time (JIT) strategy is the act of manufacturing and maintaining value adding activities or what is just demanded by the customers. Companies that have implemented just-in-time strategy ensure that deliveries are made when requested. The concept of Just-in-time is shown in the figure below. Holweg (2007) proclaimed that the primary objective of this strategy is to continuously minimize waste through value adding production and workforce engagement. The implementation of JIT technique includes the reduction in size of produced goods by modifying equipment layout, rescheduling delivery by suppliers and instituting pull production systems. Total Quality Management The inability of companies to product quality product is a major source of waste. Lack of quality means that products need to undergo reworking process which results in wastage of time and resources. According to Tari, Molina, and Castejon (2007), waste that comes in the form of quality should be eliminated to achieve high profitability. Total quality management involves a program that ensures quality is improved and maintained through capitalization of customers, suppliers, employees and management. Shah and Ward (2007) argue that total quality management should by the top priority of companies as it is associated with lean implementation. Lean manufacturing cannot be implemented if there is lack of product quality control, process management, supply quality management and effective product development that form the TQM bundle. Human Resource Management According to Bonavia and Marin-Garcia (2011), human resources contribute positively to the success of lean implementation. Bhamu and Sangwan (2014) argues that since continuous improvement is the basis for lean manufacturing, employees play a fundamental role in offering information required during the process. Lean implementation requires active involvement of employed. Holweg (2007) highlights that engaging the workforce in decision making may encourage their involvement in continuous improvement. For them to be involved, employees need to undergo training and development in lean manufacturing practices. The training will assist an organization establish multifunctional team that can perform different tasks. This reduced indirect labor which eventually reduces the cost of lean implementation. Total Productive Maintenance Ahuja and Khamba (2008) argue that maintenance play an important role in improving operations like lean manufacturing. Lean implementation is not possible without productive maintenance system. It is the process of adopting maintenance considerations by maximizing equipment efficiency and encouraging participation of the entire workforce. Total Productive Maintenance ensures all equipment are working optimally to avoid any delays that may affect manufacturing and delivery processes (Taj, 2008). The main objectives of total performance management are to deal with the causes of quality deterioration, increase productivity of plant, and create a conducive environment for the employees. Operational Benefits of Lean Management The major advantage of lean management is the elimination of waste from supply chain process which results in improved quality. All activities in a lean environment are meant to enhance the quality of products (Rachna, Chandrasekaran and Linderman, 2008). This is possible through identifying the root causes of the problems and preventing recurrence. Also, another benefit of lean manufacturing is its ability to enhance visual management. The activities of a company can be set up in a way that can be evaluated with a visual scan. Any challenges and abnormalities can be detected and identified easily by the management. This can be seen from the figure below. With lean management, more work can be done with less manpower. It creates the possibility for standardized work to be done with great efficiency with less people involved (Holweg, 2007). The reduction of manpower is beneficial to companies as it reduces expenditure and increases profitability. Reduction of waste will also ensures more space is created to be occupied by new inventory. Future of Lean Manufacturing Lean is among the best management ideas developed over the past 50 years that has led to positive changes in companies. The accumulated learning of the concept of lean manufacturing would yield a realization that it is more than just a philosophy (Holweg, 2007). The improvement of lean will involve the application of its principles in the service industries that were never thought as beneficiaries of lean concept. The principles of lean will apply to industries such as airline, banking and healthcare. According to Holweg (2007), implementation of lean principles in service industry will yield dramatic positive effects. Project plan for Nike Using DMAIC to Detect Excess Inventory Root Causes The plan to make some changes in Nike’s supply chain should start with the analysis of the root causes of excess inventory (Mefford, 2009). In order to be able to implement changes, Nike should use the DMAIC tool (define, measure, analyze, improve and control) to be able to determine the root causes of excess inventory. Eliminating excess inventory will involve four steps: Reducing Supplier Lead-Time Nike can reduce excess inventory by negotiating for faster supplier lead-time. More rapid supplier lead-time means that only the quantity of raw materials to be used is supplied. This will reduce the extra stock and eliminate wastage. Moreover, increased supplier lead-time will give Nike flexibility when reordering inventory and minimize excess inventory which will eliminate the risk of holding products that may become obsolete (Bhamu and Sangwan, 2014). Eliminating Obsolete Inventory Storage of obsolete products is among the main causes of excess inventory. Obsolete inventory involves products that are in stock although their demand is low. Products that have not been sold in one year or more are considered obsolete (Taj, 2008). Over the last years, Nike has suffered from a low demand for its running shoes and apparels which contributed to its excess inventory. The company often produces and introduce new products in the market that replace older products and result in obsolete inventory. Therefore, Nike should monitor the product life cycles frequently to track demand which will ensure the company accurately forecast demand and stock products based on sale potential (Holweg, 2007). Just-in-Time Inventory Control Nike has a strategy in place that involves the production of excess products that are then stored in warehouses awaiting demand from customers. Although this approach ensures a constant supply, it results in excess inventory (Grzechca, 2013). Therefore, the company should establish just-in-time strategy where they only receive raw materials needed in the production of demanded commodities. Nike requires a shift away from the just-in-case strategy that has resulted in large inventories. However, the company should ensure it has an accurate demand forecasting technique before adapting to this strategy (Grzechca, 2013). Continuous Inventory Reduction Analysis After minimizing inventory, it is important for Nike to conduct analysis to establish whether the methods used are effective in the bottom line. The company can utilize different techniques of analysis such as cycle counting, ABC analysis and product life-cycle management (Pattanaik and Sharma, 2009). Using these methods will ascertain if the methods of reducing inventory have achieved their purpose. Conclusion Nike is faced with the problem of excess inventory which has affected its operations and productivity. To eliminate inventory problems, the company should implement lean manufacturing concept which eliminates wastes and ensures continuous improvement. Scholars have provided the idea of lean management and have linked it to total quality management, just-in-time strategy, human resource management and total productive maintenance. With these practices in place, organizations can easily implement the lean concept. To eliminate excess inventory, Nike should reduce supplier lead-time, eradicate obsolete inventory, and introduce just-in-time strategy. References Ahuja, P.S., and J.S. Khamba 2008, "An evaluation of TPM initiatives in Indian industry for enhanced manufacturing performance". International Journal of Quality & Reliability Management, Vol. 25, Iss: 2, pp.147–172. Bhamu , J. and Sangwan , K 2014, "Lean manufacturing: literature review and research issues". International Journal of Operations & Production Management, Vol. 34, Iss: 7, pp.876 – 940. Bonavia, T & Marin-Garcia, J.A 2011, Integrating human resource management into lean production and their impact on organizational performance. 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