SCM/ERP software implementation at Nike

PROBLEM STATEMENT

WHAT ARE THE FAILURE FACTORS FOR THE FIRST NIKE-i2 ERP-SCM IMPLEMENTATION?

There are several factors that are referred throughout the case text. In order to better understand the different types of causes of failure, I believe there are 4 types:

HD aggressive growth targets are putting pressure on targeting and positioning strategies. Global Project Management

  • Over reliance on demand forecast - in fact, the failure of this project starts in non-technical decisions: a vision gap. The role of forecasting was not clearly defined, especially its multiple influence on an efficient supply chain management for "New Launches" and "Long-Term Successes". The level of importance of the role of the system and the role of the manual input from the Sales & Marketing teams was truly different between these 2 kind of products.
  • Apparent wrong partner choice - i2 reportedly didn't present strong experience on this type of integration and on this industry. Besides this, some unsuccessful stories of integration were known. Additional sensibility on choosing partner should have been taken.

No 3rd party perspective - probably, if a reputed and experienced external consultant existed, both previous issues could have been managed.

Concerning the Project Implementation itself, I identify 3 additional types of causes:

Integration

  • Not integrated with SAP ERP - if SAP R/3 is going to integrate the Supply Chain System, the ERP and the CRM, all pieces must be well integrated, as a perfect puzzle. This didn't happen with the i2 SCM, which was running isolated.
  • Excess customization - the highly customized demand forecast (for each single sku), which required a very detailed data input, caused the system operation to be very slow, and the platform was not robust.

Deployment using not harmonized legacy systems - the input information and its complexity besides its lack of integration (several languages and sub-systems), led to bugs, crashes, big delays, very inaccurate orders, several extra manual costs. This garbage in / garbage out can easily be understood in the following chart:

Testing

Not realistic time goals/milestones - there was an excessive pressure on timelines (maybe due to lack of back office help?), which directly led to a low level of testing before going live, pushing up the error probability.

Real data missing substitution - as a consequence from above issue, when real data missed for some reason, it wasn't automatically substituted by a comparable series, which led to erroneous / inaccurate forecasts

Training

No pilot test / No "super users" - no commitment on problem solving

To increase sales and customer base for the next years without jeopardizing the brand equity , and avoiding brand dilution, HD must address the US market where its natural consumer target is not growing anymore, and the EU market where specific consumer preferences are very different from American ones.

Harley Davidson needs to increase its annual production on an annual basis by 9.6%, revenues, and loyalty penetration to the brand by introducing new products combined with targeted marketing strategies that appeal to either an "untapped" or growing motorcycle enthusiast segment while maintain their core brand values of being more of a lifestyle than a motorcycle product.

This will imply that HD will face the following challenges:

  • In US expand consumer target from the typical 35-44 male motorcycle lovers while retaining loyal customers
  • In EU assess specific preferences and develop an adapted range of products
  • Directly related to both, the NPD and Production capacity is Key to ensure success to the chosen marketing strategies

HOW DO YOU EVALUATE THE ROLE OF i2 IN THIS PROCESSSITUATION ANALYSIS

The main errors of i2 and Nike during the project implementation are clearly described on question 1. Interpreting in a broader way the qualitative role of i2, I believe that it wasn't satisfactory during the Discovery and Design phases.

I can not identify evidence on the text that, during the Discovery, both i2 and Nike have agreed on clear strategies to address business issues. Only final business qualitative and quantitative objectives were set between the parts (like the objective of reducing the lead time, etc), but the process and quality information needs to fulfil these goals and vision. Besides, analysing Exhibit 4, i2 didn't address correctly the 3 myths on demand forecasting:

  • it didn't prevent the robustness need: if it would have been done, most probably the legacy systems integration issue would have been addressed, in order to fit the planning software
  • the sales and marketing teams inputs were not taken in account (in order to enrich the forecast), especially for new launches, which are the major part of the business in every single collection due to the product short life period in this industry
  • the perfect forecast obsession was not realistically addressed, which turned the objective of Excellence into an enemy of a Good and Useful forecast

Unfortunately for Nike and i2, it was necessary to confirm the unsuccessful experience in SCM implementation in order to finally understand the role of forecast for Nike, and its need manual input in order to turn supply chain more efficient.

Company & Product Analysis

  • Strong market leader in North America in terms of market share (46.4% in 2002) and brand image. Leader also in Asia/Pacific (21.30% in 2002) but with the half of market share they used to have in the States. Lagging behind in Europe (only 6.6% Market Share as of 2002) .
  • Forbes Magazine had named H-D as the Company of the Year in 2001 for its record sales growth and earnings, strong overall financial performance and in year 2002 marked the 17th consecutive year of record revenue and net income.
  • Motorcycle culture that evolved from war veterans to a lifestyle product and identity.
  • Brand values: American, passion for freedom, experience, sense to belong to a community while expressing individuality, strong, masculine, very rugged
  • Regained market share after foregoing a restructuring plan in the 80's, to fight against Japanese competitors and image of poor quality (see ad in appendix "Thank God they Don't Leak Oil).
  • Different product lines and investments helped secure its competitive position in the global marketplace.
  • Double digits profit margin for each respective year.
  • Harley positions itself more as a lifestyle product rather than a mere producer of motorcycles
  • There is an emotional story behind the founding of HD, "The veterans of war fell in love with the bike and the company when they were at war....They started riding HD with strong American pride. To some it was a remembrance of their fellow soldiers who had perished for the freedom of Americans."
  • HD is a Motorcycle producer of 2 brands Harley Davidson (represents 77% of revenues in 2002), and Buell Motorcycles (represents only 2% of 2002 Revenue). In addition, Harley Davidson consists of Parts and Accessories (represents 15% of revenues in 2002), General Merchandising (6% of revenues in 2002), and Financing (Harley Davidson Financial Services which represents 12% of operating income by segment in 2002 or $104.2MM in absolute revenue)
  • Harley Davidson is a brand with a history that created a lifestyle with an emotional link to the brand.

Conclusion - Harley Davi dson is one of the most recognized brands with the highest emotional loyalty as it is more than just a motorcycle for their customers, it is lifestyle. HD goes out of its way provide a very positive, memorable, engaging,and complete customer experience from purchase, to rallies, to membership, financing, merchandising, and other leisure activities.

Consumers and demand:

Who are HD actual customers?

  • Male in the mid-40s. (according to Richard Teerlink in a presentation one of our team members attended, "42 year old Male executives that put on their leather vests, t-shirts, boots, and become road warriors on the weekend to relieve their stress and live how they would truly want to live." Bike enthusiast affluent males.
  • Household income of about $78,300, who purchased a motorcycle for recreational purposes.
  • 41% of H-D's buyers are old customers, 31% changed loyalty from competitors to H-D and 28% are new motor riders.
  • The mecca of loyalty - how many customers tattoo your brand on their body? I don't think there's a stronger emotional bond with a brand. (See the attached Ad on the cover of this case brief).
  • There is a very high demand and waiting period of up to 6 to 18 months for a new motorcycle as HD attempted to create scarcity value by keeping production well below demand.

Who are HD /Buell potential target customers?

  • Male between the ages of 35 - 44 including the non enthusiastic affluent male and expanding the core target segment to a "younger" demographic (35-42)
  • Expand to first time motorbikes' buyers: at the moment 28% of H-D buyers.

Conclusion - Harley Davidson customers are incredibly loyalty and passionate about the brand. It has been said that the only reasons for Harley attrition is death or bankruptcy. Even at death, many bring the Harley insignia with them as a tattoo on their body.

Competition:

  • H-D's major competitors are Honda, Yamaha, Suzuki, Kawasaki and BMW (see chart in appendix).
  • Each competitor focused on other segments of the industry because H-D has dominant position in the heavyweight category and in the United States. Honda was the competitor with the largest portfolio and good reputation after H-D; Yamaha was targeting at low end, Suzuki was aiming to target a those customers that wanted luxury heavyweight but at affordable prices. Kawasaki was leading the superbike segment.

Conclusion - Please see in the appendix, graph 1, about brand positioning (identified per design and price) of the main players of motorbike market and graph 2, about motorbikes manufacturers market share in North America.

Collaborators:

  • Strong exclusive distribution channel, 75% of dealerships sold H-D motorcycles and accessories exclusively.
  • H-D dealers promoted its lifestyle experience through designer store dealerships that provides a warm and inviting retail environment.
  • H-D sold outside the traditional outlet, which are extensions of dealerships consisting of service shops called Secondary Retail Locations, Alternative Retail Outlets and Seasonal Retail Outlets.
  • H-D riders, H-D considered its customers as its real sales force (word of mouth, feedback processes to improve the H-D experience)
  • Licensing with the purpose to leverage the H-D brand and increase their revenues. 80 licensing programs with 18 product category: perfumes, toys, coffee shops etc.
  • Bank card issuer to issue the Harley Davidson Visa Affinity Credit Card (see the ad in the appendix) in the US launched by US bank in 2000 which offers a very rich CVP for Harley owners or Harley brand lovers with discounts at participating merchants: hotels, gas stations, etc, earn Harley points redeemable for HD merchandise or even to enter sweepstakes to win a HD. The HD Visa Affinity card complements the Harley Davidson Financial Services bottom line and engages Harley customers more. They even allow you to personalize the card with your own picture on a Harley to show your pride. Licensees: HD Cafe, HD-Ford, HD Toys, HD Bicycles, etc, all of which bring in ancillary revenue and promote the brand.

Conclusion - HD collaborators contribute incredible value to the sales, distribution, brand promotion and brand experience of HD to complement the loyalty engagement towards the HD brand. HD is now quite selective about how to use and extend the brand with merchandising activities to avoid the brand dilution risk.

Context:

  • H-D is market leader in North America with 46.4% market share and in Asia/Pacific with 21.30% while in Europe, which is also a fragmented market like Asia/Pacific, market share is quite low at 6.6%, following all its traditional competitors.
  • H-D invested heavily on the company's image, to broaden the brand's appeal and further elevated H-D as an American icon.
  • Gender percentage of riders, Male 91% and Female 9%.
  • Bulk of revenues derived from Touring and Custom Motorcycles (75% of total sales in 2001 and 87% in 2002).

Conclusion - Harley Davidson is more than just a motorcycle, it is a lifestyle. According to their annual report, "we fulfill dreams."

Please describe the main problems associated with ERP software modification in the short and long term ALTERNATIVES

  1. Heavily expand overseas, mainly in Europe where its market share is very low (only 6.6% mkt share in 2002 with a population bigger than the US),, developing a "tailored made" range of products offer in order to meet European specific preferences and tastes and apparently demand is bigger than supply
  2. In US, launch a sub-brand (Harley-D, for example) to capture the younger segment of motorcycle lovers, who are more price sensitive, design oriented and enjoy higher technologic developments, focusing on the Suzuki typical clients.

I think there maybe an orthodox thinking that state that software modification is totally undesirable; however I see IT delivery as something that must adapt to business drive and needs.

In general terms, if you don't stay with the original version, new processes and new functionalities may not be handled by the software. The main problems/questions associated to software modification are:

  1. HD aggressive growth targets are putting pressure on targeting and positioning strategies. Short-Term
    • Does the modification solve the mismatch rate of ERP evolution versus business evolution immediately, and are these mismatches important enough to justify the investment? How quickly is it necessary to act on software modifications?
    • How easy / difficult is it to make changes to the ERP?
  2. HD aggressive growth targets are putting pressure on targeting and positioning strategies.Short and Long-Term
    • For how long are the modifications useful as a mismatch solver? How quickly is the business changing and how do we manage this with the vendor's next release?
    • Does the vendor provide support and maintenance towards modifications? Does the vendor support the ERP if I change the software?
  3. HD aggressive growth targets are putting pressure on targeting and positioning strategies. Long-Term
    • If several modifications are/were made, what is the risk of an unsuccessful / expensive / inefficient upgrade when the vendor releases the latest version? Is it free or do you have to buy it? If you buy it, does it include integration services?

Two Fold: 1) Better segmentation 2) Penetrate Europe and Asia further: Within HD brand, expand offer to uncovered segments like Performance driven motorcycles, besides the Touring and Custom ones. To reinforce the brand spirit for each segment, customization should be an option inside each particular segment, instead of keeping it as a limited product. The aim of this is to expand the highly profitable Customized motorcycles to every segment, and also to ensure that each segment incorporates the HD original spirit.

RECOMMENDATION

Nike was one of the first companies to start using the SAP module Apparel and Footwear Solution (AFS). Do you think that is a good strategy? Please provide your argumentation

I truly believe that it was a good strategy and a breakthrough, once it brought to Nike's business a very strong operational competitive advantage. In fact in the year the implementation ended and the go-live was totally secured, Nike had one of its best years ever, mainly due to efficiency improvements that the AFS brought to the business.

Assuming the CGD between and 2003 for Revenues and Gross Margin, for 2004 results would have been 11.285 MillUSD and 4.752 MillUSD respectively. There is a direct positive real difference of 500 MillUSD between the forecasted Gross Margin and the real one (5.252 MillUSD).

There were several qualitative improvements directly related to AFS that critically contributed to these high results:

  • blind buys decreased from 30% to 3% - this has a huge impact on final margins since cheap sales after collection reduce dramatically. Unused inventories are radically reduced.
  • lead time decreased 30% (from 9 to 6 months) - this caused a big reduction on operational expenditures, but most of all, allowed to have the flexibility of producing only after the order having been received

Naturally business in this area develops very quickly, which means that further challenges will naturally occur, and the ERP inheritance will have to be addressed. Most probably the robust, reliable and highly interconnected ERP will be the system base for several years, but to keep ahead of competitors and to keep efficiency records, further upgrading, add-ons and process reviewing will be needed.

Our recommendation is to adopt option c) since they can use the same resources to be developed, such as market research studies in or to assess consumer's desires and profiles, and NPD task forces.

We believe that it is not worthwhile at this moment to launch another brand, since we believe that there is still space to expand HD major brand to new segments and consumers without endangering its equity. Option b) may be developed in a different stage of the brand cycle, in order to capture other consumer segments to which HD can not enter.

Thus for the US market, c urrent range of offer can be expanded to additional categories, like standard, performance , design and technology oriented, in order to capture the younger and 1 st bike buyers. It's key, however, to secure that intrinsic design and recognizable HD materials keep their presence in new products.

Also for this market, we have strong evidences in the available information that customization plays a bounding role between the brand, the clients, and between the clients themselves, so we recommend expanding th e availability of customization to clients, but within each clear segment proposal . Customization is also very profitable since margins for new pieces and parts are higher once the consumer is available to pay a premium for it.

Concerning EU, we believe there is a huge potential to increase market share in a market of 400 million where Harley represent 6.6% market share. Ther e is also a clear challenge of understanding the tastes, preferences and needs of these clients, which are more sensible to several motorcycle features like size, consumption, environmental impact . Besides adapting the current offer to the European customer preferences, we also believe that it's key to communicate this fact to the client (having a tailored-made European option available) in order for him to feel that HD understands that he is different from the American one.

Expansion of capacity makes then sense to address once new segments will be developed, thus new consumers will be recruited, which means that actual tactic of creat ing scarcity in order to maintain price should be kept.

IMPLEMENTATION PLAN

What are the Success Factors in the SAP implementation project?

I would say that are the following ones:

  1. Clearly secure the match/fit between the program objectives with the business ones. For example in Nike, if manual input is needed due to high subjectivity of forecast information, do not limit this feature in a way that jeopardizes the ERP delivery quality.
  2. Culture and Organization fit are Key - delegation versus control (understand the company culture and organization)
  3. Clearly define objectives and final added-values, as well as a milestone plan
  4. Always have top management explicit support, as well as transversal executives active participation
  5. Create a Super-User or similar team to enhance change and training with the end-users
  6. Secure integration with a specialized team
  7. Develop pilots in order to test and program developments and changes
  8. Work with a 3rd party consultant or team
  9. Grow Harley Davidson Sportser production and sales by 5% in 2003 up to 20% by 2008 (see forecast proposal for this recommendation of production in the appendix). At the same time grow the HOGS membership base in the EU to reach over 100,000 in the EU to reach a Harley Davidson market share in Europe of 10% by 2008.
  10. Harley Davidson needs to increase brand equity awareness to attract their target market.
  11. Align a marketing program that will forge strong, favourable and unique consumer association and experiences with a brand. A campaign that will associate H-D's branding image as a "way of life" instead of a motorcycle.

APPENDICES AND BIBLIOGRAPHY

This recommendation of Performance driven motorcycles will focus on a younger segment, recruiting them to standard, design, performance and technology oriented segment. This projection represents an increase in production of H-D Sportster Motorcycle or H-D Performance driven motorcycle. This demonstrates Harley Davidson's aim is to expand into new segments but ensures that the Performance driven segment will incorporate Harley Davidson original spirit.

For year 2002, the production level of each of Harley Davidson's product line (excluding Buell) was 26.82% for H-D Touring, 53.77% for H-D Custom and 19.41% for H-D Sportster. Compared to the prior year 2001, it represents an increase of 8.12%, 19.90% and 0.70%, respectively. This meant that H-D's revenue was mainly derived from the H-D Custom motorcycle. H-D targeted the middle age population (45+ years of age) but was aware that this target market would decrease.

The forecast is from 2002 through 2008, which demonstrates how Harley Davidson is gradually increasing production of H-D Sportster. For year 2003, production will increase to 5% representing an 18.9% of H-D's production capacity. By year 2008, H-D Sportster production will increase to 20% representing 22.15% of H-D's production capacity. This production cycle allows Harley Davidson to continue to maximize their profits with H-D Custom motorcycle through year 2006 and thereafter, H-D Sportster will become the money maker by gaining share in this segment due to H-D technology and image.

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