Supply Chain Management

Term-IV, PGP-2015-17
Case Submission: 2

New Balance Athletic Shoe, Inc.

Under the guidance of: Group 6, Sec. SCM1

Prof. Jishnu Hazra Digvijay Singh Parmar|| 1511092
Mehta Naiya Atul|| 1511031
Jinesh Sanjay Papdiwal|| 1511024
Rahul Sarkar|| 1511221
Preksha Mangal|| 1511110
Rasham Garg|| 1511113

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 Q1. Assuming US market for athletic footwear was 400 million pairs in 2005, how costly was
New Balance's decision to maintain 25% of its manufacturing in the US? What is your
assessment of this decision?

A1. New Balance is one of the top five global athletic and apparel producers across globe. Using
past sales data of 2004, market share of major brands in 2004 can be calculated and values
obtained are:

Brand Sales Market Share Using an assumption that market share of different
Nike 3225 36% brands in the year 2005 remains same as that in the
year 2004 and given that total sales of athletic shoes
Reebok 1087 12%
in US market was 400 million pairs in 2005, we can
New Balance 1022 11% arrive at total sales of NB footwear pairs in 2005.
Adidas 790 9% Assuming cost of a pair to be constant across all
K-Swiss 395 4% brand and hence market share of volume to be same
Converse 305 3% as that of value,
Vans 240 3% Sales of NB shoes = 11.36% * 400 million
= 45.42 million pairs
Puma 209 2%
Total 9000 New Balance adopted hybrid position in value chain -
both of producing/manufacturing and outsourcing. The raw material procurement and outsourcing
was done in Asian Countries.

With assumptions that production was exactly equal to sales and given 25% of the manufacturing
was carried out in U. S. in 2005, following process flow is defined.

Cut through assembly involved import of finished soles and raw materials for upper, which were
produced and attached to soles in U. S. whereas Sourced Upper assembly involved import of
finished soles and uppers, which were both attached in U. S..
For cost calculation, labor and overhead cost = 25% each and material cost = 50% of the total cost
is considered. Cost comparison for different scenarios can be carried out.

Production in Asia ($) Cut through assembly ($) Sourced upper assembly ($)
X X + 13 $ X + 0.5 $

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 Assessment
1. Additional Cost
Higher cost is incurred in both the manufacturing procedures deployed in U. S..
Total additional cost incurred which would not have been incurred if 100% outsourcing was
adopted = $ 13*3.79 + 0.5*7.57 million
= $ 49.2 + 3.8 million
= $ 53 million

Thus it is definitely costlier to manufacture in U. S., majorly in the case of Cut through assembly
(93% of additional cost).

Considering an alternative in which the entire 25% manufacturing in U. S. is done after sourcing
Uppers as well, cost incurred would have been = 0.5 * 11.36 = $ 5.68 million
Reduction of cost by 89% is obtained in this method.

2. Time to market once order is placed could be calculated.

Manufacturing Plants
Warehouse 1A

Suppliers ME 1
2A
A ME 2 0
5
3A
4 0.36
B MA
Order
4A
C Distribution Centers
7
5 5A
Lawrence, MA
D 3

Ontario, CA
A, B, C, D are suppliers in China. A and B source uppers and soles whereas C and D provide finished goods

Observations:
Route Number Path Lead Time
Route 1 O -> C/D -> Lawrence 12 Weeks
Route 2 O -> C/D -> Ontario 10 Weeks
Route 3 O -> A/B -> Warehouse ->9.36 Weeks
Manufacturing Plant-> DC

Minimum time is taken by third route, moreover, actual time to be considered = 2.5 days
(assemble to order). This ensures enough flexibility to meet the highly variable market demand of
large number of SKUs. Thus manufacturing 25% of the total production in U. S. makes sense to
meet the required service rate of 97.5%.

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 Q2. How should Davies react to Adidas planned acquisition of Reebok? What aspect of NB’s
supply chain strategy should they change?

A2. Davies has the following options to respond:

1. Acquisition or merger with other industry players
2. Shifting of domestic manufacturing to Asia
3. Increasing Marketing Spend and Changing promotional tactics
4. Improving the supply chain and reducing operational inefficiencies

Acquisition or merger with other industry players

New Balance has over many years developed a strong organizational culture and a unique
business model. Any acquisition or merger activity could result in loss of efficiency or the
entrepreneurial environment in the company.
In 2005, NB was majorly facing many operational problems. "We had a lot of quality problems,
late deliveries, and late samples, which inhibited the effectiveness of our salespeople." An
acquisition at this time would be a wrong move.
Many excerpts also tell us that at this point NB might benefit from the Adidas-Reebok
transaction as they are more responsive to retailer needs. “Adidas-Reebok transaction would be
felt most by retailers, a fact that that would help New Balance.” “Before this deal, the industry
had one 800-pound gorilla(Nike); now there are two. Those big guys tend to dictate a little bit,
but they don't move as quickly as a smaller company, and they don't really establish the
partnerships that we (New Balance) do. We see this as a major opportunity.” “A major New
Balance customer had noted that it planned on doing more business with the company after the
Adidas-Reebok merger, in part because it knew New Balance and its sales people and managers
so well.”

Shifting of Domestic Manufacturing to Asia

Prima facie given the $53 million additional cost it might seem only correct to shift
manufacturing away from U.S.. But we should remember what Jim Topkins said “One thing that
sets us apart is that we are manufacturers. But we are mediocre marketers by design. The
message that we talk about in the marketplace is different from our competitors' message. And
what makes the company unique is that we are manufacturing-and operations-based, not
marketing-based”
Having the last step assembly in U.S. lets NB respond to demand more flexibly and thus helps it
develop stronger ties with both retailers and customers. Though some of the cost are higher in
U.S. as compared to manufacturing the same in Asia, by shifting to Asia they would lose the
opportunity to learn and develop the processes and share the information with the partners
abroad. “By sharing information learned with their foreign partners they hope to shorten the
time to get foreign manufactured shoes to U.S., increasing their ability tore-stock retailers”

Increasing Marketing Spend and Changing promotional tactics

New Balance has planned expenditure of $ 21 million for the year 2006 which is more than
double the current spend. New Balance does not need to change its promotional tactics or
policies. Analysis of Exhibit 2 shows that NB has the most cost effective media expenditure.
Brand U.S Athletic Footwear U.S. Athletic Footwear Media Sales Yield / $
Sales ($ million) Expense ($ million) million Spent

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 Nike 3225 134.1 24.04922
Reebok 1087 31.0 35.06452
New Balance 1022 10.9 93.76147
Adidas 790 52.0 15.19231
K-Swiss 395 29.0 13.62069
Converse 305 3.9 78.20513
Vans 240 4.6 52.17391
Puma 209 6.2 33.70968

Also New Balance has “far greater consumer loyalty than any of its competitors”. Jim Davis said
“Well, we tried a couple of times with products and programs, and we failed, drastically.” “We
are not any good at that. We’re really good at this.” As the performance of New Balance
products is exceptionally high as compared to its competitors, NB will continue to have loyal
customers and will benefit from word of mouth promotion.

Improving the Supply Chain and Reducing Operational Inefficiencies

"We had a lot of quality problems, late deliveries, and late samples, which inhibited the
effectiveness of our salespeople."
a) Designing:
“Jim Davis felt that in the past five to six years, New Balance had ‘dropped the ball in few places,
and design was one of them.’”
As Jim Davis accepted they needed to reinvent themselves more often and be less conservative.
They need to incorporate the right mix of fashion and technology. Also lead times and schedules
for designing need to be maintained so that samples are not late.
b) Sales and Distribution:
“In contrast to competitors, New Balance relied on a sales force composed of independent
agents.” “We had a loyal group of salesperson, and their longevity of service provides us with a
distinct edge over our competitors” “A new sales force automation system enabled sales
representative to place direct orders remotely…”
As far as the sales and distribution is concerned, New Balance has a good relation with retailers
with the support of its sales team. With the latest series of automation and technology upgrade
it was able to further improve speed and responsiveness. It could now look at integrating point
of sales data with back end ordering of raw materials to further bring down lead times and
lower inventories. Additionally, freeing up sales representatives from ordering and other such
work meant they can target for better sales numbers.
The company should let the sales team be independent as one of their advantage is the 10-15
years of experience of these representatives with NB and trying to bring the sales in house will
change the status quo.
c) Lead Time:
Efforts by John Wilson had successfully reduced the lead time from 12 weeks to approximately 9
weeks.
But even then certain aspects like 1 week to place order seem inefficient. NB should work on
online systems and increase number of suppliers so that orders can be placed and accepted
faster. Also it should work on integrating ‘point of sale’ data with suppliers so that bull whip
effects reduce, inventories reduce. This will further reduce lead times and increase flexibility.
d) Warehousing and Manufacturing:

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 “As of August 2005, the three warehouses in Skowhegan and Lawrence held about $ 9 million –
or 4.5 weeks – worth of raw material inventory…” “The average lead time from arrival of raw
materials to loading on the truck as finished product…. reached 2.5 days…” “Though there was
a significant increase ein level of sales of the 991, the inventory cost was very high.”
Given that lead time for manufacturing and shipping is 2.5 days, the inventory in the warehouse
can further be reduced from current 4.5 weeks using just in time manufacturing and
procurement methods.
“Labor and overhead accounted for 25% of total manufacturing cost, while materials accounted
for remaining 50%.”
25% cost for overhead and labor seems high and cost reduction should be a focus. These
methods of cost reduction developed in house can be shared with manufacturers in Asia.
e) Lean Manufacturing – New Balance Executional Excellence (NB2E):
New Balance should remain focused on scaling its current business model and improving
operational performance via the NB2E initiative. “The NB2E initiative, if fully successful would
allow New Balance to greatly reduce inventory levels, reducing costs.” The results would ideally
be stronger relationships with retailers and greater sales.

Therefore, Mr. Davies should not respond to the acquisition in a grand manner but should focus
on improving designing and reducing lead times and inventory levels using NB2E initiative.
Better collaboration among different teams, setting up online systems and increased
involvement of suppliers right from the design stage will help. New Balance should continue to
focus on NB2E to reduce its manufacturing lead time and cost and share the learnings with
suppliers. Also, integrating ‘point of sale’ data with its suppliers and introducing the concept of
‘just in time’ inventory for retailers will further help in decreasing the lead time and improving
the overall process efficiency.

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