In the present intense competitive global marketplace, global companies in various industries have chosen outsourcing strategy as an ultimate choice for having cost-effective solutions, increased efficiency, managing complex supply chain operations, increased productivity, shared risk, reduced operating cost, better quality and more focus on core competencies.
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Nike is the world’s leader in athletic footwear and apparel. It sells its products in over 170 countries around the world through 690 Nike-owned retail stores, about 23,000 retail stores in the US and via independent distributors and licensees. Virtually all of its footwear and apparel products are produced outside the United States, while its equipment products are manufactured in both the US and abroad. Over the years, the company has built the core competencies of design, development and worldwide marketing of high-quality footwear, apparel, equipment and accessories (Yahoo Finance, 2011).
Reasons for Outsourcing:
Nike decided to outsource all of its manufacturing operations and located them outside the U.S due to numerous reasons. It contracted hundreds of contractors outside the U.S for getting an advantage of low cost of production since companies have to pay high wages in the US as compared to developing countries of the world. By outsourcing its manufacturing overseas, in particular, in third world economies, Nike gains tremendous benefits of reduced wages to remain competitive in an intensely competitive market of athletic footwear and apparel.
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Nike’s decision of outsourcing of manufacturing operations also enabled it to focus on its core competencies of design, development and worldwide marketing and distribution. Moreover, it did not develop itself into vertical integrated global footwear and apparel company since vertical integration requires large capital expenditures requirements and problems of managing company-owned factories, which result in lower profit margins (Dusen, n.d.).
Locating all of its manufacturing outside the U.S has enabled the company to be world’s largest athletic footwear and apparel company, however, it has to face an of issues which are challenging its long-term success and growth. For instance, Nike has to face continuous threats due to the increased difficulty of monitoring the quality of its products and actual working condition in factories located in third world countries of the world. The company often faces the litigation and pressures from third parties such as the Human Rights Organization for child labor practices in it manufacturing facilities in the Asian countries. Additionally, its difficulties are increasing day by day for protecting its intellectual property rights outside the U.S since developing countries do not have strict laws for protecting them. Moreover, Nike’s future growth and sales may suffer due to significant or continuing noncompliance with the code of conduct and laws by contractors outside the U.S. there is always inherent threats of political unrest, disruptions and economic conditions in the developing countries where manufacturing operations are located (Nike Inc, 2010).
To overcome the drawbacks of outsourcing of manufacturing operations, Nike developed their code of conduct and implemented it across the globe to ensure both qualities of products and quality of working conditions in factories. Since violation of this code of conduct by subcontracts has raised human rights issues which are widely publicized, the company hired top consulting companies and developed reports such as Young Report, the Dartmouth Study, and Ernst & Young’s continuing monitoring. However, the inherent risks of outsourcing strategy, as well as the violation of the code of conduct, cannot be completely eradicated, since theses present wicked problems which have to be managed effectively