In our FY05/06 report we released a target of zero excessive overtime identified in contract factories. As we started working toward that goal we realized that this goal was measuring the wrong thing. The target of eliminating "identified" overtime could be achieved by incentivizing lower levels of identification and reporting whereas our overarching aim is to increase tracking and transparency. While we seek to reduce excessive overtime across the industry, the only items we can directly influence are those caused by Nike.
All contracted suppliers are required to abide by NIKE, Inc.'s Code of Conduct. That Code includes standards for contracted manufacturers with regard to working hours, including:
In our FY05/06 report, we discussed excessive overtime and our work to identify root causes, including formation of an Excessive Overtime Task Force. That task force determined that in order to understand and address excessive overtime comprehensively, we needed data - information that is often difficult to come by especially in regions where this is not well tracked or managed.
Our focus ahead is on understanding and action; building on the education efforts of previous years.
In FY07-09 we did not have systematic processes for tracking the root causes of Nike-caused excessive overtime. The reasons for this lack of process are twofold: we were unable to create adequate dynamic systems to track incidents in real time (excessive overtime is identified after the fact), and our processes simultaneously were going through significant shifts as Nike adopted and implemented its category restructuring which resulted in significant organizational realignment and restructuring efforts. We did, however, begin to educate our teams, including designers, category managers and line developers, about actions that might contribute to Nike-caused overtime. We think of these supply chain inputs as "upstream" - or internal to Nike.
One of the biggest root causes of excessive overtime in apparel manufacturing is the large number of styles factories produce. Every time a factory has to change a style it reduces productivity and overall efficiency placing pressure on hours of work.
Our analysis shows that, among the variables we have direct control over, asking factories to manufacture too many styles is one of the highest contributors to factory overtime in apparel. We have an opportunity to reduce this pressure by reducing the number of apparel styles and partnering with the factory to improve efficiencies through lean production. Our business plans to reduce the number of styles in each of Nike's categories, and aligning styles globally wherever possible, should also help to reduce this pressure. Additionally, in FY10 we will systematically collect the root causes of overtime identified, analyze and increase awareness and accountability upstream where decision making often triggers downstream impact: overtime. Armed with this understanding, we are beginning to methodically address root causes and measure reductions in excessive overtime in contracted factories. We are also supplementing this effort with an educational program to enhance upstream root analysis and understanding around the drivers of excessive overtime.
Although style proliferation is one of the primary drivers of overtime, we have found that there are many other contributors including capacity miscalculations in sourcing, long approval processes in merchandising, last-minute changes in colors and fabrics in product development, and poor forecasting as well as changes in buying patterns in operations. These factors result in a broad range of impacts on how workers spend their time.
Longer term, we see an opportunity to reduce excessive overtime by helping factories become more efficient through adopting lean manufacturing principles and capacity building.
At the same time, there are a number of marketplace pressures that are driving volatility in orders and shortening lead times. The global marketplace is highly competitive, and retailers are responding to consumer demand for more styles and more customization, reducing lead times and cutting the amount of inventory they are willing to carry. All of this adds pressure on factories.
We anticipate that trends, including the global economic downturn and reduced apparel orders, will likely reduce the total number of overtime hours reported in the short term. While we feel we can make a positive impact on excessive overtime with both of the efforts described above, we also believe it will remain a challenging issue across our industry.
We do not have specific information on Nike-caused excessive overtime; however, we have analyzed all incidents of excessive overtime reported by contracted factories from FY06 through FY09. This analysis reveals that approximately 20 percent of factories had incidents of excessive overtime and 4 percent recorded incidents where overtime exceeded 72 hours per week. Reported incidents grew year on year, particularly in apparel. North and South Asia regions reported higher incidences of excessive overtime, reflecting fewer standards and enforcement than in other regions. Factories in the Americas region had the fewest incidents. The duration of excessive overtime incidents also increased across all product categories and several regions, most especially in North and South Asia.
This information does not establish a baseline against which we can measure Nike-caused incidents of excessive overtime. These figures provide information on all incidents of excessive overtime among our contracted manufacturing base.
Though we have not yet identified fully all the root causes for excessive overtime, some assumptions are guiding our analysis: