Lessons from the Nike-i2 Supply Chain Software Implementation Debacle

Is this what you receive for $400 million? Nike’s President and CEO, Phil Knight, famously posed this question during a conference call just days before revealing that the company would fall short of its third-quarter earnings by at least 28% due to a glitch in its new supply chain management software. The subsequent announcement caused Nike’s stock to plummet by 19.8%. Additionally, the Dallas-based supply-chain vendor, i2 Technologies, which Nike held responsible, saw its stock price drop by 22.4%. This mishap would ultimately cost Nike an estimated $100 million. Both companies pointed fingers at each other for the failure, but much of the damage could have been mitigated with realistic expectations and a well-defined software implementation plan. Recovering from such a catastrophic supply chain glitch or “speed bump,” as Knight referred to it, is something most companies wouldn’t manage, but Nike eventually rebounded due to its dominant position in the retail footwear and apparel market.

In 1999, two years prior to Knight’s famous outburst, Nike paid i2 $10 million to centralize its supply, demand, and collaboration planning system, with a total projected implementation cost of $40 million. Initially, i2 was the first phase of The Nike Supply Chain (NSC) project, aiming to replace the existing system and introduce enterprise resource planning (ERP) software from SAP and customer relationship management (CRM) software from Siebel Systems.

The NSC project’s objective was to streamline Nike’s lengthy 9-month product cycle and fragmented supply chain. As the brand experienced rapid growth and market dominance in the 1990s, it accumulated 27 separate order management systems worldwide, each vastly different from the others and poorly connected to Nike’s headquarters in Beaverton, Oregon. At the time, there was no existing model to follow at the scale Nike required. Competitors like Reebok struggled to find a functional supply chain solution tailored to the retail footwear and apparel industry. To solidify its position as the sportswear leader, Nike decided to swiftly adopt i2’s predictive demand application and supply chain planner software.

“Once we delved into this, we quickly realized that what we initially thought would be a two-to-three-year effort would extend to more like five to seven,” said Roland Wolfram, Nike’s vice president of global operations and technology.
The NCS project eventually succeeded, and Nike achieved all its supply chain goals. However, the process took much longer than anticipated, cost the company an additional $100 million, and could have been avoided with a different approach to implementation by both companies.
“In the long run, I believe it will be a competitive advantage,” Phil Knight stated.
In the end, Knight’s assessment proved accurate, but there are numerous valuable lessons to be learned from the Nike-i2 failure. So, before delving into the case study, let’s examine precisely what transpired…

Timeline of Events

1996 – 1999

During this period, Nike experienced tremendous growth but found itself at a crossroads. Strategic endorsement deals and groundbreaking marketing campaigns had given the company a clear edge over its two major competitors in the 80s and 90s, Adidas and Reebok. However, as Nike evolved into a globally renowned athletic brand, its supply chain became increasingly complex and challenging to manage.

One aspect of Nike’s strategy that set it apart from its competitors was its centralized approach. Product design, factory contracting, and order fulfillment were all coordinated from its Oregon headquarters. While this approach led to iconic designs and athlete partnerships, manufacturing remained disorganized.

During the 1970s and 80s, Nike had struggled to develop and control the emerging Asian sneaker supply chain. Eventually, the brand dominated the market but faced challenges expanding due to a nine-month manufacturing cycle.

At that time, there was no established method for outsourcing manufacturing from Asia, resulting in a disorganized and inefficient ordering process across the industry. Nike’s fragmented order management system contained tens of millions of product numbers with different business rules and data formats. The brand needed a new way to gauge consumer demand and manage purchase orders, but the state of the legacy system made implementing new software a daunting task.

1999

In early 1999, Nike made the decision to implement the first stage of its NSC project using the existing system. This stage cost the company $10 million, with the entire project estimated to exceed $400 million. It would become one of the most ambitious supply chain overhauls by a company of Nike’s size.

i2 Technologies, based in Dallas, Texas, specializes in designing solutions that simplify supply and demand chain management while maximizing efficiency and minimizing costs. Before collaborating with Nike, i2 was an emerging player in logistics software, experiencing year-over-year growth. Involvement in the Nike project would position the company as a leading name in supply chain management software.

Nike’s vision for the i2 phase of NSC was to achieve greater flexibility in planning execution and delivery processes, seeking better forecasting and more profitable order fulfillment. Successful implementation would reduce the manufacturing cycle from nine months to six, converting the supply chain from make-to-order to make-to-sell, an achievement not yet realized in the footwear and apparel industry.

Predicting demand required feeding historical sales data into i2’s software. At the time, there was substantial support for the idea of “crystal balling” the market among supply chain management companies. Although the belief that simply inputting numbers into an algorithm would yield a magical prediction hasn’t aged well, the methodology required reliable, standardized data sets to function.

When transitioning to i2 for supply chain management, Nike opted for a “Big Bang” ERP approach, going live with a complete business transformation without phasing out the old system. Nike also chose a single-instance strategy for implementation. This decision was summed up by Gordon Steele, Nike’s CIO at the time, who said, “Single instance is a decision, not a discussion.” Typically, global corporations opt for a multi-instance ERP solution, using separate instances in various regions or for different product categories.

2000

By June 2000, issues with the new system had become apparent. According to documents filed by Nike and i2 shareholders in class-action suits, the system utilized different business rules and stored data in various formats, making integration challenging. Additionally, the software required customization beyond the 10-15% limit recommended by i2. This extensive customization slowed down the software, with entries taking over a minute to record. Furthermore, the SCM system frequently crashed as it struggled to handle Nike’s tens of millions of product numbers.

The problems persisted but were correctable. Unfortunately, the software was linked to core business processes, particularly factory orders, leading to a ripple effect resulting in over- and under-purchasing critical products. Additionally, the demand planner would delete ordering data six to eight weeks after input, making it impossible for planners to access purchasing orders sent to factories.

The system issues led to an excess of factory orders for less popular shoes like the Air Garnett IIIs and insufficient orders for popular shoes like the Air Jordan, resulting in market demand not being met. Foot Locker was forced to reduce prices for the Air Garnett to $90 instead of the expected retail price of $140 to move the product. Many shoes were also delivered late due to delayed production, causing Nike to resort to shipping them by air at $4-$8 per pair, compared to the $0.75 cost of sending them across the Pacific by boat.

November 2000

According to Nike, all issues with i2’s supply chain management system had been resolved by the fall. Once the problems were identified, Nike devised manual workarounds, such as downloading data from i2’s demand predictor and reloading it into the supply chain planner weekly. While software glitches were fixed, and orders were no longer duplicated or disappearing, the damage had been done. Sales for the following quarter were significantly impacted by purchasing order errors, resulting in a loss of over $100 million in sales.

2001

On February 27, 2001, Nike publicly acknowledged the problem. The company reported quarterly earnings to stakeholders to avoid repercussions from the SEC. As a result, the stock price plummeted by 20%, numerous class-action lawsuits were filed, and Phil Knight famously commented on the implementation, saying, “This is what you get for $400 million, huh?”

During the meeting, Nike informed shareholders that they anticipated profits for the quarter to decline from around $0.50 a share to about $0.35. Additionally, inventory problems would persist for the next six to nine months as overproduced products were sold off. As for the future of NSC, the company, including its CEO and President, expressed optimism. Knight stated, “We believe that we have addressed the issues around this implementation and that over the long term, we will achieve significant financial and organizational benefit from our global supply-chain initiative.”

A Nike spokeswoman reassured stakeholders that the problems would be resolved. She mentioned that they were collaborating closely with i2 to address the issues by creating “some technical and operational workarounds,” and the supply chain software was now stable.

While Nike remained positive about the implementation process moving forward, they placed full blame on the SCM software and i2 Technologies.
Nike ceased using i2’s demand-planning software for short- and medium-range sneaker planning but continued using the application for short-range and its growing apparel business. By the spring of 2001, Nike integrated i2 into its broader SAP ERP system, with a stronger focus on orders and invoices rather than predictive modeling.

What Went Wrong?

While the failures tarnished both companies’ reputations in the IT industry, they ultimately managed to recover from the poorly executed software implementation. After reviewing all the events, it is safe to say that both sides played a role in the breakdown of the supply chain management system.

Underestimating Complexity

Implementing software on such a scale always carries risks. Tom Harwick, Gigi Information Group’s research director for supply chain management, stated, “Implementing a supply-chain management solution is like crossing a street, high risk if you don’t look both ways, but if you do it right, low risk.”

One of Nike’s most significant errors was underestimating the complexity of implementing software on such a large scale. According to Roland Wolfram, Nike’s operators had a false sense of security regarding the i2 installation because it was small compared to the larger NSC project. “This felt like something we could do a little easier since it wasn’t changing everything else [in the business],” he says. “But it turned out it was very complicated.”

Part of the reason why the project was so complicated was because of Nike’s fragmented legacy supply chain system and disoriented data sets. i2’s software wasn’t designed for the footwear and apparel industry, let alone Nike’s unique market position.

Data Quality

Both parties share blame for execution issues. i2 Technologies had recommended customization not exceeding 10-15%. Nike and i2 should have recognized early on that this range was impossible to accommodate given the existing SCM system.

Choosing a “Big Bang” implementation strategy didn’t make sense in this scenario. Nike’s legacy system data was too disorganized to be integrated into i2 without significant changes before a full-scale launch.

Poor Communication

Communication between Nike and i2 from 1999 to the summer of 2000 was subpar. i2 claimed not to be aware of problems until Knight publicly assigned blame. Greg Brady, the President of i2 Technologies directly involved with the project, responded to the finger-pointing by saying, “If our deployment was creating a business problem for them, why were we never informed?” Brady also claimed, “There is no way that software is responsible for Nike’s earnings problem.” i2 blamed Nike’s failure to adhere to customization limitations, which was caused by the link to Nike’s backend.

Rush to Market

At the time, Nike was on the cusp of solidifying its position as the leader in footwear and sports apparel for decades to come. Building a robust supply chain adaptable to market trends and reducing the manufacturing cycle was the final step toward complete market dominance. Furthermore, existing supply chain solutions for the footwear and apparel industry were not ready for large-scale deployment. This provided Nike with an opportunity to develop its own SCM system, putting the company years ahead of competitors. Implementing functional demand-planning software would have been highly valuable for Nike and its retail clients.

i2 also faced market pressure to execute a major project. If the implementation had gone smoothly, i2 would have gained a massive competitive edge. The desire to please Nike likely played a role in i2’s missteps. Failing to provide clear expectations and communication throughout the process might not have occurred with a less prominent client.

Failure to Train

After problems became apparent in the summer of 2000, Nike had to hire consultants to devise workarounds to make the SCM system operational. This clearly indicates that Nike’s internal team wasn’t adequately trained to handle the complexity of the new ERP software.

Nike’s CIO at the time reflected on the situation. “Could we have taken more time with the rollout?” he asked. “Probably. Could we have done a better job with software quality? Sure. Could the planners have been better prepared to use the system before it went live? You can never train enough.”

How Nike Could Have Done Things Differently

While Nike and i2 attempted to implement software that had never been successfully deployed in the global footwear and apparel industry, many problems could have been avoided. We can learn from the mistakes and how Nike overcame their challenges with i2 to build a functioning ERP system.

Understanding and Managing Complexity

Nike’s failure to assess the complexity of the problem is at the root of the situation. Regardless of whether the i2 implementation was just the beginning of a larger project, it represented a significant transition from the legacy system. Nike’s leadership should have realized the scale of the project and the importance of starting NSC off on the right foot.

i2 is also to blame for not providing its client with realistic expectations. As a software vendor, i2 is responsible for providing its client with clear limitations and the potential risks of failing to deploy successfully.

Collaborate with i2 Technologies

Both companies should have realized that Nike required more than 10-15% customization. Working together during the implementation process could have prevented the ordering issues that were the reason for the lost revenue.

Collaboration before deployment and at the early stages of implementation is critical when integrating a new system with fractured data. Nike and i2 should have coordinated throughout the process to ensure a smooth rollout; instead, both parties executed poor project management resulting in significant financial and reputational blows.

Hire a 3rd Party Integration Company

Nike’s lack of understanding of the complexity of SCM implementation is difficult to understand. If i2 had been truthful in that they did not know about problems with their software, Nike could have made a coordinated decision not to involve the software company during the process.

Assuming that is the case, Nike should have hired a 3rd party to help with the integration process. Unfortunately, Nike’s internal team was not ready for the project. Outside integrators could have prevented the problems before the damage was done.

Not seeking outside help may be the most significant aspect of Nike’s failure to implement a new SCM system.

Deploy in Stages

A “Big Bang” implementation strategy was a massive mistake by Nike. While i2 should have made it clear this was not the logical path considering the capabilities of their software and Nike’s legacy system, this was Nike’s decision.

Ego, rush to market, or failure to understand the complexities of the project could all have been a factor in the decision. Lee Geishecker, a Gartner analyst, stated that Nike chose to go live a little over a year after starting the project, while projects of this scale should take two years before deployment. In addition, the system should be rolled out in stages, not all at once.

Brent Thrill, an analyst at Credit Suisse First Boston, is on record saying he would have kept the old system running for three years while testing i2’s software. In another analysis, Larry Lapide commented on the i2 project by saying, “Whenever you put software in, you don’t go big bang, and you don’t go into production right away. Usually, you get these bugs worked out . . . before it goes live across the whole business.”

Train Employees Sufficiently

At the time, Nike’s planners weren’t prepared for the project. While we will never know what would have happened if the team had been adequately trained, proper preparation would have put Nike in a much better position to handle the glitches and required customizations.

Practice Patience in Software Implementation

At the time, a software glitch causing a ripple effect that would impact the entire supply chain was a novel idea. Nike likely made their decisions to risk the “Big Bang” strategy, deploy in a year without phases and proper testing, and not seek outside help because they assumed the repercussions of a glitch wouldn’t be as catastrophic.

Impatience resulted in avoidable errors. A more conservative implementation strategy with adequate testing would have likely caught the mistakes.

Closing Thoughts

One of the most remarkable aspects of Nike’s implementation failure is how quickly the company bounced back. While Nike undoubtedly made numerous mistakes during the process, NSC was 80% operational in 2004.

Nike turned the project around by making adjustments and learning patience. Few companies can suffer a $100 million “speed bump” without filing for bankruptcy, but Nike is in that position because of its resilience. The SAP installation wasn’t rushed and resumed many aspects of its original strategy. In addition, a training culture was established due to the i2 failures. Customer service representatives receive 140 to 180 hours of training from highly skilled “super users,” and all employees are locked out of the system until they complete their required training courses.

Aside from the $100 million loss, the NSC project was successful. Lead times were reduced from nine months to six (the initial goal), and Nike’s factory inventory levels were reduced from a month to a week in some cases. Implementing a new SCM system also created an integration between departments, better visibility of customer orders, and increased gross margins.

While Nike could have executed far more efficiently, Phil Knight’s early assessment of the i2 failure turned out to be true. In the long run, the process gave Nike a competitive advantage and was instrumental in building an effective SCM system.

In a nutshell: A failure to demonstrate patience, seek outside help, and rush software implementation can have drastic consequences.