Tuesday, June 29, 2010

The labor standards at Nike

As early as 1988 Nike has been taking a beating for the working conditions in the factories that source many of it’s products1. While they where slow to react in recent years, much of the heat has subsided as Nike takes steps to promote fair treatment of employees in the factories they buy from. While some steps are counter-intuitive or simply meaningless, they have shown that they are serious about making things better. In 2006 they cut ties with a supplier for non-compliance2. Though it was a last ditch effort it sent waves through their supplier network. Nike’s efforts include establishing operational goals for all their suppliers as well as strengthening supplier relationships through audits and active relationship management.

Measure twice, cut once… or twice
Nike has taken a much stronger stance in regards to supplier working conditions. They developed a series of audits that measure many aspects of those conditions. They wanted the audits to be able to answer several questions such as “wages”; is the factory adhering to local wage laws and regulations? “Employee satisfaction”; are the workers satisfied with where they work, do they work in teams? “Participation in Production Planning”; is production planned on all levels with a high amount of feedback coming from entry levels of the organization? and “Hours and Overtime”; are the workers working to exhaustion, are they getting the hours they want? These are all good goals; however having such a diverse goal set can be problematic, leading to loss of focus and ultimately failure to achieve any of those goals. Looking at a case focused on two Mexican factories that received almost the same score on the audits it is easy to see how this is the case.3
One thing that the audit measures is pay. Two factories that where examined in the case obeyed the law and requirements from Nike, however “plant A” workers took home much more (almost $1000 annually) because they received incentive pay and production bonuses. This is the behavior that Nike had hoped to stimulate, however, by creating a standard it allowed “Plant B” to fulfill the standard and nothing more.
Nike also attempts to limit the number of hours worked by each employee in a given week. Again, they set a standard and allowed minor infractions of that standard to go unnoticed. They wanted to make sure that employees are not worked literally to death, but this standard in the long run will lead to fraud as factory managers attempt to hide forced overages to increase output.

Lengthen your stride
Nike needs to take a close look at the performance criteria it imposes on its’ suppliers. It has been known for many centuries that money talks, and if anyone should know this it is the owner/operators of low wage factories. Rather than being afraid of loosing Nike as a customer should they fall behind in production, Nike should reward long term contracts based and contingent upon continued compliance with fair labor standards.
Nike should further reward suppliers for actions above and beyond, or even offer to subsidize bonus programs. Certainly Nike knows the benefit of developing close ties with all its’ suppliers and there should be a better effort to shift to a cooperative relationship with distant suppliers.
Nike has already seen the benefits of this ideological approach. “Plant A” was near regional headquarters in Mexico City and as such developed strong ties and eventually, with the help of Nike, switched to a lean manufacturing process. Production improved, employee moral improved and cost went down3. Great, lasting improvements could be realized around the world if Nike implemented this one change institutionally. The process of doing that would be monumental in scope, but judging from the returns that have been realized they stand to make astronomical sums of money, not to mention the social capital that would result.

Wednesday, June 16, 2010

Starbucks Corporation: Developing a dynamic, customer centered supply chain

Developing a competitive advantage
Starbucks management knew that they needed to cement the supply of a resource vital to their operation, Arabica coffee, if they where to sustain their huge amount of growth. They wanted to do so responsibly and effectively. To do this they partnered with Conservation International1, an environmentally centered nonprofit. Together they developed what came to be known as C.A.F.E., a set of points based requirements that would be used to award future coffee bean purchases.
Farms caught on quickly and in some cases completely changed their growing patterns. Coffee farms where given Preferred status if they attained 60 percent and those farms above 80 percent received a $0.05 per pound premium. The best farms where awarded contracts that ensured that Starbucks would buy all they could produce.
The standards that C.A.F.E. brought to Starbucks added to the competitive advantage that they had been refining for years. The advantage of having an earth friendly procurement process outweighed the increased cost of their product has been seen. Sales grew and brand recognition soared. It has become an advantage in that they have a positive source of the much-needed coffee bean. The visibility that C.A.F.E. gave to Starbucks into their supply chain gave them the ability to develop lasting relationships.

Recent Struggles
While working to cement their global supply of coffee Starbucks needs to pay close attention to the ramifications of peering into 2nd and 3rd suppliers. Because many suppliers are processors that pull raw beans from many farms, they may be put off by an attempt to view past them into the supply chain. This becomes more of an issue as close competitors of Starbucks’ gain ground. Once the supply chain has been developed it is easy for a supplier to switch to providing the same product to another company, especially since coffee prices are set at a global level. The fear of being cut out of the equation may spur some processors to seek agreements elsewhere. Further it would be impossibly hard for such a corporation to adapt their management style to the relatively relaxed atmosphere common through Central and South America. The benefits of such a strategy quickly evaporate.
Starbucks has struggled in recent history. With low numbers and an emerging base of competitors, they are being faced with the necessity of redefining their product yet again. In at least one European market they have had to scale back operations. Complaints of substandard product have resulted in big losses for locations in Ireland, where competition is especially fierce2. Starbucks will be closing upwards of 100 stores in the hope of re-emerging into those markets in the near future.

Looking Forward: Focus on the other side of the supply chain
Amid this fierce competition, Starbucks has decided to focus on giving the customer what they want. In a recent interview3 C.E.O. Howard Schultz said that the trick will be to focus on the people involved forward in the supply chain. They will begin offering free Wi-Fi access in all their locations shortly.
Starbucks faces many challenges and barriers as it works to increase the market share of it’s brand; language and location being among the top concerns.
Customers in Ireland complained about their coffee being bitter. Does management know what this means? If they are supplying a universal product why are people in Ireland getting bitter coffee while everyone else loves it? Looking backward the supply chain is not muddled by vernacular but by the dominating language of the area. When pressing for higher output Starbucks will need to be careful not to burn bridges. Expert translators and even local agents should be used to provide an insiders viewpoint into situations that may arise.
Simple geographic situations arise as well. People in Ireland may simply want to support an Irish brand and the idea of a brand that is managed from England may be a turn off. Similar conflicts may arise in coffee producing countries.