How Not to Spend $400 Million

Nike's supply chain management system has spun out of control. But other companies don't need to suffer the same fate.
Craig SchneiderMarch 5, 2001

You could be next.

At least that’s what some experts say about the potential for more companies to meet the same fate as athletic footwear maker Nike, which last week said the problems it had implementing i2 Technologies’ supply chain management software would cause it to miss third-quarter forecasts.

One Wall Street analyst said the i2 project was part of a larger effort that has cost Nike $400 million during the past year.

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The software is supposed to cut costs by helping companies forecast purchasing requirements from suppliers and orders from customers. However, Nike says the software has so far failed to properly match its inventories with customer demand. Instead, Nike is left with excess inventory of some product lines and shortages in others.

After revealing its problems during a conference call with analysts, Nike officials made few additional public comments. But a Nike spokeswoman said late Friday, “We see these software issues being resolved by the end of the calendar year, if not sooner.”

The scary part is that this type of event is part of a trend that will likely get worse. “I don’t think this is going to be an isolated event of any of the vendors,” says Karen Peterson, an analyst with market research firm Gartner Inc. “We’re going to see a lot more failures in the future. That’s not necessarily knocking i2. We saw this with ERP.”

CFO’s January 2000 article “Blaming ERP” described the problems that several companies had when implementing enterprise resource planning (ERP) systems.

Peterson believes that technology, functionality, and the resistance some companies have to changing their business processes, will continue to plague installations of complex systems, such as those for supply chain management.

“We’re in a hype cycle,” she says. “There are a lot of people claiming a lot of things, but functional maturity of the applications has not caught up. So we have immaturity of processes and technology.”

At least there’s time to figure out where things went wrong at Nike and learn from the mistakes.

For starters, retail is inherently a complex industry to implement supply-chain management software, whether i2’s or that of Manugistics, an I2 rival. That’s because of the many product variations such as size and color that each need to be managed.

And the execs know it. “I don’t want to claim that we’re 100 percent responsible,” says i2 CFO Bill Beecher. “Both companies knew [the implementation] was going to be complex. Both companies put a lot of resources against it.”

Among those resources was an i2 consulting team that Beecher acknowledged could have done better: Problems arose because Nike “didn’t follow standard methodology,” he says. Specifically, it chose not to use a template for the apparel industry, and the customized implementation “put the software under strain.”

In hindsight, Beecher says i2 could have been more forceful in directing the implementation, echoing comments i2 CEO Sanjiv Sidhu made in an interview with Bloomberg Radio.

But clearly, Nike has its own issues. “They underestimated the kind of talent that they needed,” says Wilson Rothschild, senior analyst for applications-delivery strategies at Meta Group and former i2 employee. There wasn’t a “joint ownership” from both sides as there should have been.

Nike’s technology staff was already stretched to the limit by two other projects. At the same time the company was installing the i2 product for supply chain management, it was implementing SAP’s ERP system and Siebel Systems’ customer relationship management software.

Wells Fargo Van Kasper analyst John Shanley estimates that Nike spent $400 million during the last year on the installation of the three systems.

Inadequate Data?

Nike was trying to shift all the data from its existing systems, including some that it had written. In addition, analysts say the data Nike was entering into the system was inadequate for the forecasts it was trying to make.

“If you don’t fuel i2 with the right information, it’s not going to have the right information for you,” says Credit Suisse First Boston analyst Brent Thill, who says he’s been talking with people inside Nike. “I think that’s been the biggest issue behind the scenes.”

Adds Thill: “It was like a pipe that had a leak in it. Unless you capture every drop of water, it doesn’t play right.”

To be fair, says Meta Group’s Rothschild, it’s not unusual to make tradeoffs in the data used when some is not available. It’s just that in the pressure to go live, Nike may have used data that didn’t reflect the business as well as the company had thought.

It may also be that Nike was trying to do too much, too soon with the software, says Rob McClellan, senior project manager for TaylorMade- adidas Golf’s E-business. Nike’s problem was that they “drilled down to an extraordinary level of detail for the forecasting model” by “requesting too much history and trying to forecast too far out ahead.”

How does he know? McClellan says the same i2 consultants that worked with Nike are working with TaylorMade’s own implementation of i2’s software and told him about the Nike project. Maybe, as Beecher says, the consultants could have been more forceful with Nike and prevented the company from making the implementation more complicated than it was.

But that may also reflect a disconnect between the vendor’s rosy scenario and the actual implementation, says Rothschild. While i2 has some 1,000 customers, the retail business processes are still relatively new to the company. “Not everything that Nike wanted to do was available in the software,” he adds.

TaylorMade has had its own bumps along the way. McClellan says the company wound up spending slightly more for network servers than i2 had estimated. But he’s happy with the overall implementation.

“They’ve been nothing but responsive to our needs,” he says. He adds that suggestions by TaylorMade are being included in the next software upgrade.

Despite Nike’s problems, installing a supply chain management system need not be a nightmare.

“It’s like crossing the street. If you look both ways, crossing is not at all risky,” says Tom Harwick, research director for supply chain management at Giga Information Group. “However, if you just step out there, it’s a very risky activity.”

Among the precautions: Companies need to budget time and resources properly and structure the needed business process. “If you install the software without changing the process, you’re going to have problems,” Harwick adds. “Best practices are well known in the industry. You have to willfully ignore best practices to screw up.”