Nike sells more athletic apparel and shoes than any company in the world.  Nike footwear is made in 122 factories across 12 countries, with half of the shoes made in Vietnam.  Nike apparel is manufactured in 329 factories throughout 38 countries.

Yet Nike itself manufactures nothing.

That’s right, nothing.

Nike contracts out all of its manufacturing.

“We do not own or operate any of the footwear manufacturing facilities and depend upon independent contract manufacturers to manufacture all of the footwear products we sell.”

Thus, Nike is completely dependent on these contract manufacturers for its products.

If the manufacturer ships the product late, ship poor quality product, or go out of business, Nike could run out of inventory.

This might explain why Nike relies on hundreds of factories spread across many countries.  Company executives are trying to reduce the risk of a supply chain disruption by relying on a broad base of suppliers.

The downside is that it’s difficult to know what’s going with all those suppliers.  Are the workers being treated fairly?  Is child labor being used?

Nike’s reputation was badly tarnished in the 1990’s when it was accused of using sweatshops to make its products.  Most of Nike’s value is derived from its brand, so the company has a strong incentive to ensure something like that doesn’t happen again.  Even though these contract manufacturers aren’t Nike employees, Nike will be held responsible in the court of public opinion if something goes wrong.

But these aren’t the only challenges of running a global supply chain.

Nike also has to worry about tariffs and fluctuations in foreign currencies.  In its most recent 10-K, Nike said, “protectionist measures have resulted in increases in the cost of our products.”  More than one-fifth of China’s shoes are manufactured in China, so a U.S.-China trade war is bad news for Nike’s purchasing division.  And even without a trade war, there’s always the chance that the dollar will strengthen or weaken relative to other currencies, causing Nike’s costs to fluctuate in turn.

An additional challenge is that the primary raw material for Nike’s shoes, rubber, is primarily cultivated in southeast Asia.  Raw materials must then be transported to factories, with the resulting products being transported to ports for shipping.  This makes Nike highly dependent on southeast Asia for its products, and a major disruption (e.g., a tsunami) could wreak havoc on Nike’s supply chain.

Given all of these logistical challenges, it is impressive that Nike was able to generate $37 billion in sales and a $2.5 billion profit during its most recent fiscal year.  Both of these figures were lower than the year before due to COVID-19, but the company’s performance was still dominant relative to many other firms:  Nike boasted an ROE of 29.7% and an ROA of 9.2%.

This financial performance is impressive, particularly during a pandemic and a trade war.  But the complex nature of Nike’s global supply chain makes its fragile, and company executives have the difficult task of coordinating a large number of moving parts to ensure that consumers can get a new pair of Air Jordan’s.

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