Why did Nike decide to outsource?
Because Nike is able to more efficiently produce its product and reduce costs due to outsourcing, it can more competitively price its products. This enables Nike to price its brand at a competitive rate with other companies that sell a similar product.
Nike + outsourcing = competitive advantage
Nike has no manufacturing plants of its own but chooses to outsource the work to contractors in the Philippines, Vietnam, China, Indonesia, and Taiwan. There are 500,000 people worldwide involved in the production of Nike footwear.
Reduction in Costs
Not having to hire and train an employee, plus pay them benefits is the primary reason companies choose to outsource work. Getting the same work from a contractor that you would from a full-time employee saves money and makes the business more profitable.
Outsourcing will grow because there are always businesses looking to reduce costs. By moving a job from inside to outside a company, the price paid for the work drops. Any large established company will eventually see slower growth, and will look for ways to make up the difference by saving money.
Attracted to the low labor costs in Vietnam, Nike first set up shop in the country in 1995. Even now, labor costs in Vietnam are estimated to be 50 percent lower than in China, a fact that no doubt contributed to Vietnam surpassing China as the leading producer of Nike footwear in 2010.
Yet NIKE owns no factories for manufacturing its footwear and apparel, which make up ~88% of its revenues. Instead, manufacturing is outsourced to third parties because of the cost advantages of doing so. Most raw materials in NIKE's supply chain are sourced in the manufacturing host country by independent contractors.
| 1. Google | Multinational technology company |
|---|---|
| 4. Wells Fargo | Financial services firm |
| 5. Nike | Footwear manufacturing company |
| 6. Hewlett-Packard (HP) | Information technology corporation |
| 7. IBM | Technology and consulting enterprise |
Does Nike outsource marketing? Nike is currently outsourcing to multiple countries including: China, Indonesia, Vietnam, Taiwan, South Korea, and the Philippines. Half a million people throughout the world have been hired to help produce their products. Nike even outsources their advertising component!
Even though Nike is registered as an “American Corporation” not a single shoe is assembled in the United States[3]. Nike uses outsourced labor because it is closer to the raw materials Nike uses and it lowers the cost of production which allows for a wider profit margin.
- Reduce and control costs of operation (this usually the main reason).
- Improve the company's focus.
- Liberate inner sources for new purposes.
- Increase efficiency for some time-consuming functions that the company may lack resources for.
- Use external resources as much as possible.
How does outsourcing help a business grow?
By converting fixed (and often sizeable) outgoings into variable or smaller costs, outsourcing frees up cash to be used elsewhere. It's equally beneficial if you're looking for funding. Those investing are far more likely to be attracted to a company that has the cash to plow back into revenue-generating activities.
- Focus on core tasks.
- Lower costs.
- Promote growth.
- Maintain operational control.
- Offer staffing flexibility.
- Provide continuity and risk management.
- Develop internal staff.
Once Nike had established their market in America they decided to expand to a foreign market in 1972 and their first choice was Canada, their sister country.
Even though Nike is registered as an “American Corporation” not a single shoe is assembled in the United States[3]. Nike uses outsourced labor because it is closer to the raw materials Nike uses and it lowers the cost of production which allows for a wider profit margin.
Nike does still use offshore outsourcers for testing work because the cost savings, in that case, make sense. The Nike work has given Catalyst, a 200 employee company, some visibility. The company has been around since 2001, but didn't have anyone in a marketing position until this year.
Nike sweatshops
Nike had been accused of using sweatshops to produce its sneakers and activewear since the 1970s, but it was only in 1991 when activist Jeff Ballinger published a report detailing the low wages and poor working conditions in Nike's Indonesian factories that the sportswear brand came under fire.
The company's founder, Phil Knight, came up with the idea of outsourcing manufacturing jobs to cut costs while attending Stanford Business School in the early 1960s, according to the Wall Street Journal. The company now has 68 factories in the U.S., representing just 9% of its manufacturing facilities.
Every brand needs what marketer's call “noticing power.” Nike is successful because they have their iconic catchphrase and celebrity endorsem*nts. This power has the ability to grab people's attention, make the product stand out, and rise above the competition.
The company accomplished this through its product innovation, high status merchandise that demands greater full-price sales, digital capabilities, and strong global network. Here's the breakdown of Nike's growth in world markets over the past five quarters. Data source: Nike quarterly reports. YOY = year over year.
