15 February 2013
Decreasing overhead through outsourcing is a valuable resource for Nike. Cutting costs by employing workers at a reduced rate or paying less for plant operation allows Nike to invest the additional profits into other areas of the business such as advertising, thereby increasing the potential for company growth. In addition, decreased operational costs are more likely to attract and retain company investors because more money can go into increasing business profitability.
Because Nike is able to more efficiently produce its product and reduce costs due to outsourcing, it can more competitively price its products. This enables Nike to price its brand at a competitive rate with other companies that sell a similar product. Decreasing competition can help Nike corner the market for its particular products.
Finances and Risk Reduction
Outsourcing allows Nike to skirt some of the financial obligations it might face with the confines of tax laws in the United States. In addition, when it outsources to subcontractors, Nike assumes less risk associated with producing its product such as insurance liability.
Sport goods producer companies have two options for manufacturing their products. They can own and operate the factories, or look for the ways of outsourcing. Facilities that are enough efficient for outsourcing, could be located either domestically or internationally. Outsourcing to domestic firms (US) gives advantage of easy monitoring, skilled workforce, well understood labor rules, but on the other hand it is relatively expensive if compared with outsource in developing countries. By manufacturing products overseas, in the third world economies, tremendous efficiencies are gained because of low salary expense, but in this case company has to face increased difficulty of monitoring the quality of their products and the uncontrolled working conditions in the factories. Nike uses outsourcing strategy, using only subcontractors throughout the globe. It currently owns a 47% market share of the domestic footwear industry, with sales of $3.77 billion. Nike has been manufacturing throughout the Asian region for over twenty-five years, and there are over 500,000 people working for Nike. Vast majority of production comes from China, Indonesia, Vietnam, Philippines, Taiwan, and South Korea. Factories in these countries are owned by subcontractors, with the majority of their output consisting solely of Nike products.
To avoid pressure from customers and legal cases against the company, Nike employ teams of four expatriates per each of the big three countries (China, Indonesia, Vietnam), that focus on both quality of product and quality of working conditions, visiting the factories weekly. They also developed their code of conduct in 1992 and have implemented it across the globe. Its goal is to set the standard for subcontractors to follow. However, company still faces problems with executing code of conduct because most of the factories are owned not by the company, but by subcontractors. Factory conditions and human rights issues have been widely criticized by different pressure groups. Even though company responded these issues with Andrew Young report, the Dartmouth Study, and Ernst & Young’s continual monitoring, Nike still needs couple years to eradicate mentioned problems.
• Nike, Inc. is the largest supplier of athletic shoes in the world. Yet it outsources 100 percent of its shoe production and manufactures only key technical components of its Nike Air system. Athletic footwear is technology- and fashion-intensive, requiring high flexibility at both the production and marketing levels. Nike creates maximum value by concentrating on preproduction (research and development) and post- production activities (marketing, distribution, and sales), linked together...
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