Nike's Outsourced Manufacturing

Nike’s strategy of shaving costs caused ethical dilemmas that ultimately damaged its reputation. Nike outsources all of its manufacturing. This approach has provided Nike with huge profits, “from a 1972 level of $60,000 to a startling $49 million in just ten years” (Bartlett, Ghosal, & Birinshaw, 2004). “Production is now globalised, with different countries concentrating on different parts of the process depending on what they are good at, or what they can do most efficiently or cheaply. Poorer countries get the less lucrative activities such as lowly paid semi-skilled or unskilled production or assembly” (Ballinger & Olsson, 1997).

This approach also allows Nike to keep an arms-length arrangement with its subcontractors, stating that, “it is not they who employ cheap labor, but their contracted suppliers, hence the responsibility lies with the latter” (Ballinger & Olsson, 1997).

This strategy resulted in Nike requiring steep wage concessions from its subcontractors to continue its intense growth patterns. “Nike has always paid the lowest possible wages in Indonesia, claiming year after year that it could not afford even to pay the country’s minimum wage.

Each year, Nike contractors in Indonesia refused to pay minimum wage raises of a few cents a day. Thanks to a corrupt and inefficient government, they usually got away with it” (Global Exchange, 1998). Adding to this problem was the issue of child labor. “Nike went into Pakistan, knowing full well that child labor is an ages-old practice there and taking no precautions whatsoever to prevent the use of child labor in the production of its soccer balls.

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We have to conclude that Nike expected to profit from its Pakistani contractors’ known usage of bonded child labor” (White, M., 1997).

Nike further tarnished its reputation by attempting to dilute information that had come to the attention of the general public regarding its practices, resulting in a lawsuit. “Mike Kasky is suing Nike, Inc. under California laws regulating unfair competition and false advertising. Kasky claims that when an internal audit was leaked to the press that revealed illegal employment practices in Nike’s factories in China, Vietnam, and Indonesia, Nike responded by issuing to the press numerous statements it knew to be false” (Truthout Forum). “The California courts ruled last year that Nike’s PR effort was meant to bolster its image and improve its sales – so indeed, it did amount to advertising, and, as such, it needed to be truthful” (Hightower, J., 2003).

Nike has a difficult situation to resolve. Its strategy to use celebrity endorsements to develop a strong brand identity had the result that “Nike became by the 1990s one of the world’s best known brands, as well as a global symbol of athleticism and urban cool” (Bartlett et all, 2004). This situation began to change by 1998, when currency woes in Asia along with the damage to its image resulted in Nike experiencing a loss for the first time in 13 years. Nike must make serious changes if it is to repair its image and hopefully regain its market in the future.

One alternative for Nike is to enforce its own Code of Conduct with its subcontractors. This Code has been amended several times, but had been very general in its listing of business practices. Its current version stipulates many requirements that we take for granted, one of which is that a subcontractor “certifies that it pays at least the minimum total compensation required by local law, including all mandated wages, allowances and benefits” (Instituto per Il Lavoro). An immediate benefit of this decision would be the good press it would generate that Nike would be willing to put pressure on its suppliers so that the people who produce its goods are treated fairly. Another benefit would be to align Nike’s suppliers’ actions with Nike’s vision as listed on its web site,”to bring inspiration and innovation to every athlete in the world”. This would include those employed by Nike because the company considers all people to be athletes. A third benefit would be to prevent work stoppage strikes that had previously affected the company in Indonesia.

This change in how Nike will handle its operations has significant drawbacks. Closely adhering to its Code of Conduct will be very expensive for Nike. Nike’s success has been heavily driven by the aggressive stance it has taken on labor costs. In addition, Nike’s subcontractors have used the freedom given to them to provide Nike the labor expense level they expect while also allowing themselves to profit as well. Nike will now be monitoring their subcontractors’ workplaces and wage practices, which will place a strain on their relationship. This new focus for Nike will require the company to divert some of its attention from its main marketing focus to supervise the overseas operations.

Another option for Nike would be to contract with a U.S. shoe manufacturer. Although the benefit of having its suppliers overseas has been the low prices for the finished goods, Nike would gain an advantage by providing work for the people at home. “Made in USA” labels are very important to many Americans. Also, the combination of job creation and openness to providing equitable wages and benefits for its workers as required in this country could reduce the uproar about its labor practices, especially among the youth. In addition, Nike could incorporate at least one factory into a tourist attraction, providing visitors with the opportunity to tour the plant, learn the history of the company, and become more familiar with the products Nike produces, thus developing more customer loyalty.

This option would require Nike to make a major shift in its focus from having a limited, long-distance relationship with subcontractors to playing a more active role in the manufacture of its products due to the proximity of its suppliers. This significant change in how Nike does business would be very expensive, both in terms of the financial outlay and use of personnel. It would require a more direct involvement of the company in a portion of the business in which it has no first-hand experience, which would entail a considerable learning curve. This would result in major upheaval for the company, and a loss of confidence by investors. Nike would also lose the competitive edge of its competitors who have lower foreign wages.

A third option for Nike would be to both enforce its Code of Conduct and invest at a high level in the countries where it has factories, and highly advertise those efforts. Per Nike’s web site (2004), “Since 1997, Nike, with help from several of its key partners, has supported micro-enterprise ventures in Asia, playing a small but significant and direct role in building and expanding the number of locally-owned businesses in mostly rural areas throughout the region. Nike has funded micro loans and provided technical assistance in Thailand, Vietnam and Indonesia, working with the Population and Community Development Association (PDA), Vietnamese Women’s Union and Opportunity International, respectively”.

The press has given faces to the people who have been affected by Nike’s contractors’ exploitation. Nike must rectify the damages by giving faces to the people who have been affected in a positive way by the loans and other assistance given to the local populations. This, coupled with Nike’s firm stance on the treatment of those making its goods, would help regain its lost positive image. In addition, this option would forge a stronger relationship with the countries where the factories producing Nike’s products are located. It would also help Nike’s subcontractors to entice and retain the best local employees, thus ensuring higher quality products.

This approach would be expensive for Nike. The costs of enforcing the Code of Conduct alone will significantly affect the overall cost of its products. The higher level of investment in small business will require further use of Nike’s cash, limiting its ability to retain the high profile athletes who have added credibility to Nike’s products. The company will also have to expend more energy to both monitor the manufacturing facilities and determine which small businesses to support, diverting its attention from the company’s primary focus of marketing its products and making a profit. In addition, making investments in other countries will help Nike relate in more personal ways to their local environments. This will make it more difficult for Nike to direct its subcontractors to move to another country when local labor wages have become too expensive. However, there would probably be no lack of interest if movement to new countries became necessary with Nike’s products so well known.

Nike as a corporation has many strengths, but particularly its strong brand recognition. Nike is known worldwide for its shoes and apparel, as well as endorsements from sports athletes and celebrities. The company can build on its strong name association, and use this already established foundation to further its name recognition. If necessary, Nike could rely on its quality product reputation for securing financial, management, and marketing support in the future. The “swoosh” is very much a viable and highly recognized symbol.

Because Nike is well known, subcontractors as well as suppliers are more than willing to work with Nike, and the channels of distribution and supplies needed to fuel their factories are in place. The company has established distribution networks and supply channels set up around the world, providing Nike with the necessary structure to keep its customers’ needs, and its profits, addressed.

Nike has a definite strength in its financial health. The company has experienced phenomenal growth. Since going public, the market cap for this company in 1999 was over 17 billion dollars. Share price has grown from approximately $5 per share in 1989 to nearly $16 per share in 1999. Nike has nearly $200 million in liquid assets it could use if necessary. With its market cap so large, and its cash reserves vast, Nike could tap its resources to change operation tactics or marketing to combat problems. It also would seem that the company could float more stock, or have additional offerings if necessary.

Even Nike’s deep pockets have not prevented it from suffering from negative name recognition. Because Nike is so visible and financially strong, the company has been targeted for taking advantage of cheap labor and employment practices. People now associate the name with poor people making their products and rich endorsements given to athletes to market the goods. The opinion of Nike by its present and potential customers is very important. Currently, Nike has an image problem, and its name is a weakness for the future of the company if that image isn’t improved.

Nike’s image was impacted by the factories making its products not being under the control of the company. Subcontractors have exhibited poor labor practices, and their behavior has hurt Nike’s reputation. Part of the reason for these practices has been the prices Nike has set concerning wages. This has forced these contractors to move their operations from Japan, then to China, and South Korea, and now to Indonesia. Another related problem with lack of control is not keeping these production facilities up to code concerning working conditions and hiring practices. Nike has turned its head regarding these issues. As a result, its subcontractors have dictated what the Nike brand represents now, as well as in the future.

Another weakness is the decline in revenues over the past couple of years. It is important that this situation does not turn into a trend. Nike has lost market share along with its declining gross margins. Nike needs to hold its revenue status and at the same time increase its stock prices. There are economic conditions that have had an effect on the declining revenue situation, but the company must continue to grow its profits. If this trend continues, Nike’s rating may deteriorate. Nike should look at the current year’s figures as a weakness and be vigilant in its search for the reasons behind its declining profits. The business model may be fine, but consumer attitudes have been affected by the exploited practices. Revenues are a true indicator of a company’s success. Nike needs to pay closer attention to its bottom line.

There are opportunities for Nike to pursue to bring its image back into favor with its customers. President Clinton convened a coalition, called the Apparel Industry Partnership (AIP), to help develop acceptable labor standards for foreign factories and Nike was the first company to join. Nike initiated a series of across-the-board changes that included adopting age restrictions of workers, U.S. based policies on clean air in factories, and other improvements. Nike also became more involved in Washington-based reform efforts. The AIP organized an oversight organization called the Fair Labor Association (FLA) that was tasked with third party monitoring of company factories. Nike worked diligently to get other manufacturers to join the FLA. Nike also helped fund the Global Alliance that is devoted to improving the lives of foreign workers. The changes that Nike initiated have helped to repair and initiate a new image of the company.

Nike has provided training programs for its subcontractor managers and supervisors so that their practices were in alignment with its new image. All managers are required to be trained on cultural differences and acceptable management styles of the county in which they are working. They are also required to learn the native language of the workers.

The main criticism of Nike’s human rights violations concerns worker’s wages. Nike hired the accounting firm Ernst & Young to audit its foreign factories. Nikes also created a Labor Practices Department to further address fair labor practices. Critics were still skeptical about Nike’s stance on wages and felt the company was still not doing enough to eliminate the problem. All of the opportunities will help Nike to improve its image as being an activist in human rights issues instead of being a human rights violator.

The human rights violations are a consequence of Nike’s policy of outsourcing all product manufacturing to independent subcontractors. The company only has contracts with factories in low-wage areas of the world. The Asian-American Free Labor Association (AAFLI) published a critical report on foreign companies operating in Indonesia. The AAFLI along with other Western labor groups investigated labor practices and charged the government with correcting the problems. The activists also went after the companies by drawing worldwide attention to the exploration of the workers, especially Nike. Public outrage resulted in damage to the company’s image and alienation of customers. Threats of adopting American-style governmental regulations regarding labor practices in Indonesia were advocated.

In the U.S., other threats loomed. Some of Nike’s best customers are the young hip-hop generation. Due to anti-Nike sentiments, and a weak economic demand for Nike products, its competitors’ sales surged. Adidas replaced Nike with teen trendsetter shoes in 1998. New Balance and Airwalk also took over shares of the Nike’s market.

The ripple effect of negative consumer sentiment affected more than just Nike’s retail sales. New and existing endorsement contracts with college and university athletic departments were lost or voided. College students staged sit-ins and other forms of civil disobedience to protest the use of Nike products regardless of whether their school used or did not use Nike products. The protests were mainly about the conditions under which Nike’s products were manufactured. The students demanded that the company rectify its labor practices. All of these threats could cause Nike to lose customers, resulting in lost revenue and market share.

To reinstate the Nike image back to its earlier prominence, Nike would be wise to pursue the option to enforce its Code of Conduct, and invest in the countries in which its factories are located. The Code of Conduct should require unannounced audits of Nike’s factories at random, frequent time intervals to ensure compliance to rules and regulations. Equipment should be inspected to meet higher safety standards than would be required in the host country. For example, if the factory is located in Indonesia, the equipment should be inspected to be compliant to United States’ Occupational Safety and Health Association (OSHA) safety standards. Doing so is above-and-beyond what may be considered “reasonable” and should shed positive light on Nike’s effort. In addition, hiring documentation should be verified in the audits to assure that workers are of the appropriate age, and that children are not placed into the workforce. Subcontractors would be trained in cultural awareness and required to maintain consistent and reasonable management practices.

Although selecting the option to contract with a U.S. shoe manufacturer would improve Nike’s image in the ever-important domestic market, it would ultimately hinder the company’s ability to be competitive with the other shoe manufacturers who use Indonesian labor. The gap between U.S. workers’ wages and Indonesian workers’ wages is too great to ignore, and manufacturing shoes in the U.S. would ultimately hinder Nike’s ability to regain profitability.

Nike must adopt a solution that will remedy its image plight while also allowing for a similar competitive edge to its rivals. Requiring Nike to enforce its Code of Conduct would definitely help, but may not be enough to give Nike the boost it needs in the marketplace. Further effort exceeding normal measures would be required. This additional effort would be best spent on investing in the small businesses of local communities in the countries where the Nike factories are located. An additional element of this campaign would be to supplement the minimum wage requirements in the host countries by the use of “bonuses” that are given to workers with the lowest minimum wage base. Although this step adds more cost to the product, the positive effect of this action on Nike’s image should not be underestimated. Essentially, this would drive home the fact that Nike cares about the workers that make superior Nike athletic products. As an example, television marketing can emphasize this point through a slogan such as: “Superior athletic products made by people who care. – At Nike, we are pleased to announce our ‘workers first’ initiative.”

The distinguishing difference between Nike and other companies with factories in Indonesia (such as Reebok) was the proactive approach to addressing the human-rights concerns. Reebok addressed these issues head-on by creating the Reebok Human Rights Award in 1988 and adopting a human rights policy in 1990. This step may have effectively “shielded” Reebok from additional criticism, and may have ultimately set the stage for human rights activists to pick Nike as their target. Nike will need to overcome this stigma in two sequential steps:

  1. Correct the Problem: Bring factories up to generally-accepted human rights standards, Code of Conduct standards, and OSHA standards
  2. Market the Changes: Make sure the public and critics see the significant changes and, more importantly, see the sincerity of Nike to aggressively improve. This can be accomplished by using the status of celebrity athletes to emphasize the “humanitarian” efforts of Nike’s overseas’ factories. For example, a star athlete could make a television commercial that is essentially a documentary of how an Indonesian worker’s life has improved as a result of Nike’s micro-loans. The star athlete would essentially “put a face to the policy” and display how real factory workers have improved their quality of life as a result of Nike’s policies.

In order to be effective, proper and sequential implementation of the above solution is critical. These actions must be performed in well-planned steps
that are based on an aggressive, but realistic timeline. Failure on the sub-contractor’s part to comply with Nike’s new initiatives should be handled promptly, with severe infractions resulting in financial penalties or loss of contract. The preliminary implementation timeline is as follows.

Implementation Measures


  • Enforce safe working conditions in factories by: providing step-by-step procedures for effective implementation of Occupational Safety and Health Association (OSHA) standards.3 months
  • Hire a safety consultant to assist factories in implementation of OSHA standards.5 months
  • Perform periodic, unannounced safety inspections to assure continuous compliance (minimum of 2 per year)12 months
  • Update the Code of Conduct to include the following regulations: üStatement that limits the maximum number of hours worked per person to 60 hours per week.üMandatory training of factory management on cultural awareness.üThe minimum wage rate (as required by local law) is to be paid as a minimum. Based on profitability, the factory contractor and workers would share in bonuses offered by Nike. These bonuses are not only contingent upon plant profitability, but are also based on adherence to the other requirements of this plan of action.üStatement dictating the minimum age requirements of factory workers.9 months
  • Provide micro-loans to employees and community assistance to the countries in which the factories are located. Become involved in community development programs in the worker’s communities.9 months
  • Launch a media campaign in print and television to support the new initiative “Superior athletic products made by people who care. – At Nike we are pleased to introduce our ‘workers first’ initiative.”üCelebrity athletes are used to show the “real-life” difference that the Nike initiatives are making. Television commercials are shot on-site with a celebrity athlete interviewing a worker that has benefited from Nike’s initiatives.üFocus is put on “putting a face” to the new initiatives.12 months

In both the short and long run, Nike must adopt and implement policies and measures to control the conditions in which their products are produced. Control policies must be practiced from the corporate level down to the factory level to ensure compliance throughout the organization. Current contracts with manufacturers will be changed to reflect the new Nike Code of Conduct policies, and future contracts will be awarded based on acceptance and compliance with the policies. Subcontractors who fail to meet the minimum requirements will be penalized up to and including possible dismissal from the Nike supply chain.

To ensure compliance and demonstrate the seriousness of Nike’s resolve, a corporate level position of Vice President of Corporate Responsibility will be created. The VP of Corporate Responsibility will report directly to the CEO and will be charged with the responsibility of policy implementation, monitoring and control. Further duties include public relations and media control, OSHA relations, and oversight of foreign relations through correspondence with each country’s Nike Operations Director.

Members of the Corporate Responsibility team will report directly to the VP. These members include the Chief Labor Policy Spokesman, the Spokesman and each country’s Nike Operations Director. For each country that Nike has operations, a manager level position will be created to help assure compliance with the new Nike Code of Conduct. Each manager will be of the same nationality as the country they direct. This will provide Nike with cultural insight and ensure that the cultural needs of the workers are being properly met and communicated. These managers will be responsible for assisting local government agencies in charge of labor law enforcement, assisting the Global Alliance assessment teams, assisting other third party inspection and audit teams (such as Ernst & Young), and conducting the biannual safety inspections of Nike contract factories. The managers will have the authority to enforce the Code of Conduct by levying fines and performing compliance follow-up audits. The recommendations made by the managers will be fully supported by the corporate office.

The cost of these positions has become necessary to restore goodwill towards the Nike name and show that positive corrective actions are being taken. By comparison, these costs are small and insignificant to the cost of lost business and market share resulting from ill will and a tarnished image. Only after these measures are taken will Nike return to the good graces of their target markets and return to profitability.

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Nike's Outsourced Manufacturing. (2016, Jul 02). Retrieved from

Nike's Outsourced Manufacturing
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