From Supply Chain Crisis to Sustainability Leadership By America Harris, EMBA-EN-APR17

Nike introduced the SHAPE internal monitoring system to provide it with an initial assessment of whether a proposed new factory was near satisfying the code of conduct. Factories flagged as high risk would also undergo a more comprehensive “M-audit.”

Senior management created a new division to facilitate the integration of corporate responsibility issues throughout the business. This brought together sustainability and compliance employees working across product groups.

Nike assigned field managers to the various regions. They were responsible for monitoring day-to-day compliance with labor laws and the Nike code.

Head office developed a comprehensive database to help track the global supply chain and access audits conducted in the field.

In 2004, Nike invited a panel of external experts to review a draft of its corporate responsibility report and provide feedback/recommendations.

Ambition: Double business with half the impactVision: Sustainable innovation is a powerful engine of growthAims:Minimize environmental footprintTransform manufacturingUnleash human potential

Nike changed its organizational structure to better integrate sustainability within traditional corporate functions. The company uses a matrix organizational structure in which managers’ report to multiple departments. Based on business unit goals, employees develop strategies and plans detailing their multidisciplinary responsibilities. Internal scorecards are used to report progress towards the goal. Nike also moved its Corporate Responsibility team much further upstream in the organization, where it could have a greater impact on decisions by providing input early in the process.

Nike moved from the low industry standard to focusing on quality, long-term supply agreements with fewer factories that are committed to our strict standards of sustainability and product excellence. The sourcing strategy prioritizes and favors these suppliers that show demonstrable leadership in corporate responsibility and sustainability and who seek to move beyond minimum standards.

Nike focused on reducing environmental impact throughout the product lifecycle. This was achieved by looking upstream to materials vendors, contract factories and product transport to investigate opportunities for implementing lean manufacturing and better shipping options. Also by looking downstream to retail partners and consumers to explore better reuse and recycling opportunities. By doing this Nike, redefined the concept of waste, seeing it as an input to products and a material “feedstock” to other industries. By the end of 2020, Nike is targeting that no waste from contracted footwear manufacturing is sent to landfills and excess materials in the manufacturing. NIKE shoes will fuel a “future closed-loop model” where waste becomes a product input.

Target for Product: Deliver products for maximum performance with minimum impact, with a 10% reduction in the average environmental footprintTarget for Materials: Increase use of more sustainable materials in footwear and apparel

Nike brings different teams and skill sets to the development process – from design and sourcing to engineering. For example, placing design teams alongside production teams allows both to take full advantage of innovative breakthroughs. Integrating thinking, moving teams beyond their own subject matter expertise to achieve greater efficiency and greater sustainability

Proliferating portfolios of sustainable products across the businessScaling the use of technology

Nike developed multiple indexes that measured its sustainability practices and those of its independent contract manufacturers. The indexes have metrics for measuring the relevant impacts of product waste, water, chemistry, labor, and energy.

The MSI provides scores based on a variety of relevant environmental criteria and forms the basis for how we measure the sustainability of products. The index takes into account the energy, water and chemicals used to make materials, as well as waste generation. It also rewards material suppliers for participating in sustainability programs. By leveraging the MSI, Nike’s teams can choose materials with verifiably lighter environmental footprints. This encourages the choice of better materials from better vendors by allowing them to compare the environmental impacts of approx. 57,000 different materials, supplied by 741 vendors. MSI was the foundation for the Higg Index in the apparel industry.

The Nike Making App measures the sustainability performance of materials and products

Is a restricted substance list to help create an industry-wide manufacturing restricted substances list (MRSL) and shared a water-based solvent formula to enable the industry to eliminate the use of toxic chemicals in a key footwear process.

Target: Reach 100% renewable energy in owned or operated facilities13 by the end of FY25 and encourage broader adoption, as part of our effort to control absolute emissionsNIKE’s approach to reducing their carbon footprint involves pursuing innovation in low-impact materials, driving energy efficiency in the supply chain and advancing renewable energy in owned or operated facilities.

Expand use of renewable energy in Nike built environments (where available) including all new retail stores

Target: Innovate and adopt new approaches to reduce water use in the supply chain, with a 20% reduction in freshwater use in textile dyeing and finishing (l/kg)17 per unit of production.

Target: Enable zero discharge of hazardous chemicals (ZDHC).Work to decrease the use and discharge of toxic chemicals in the supply chain by replacing them with better alternatives. The better selection and use of chemistry will help reduce the impact of manufacturing materials and finished goods.Continuously test different ways to improve data collection and measurement and aim to scale these approaches through industry coalitions, such as the ZDHC and the Sustainable Apparel Coalition (SAC).

In manufacturing, the best way to reduce waste is to design it out of products from the start. As a result, contract factories and materials suppliers have implemented an array of efficiency initiatives aimed at reducing waste and Nike are continuing to develop new solutions to address new challenges. For example, Nike encourage material vendors where possible to cut footwear components at their facilities and then ship the pre-cut pieces to our contract finished goods manufacturers. This practice means those material vendors are able to recycle the scrap back into usable materials at their own facilities. It also reduces waste sent to landfill and cuts down on CO2e emissions related to transporting the materials from the vendor to the contract factory.

Increase recycling, reuse, repurpose and composting of waste (in manufacturing, retail, distribution centers, offices)

Transforming Manufacturing means ensuring the NIKE sourcing and manufacturing ecosystem continues to deliver sustainable growth across the entire value chain. It’s not enough to just reduce waste and improve efficiency. We must also rethink how labor is valued within manufacturing.NIKE requires its finished goods suppliers to verify they are sourcing materials from vendors that are compliant with NIKE's Restricted Substances List (RSL) and with the NIKE’s Code of Conduct. NIKE's Supply Agreements also explicitly require suppliers to comply with all local and country-specific labor laws and NIKE’s Code of Conduct and Code Leadership Standards.

Focusing on quality, long-term partnerships with fewer factories, where sustainability and product excellence is at the heart of the partnership.

In 2012, Nike launched the Sustainable Manufacturing and Sourcing Index (SMSI), a system for combining factory ratings for lean manufacturing and human resource management, as well as for health, safety and the environment (HSE). This system gives environmental and human resource management performance equal weight alongside business metrics in sourcing for Nike, increases transparency to reduce noncompliant practices, and creates targets and incentives to go well beyond compliance. To date, factories are making progress in meeting compliance with Nike's standards – 86% of contract factories were rated bronze or better at the end of FY15. Nike continues to drive to source 100% of products from contract factories that meet their definition of sustainable.

Ensure contract factory workers share in productivity gains & Establish partnerships that support the needs of workers both inside and outside the factories

Nike audits factories directly and through third parties to help factories measure and achieve higher levels of performance. These steps encourage factories to take more direct responsibility and accountability for their performance, and align to industry efforts to normalize auditing tools and processes for factories that produce for multiple brands.

NIKE’s commitment to ethical practices in their own operations and supply chain begins at the senior executive level. NIKE, Corporate Responsibility & Sustainability Committee of the Board of Directors review significant strategies, policies and activities and make recommendations to NIKE’s Board of Directors regarding sustainability (including labor and environmental practices), community impact. The Board confirms all company-wide sustainability policies and targets, reviews performance toward targets, receives updates on key issues and emerging trends, and provides oversight for efforts to improve data, transparency and disclosure.

A systematic supply chain monitoring mechanism can help address the worst practices. Also, this mechanism is foundational prior to adopting greater transparency. You must first know about the problem before you can fix it.

NIKE was the first company, in 2005, to voluntarily disclose the locations of all its contract factory suppliers.

The NIKE Manufacturing Map clearly identifies our global footprint and assigns accountability for our chosen source base.It discloses NIKE’s current suppliers including information about the factory and its workers in an effort to accelerate collaboration on labor rights in the supply chain.

Nike collaborates with governments, NGOs, policymakers, industry peers and labor unions in order to resolve labor issues and to continue to build even greater transparency into factory performance data and engagement with workers. If a contract factory did not score high enough on the company’s sustainability and labor ratings scales, Nike would impose sanctions on the factory or even drop it from the supply chain.

Nike is at the forefront of using high tech technologies and highly skilled workers, in an industry that traditionally has used the opposite. Nike continually transitions to leaner, more sustainable, technology-driven manufacturing. These high tech factories require new skills from their workers, with higher-value roles.

Nike launches innovation hubs for new manufacturing technologies and ways of working

Nike uses robotics technologies to apply accurate, time-saving and waste-eliminating auto-cementing to the sole units of footwear.

Nike uses technology to stream data from the production floor to a central location, enabling production managers to make real-time adjustments for optimal efficiency. This is shifting worker responsibilities from low-skilled machinery work, to monitoring, calibrating and maintaining equipment, as well as requiring new soft skills, such as ownership of safety processes, collaboration to solve problems and communicating real-time data

Nike learned the hard way how important it is to embed sustainability into the business model and think about environmental and social impacts through the supply chain and entire value chain. Nike’s executive board realized significant changes were needed in order to maintain their position of dominance in the market.Instead of using a defensive strategy, Nike began to empathize with those accusing the company of malpractice and started to tackle the areas of the business that required serious revision. Nike took a proactive strategy and made significant changes in its sustainability practices, by focusing on the major ethical issues surrounding involvement with foreign sweatshops, employing sustainable manufacturing practices and changing production methods to meet and exceed industry standards.

Nike began its sustainability journey in a very public way, when in the 1970’s it became one of the first companies to be campaigned against around the issue of supply chain and labor rights. However, in the 1990s, Nike ran into intensified criticism over labor practices at contract factories that included:unsafe working conditionslow wage ratesexcessive overtimerestrictions on employee organizingnegative environmental impacts

Nike’s vision: Sustainable innovation is a powerful engine of growthDrivers of success:2020 targets owned by business functions and implemented across NIKE Innovation to create closed-loop solutions across materials, products, business models and systemsEnabled by: Diverse teams unlocking change and innovation at scale ƒ Smart and consistent public policies that incentivize innovation, promote sustainability, protect supply chains and provide market certainty  Flows of capital to innovators unlocking low-carbon growth economiesAs part of our growth strategy, Nike seeks partners who are developing agile and resilient management systems which enable them to drive sustainable business growth through minimizing their environmental impacts, fostering a strong culture of safety and developing an engaged and valued workforce.