The Manufacturing Practices of the Footwear Industry: Nike vs. the CompetitionThe current manufacturing practices of the sneaker industry, in particular companies such as Nike, Reebok, Adidas, Converse, and New Balance, takes place throughout the globe. With the industry experiencing severe competition, and the product requiring intensive labour, firms are facing extreme pressure to increase their profit margins through their sourcing practices.
The following paper will analyse the sneaker industry, while examining the multitude of viable manufacturing options, and critiquing their current manufacturing structure. Footwear Industry Players, Revenues, Market ShareTo properly review the manufacturing in the footwear industry, it is necessary to first gainan understanding of the dominant leaders in the marketplace. The industry is currentlyexperiencing hyper competition, led by six main firms Nike, Reebok, Adidas, Fila,Converse, and New Balance (see exhibit 1), with nearly $7 billion in revenuesdomestically. Nike is the industry leader, with a 47% market share, followed by Reebok,a distant second at 16%, and Adidas at 6% (see exhibit 2).
This category is facingdecreasing demand and the rising popularity of alternative footwear, resulting in morepressure than ever before to achieve high gross margins through effective globalsourcing practices. Manufacturing optionsFootwear companies have two basic options in the manufacturing of their products, theycan both own and operate the factories that produce their products, or subcontract their products out to secondary manufacturers. These facilities can be located either domestically or internationally, and both present a myriad of positives and negatives. Firms that produce domestically benefit from ease of monitoring, skilled workforce, government stability, job creation, and well understood labour rules, while suffering from the relatively high wages required in the U. S. as compared to developing countries.
By manufacturing products overseas, in particular in third world economies, tremendous efficiencies are gained in the form of reduced wages, but are countered by the increased difficulty of monitoring the quality of their products and the actual working conditions in the factories. Companies that are vertically integrated, who own and operate the factories where their products are manufactured, are faced with largecapital expenditure requirements and the management of the factories themselves, resulting in lower profit margins. Strategic OutsourcingIn analysing the sneaker industry, we are faced with the question, “What are these firms core competencies?” If manufacturing falls under this umbrella, then firms should look to produce internally. However, the core skills that set these companies apart from thecompetition, are their marketing, distribution, and technological expertise. Applying thedominant sneaker companies areas of expertise, let’s review the following questions: Is internalization a source of competitive advantage? Is manufacturing a skill our firm does better than anybody else? Will firms be able to leverage their manufacturing expertise in the future? Are we releasing any of the firm’s proprietary skills/information by outsourcing?With all of the above questions posed to any of the big four sneaker companies, they would respond with a resounding “no”.
Therefore, in today’s global environment, the most strategically viable manufacturing strategy is the outsourcing of their products. The efficiencies that are gained, in the form of shifting of risk, reduced capital requirements, lower wages, and ability to focus on their core competencies, strongly outweigh all other manufacturing options. The Evolution of Manufacturing in Third World CountriesAs the economies of countries around world expand, so does their ability and skill levelin all facets of manufacturing. Beginning in London in the early 1900’s, and followed through to the present day, manufacturing in its simplest form consists of light manufacturing, which uses unskilled labour to produce items such as shirts, shorts, and jeans.
As the economy develops along with the skill of manufacturing, countries begin moderately technical light manufacturing, which includes footwear, outerwear and, performance sportswear. The next step in this growth involves the production of technical consumer products such as radios, calculators, and wristwatches. With the most developed economies gaining high levels of technical expertise, manufacturing grows to include technical durables, which includes automobiles and computers. This progression represents the advancement of economies throughout the world today, andprovides the reasoning behind sneaker companies manufacturing beginning in the United States and Germany, and passing through Japan, Korea, and Taiwan, to its present day central areas of China, Indonesia, and Vietnam.