Businesses typically adopt Lean to streamline production and improve efficiency, but recent research from MIT Sloan professor Greg Distelhorst suggests Lean can help alleviate poor working conditions for factory workers as well.
In fact, a study of the factories within Nike Inc.’s supply chain found that Lean adoption correlated to a 15 percent reduction in noncompliance with labour standards such as wages, benefits, and time off. Distelhorst himself was surprised by the findings:
“The assumption people have is that good business and treating workers well are in fundamental conflict... The pretty significant positive impact [of Lean manufacturing] we saw in our research was a pleasant surprise. It suggests a way to align business interests in the supply chain with worker well-being.”
So, why did Nike turn to Lean in the first place? And how did it manage the transformation of its contract factories?
It all began with a visit to the Gemba
The 1990s global boycott campaign of Nike was so successful that it has now become a prime example of how industry giants can be brought to account by ordinary consumers.
Nike was the poster child for lack of corporate responsibility at the time: it was the world's best-selling brand and denied responsibility for any malpractice that might have been taking place in its contract factories.
However, in 1996, a Nike board member, Jill Ker Conway, argued that at least one director should be able to speak first-hand about the labour issues and offered to visit the contract factories in Southeast Asia. With then-CEO Philip Knight’s blessing, she made the first in what would become an extensive series of visits over subsequent years.
By “going to the Gemba,” Conway was able to identify a number of ways in which the factories could be improved, mainly by changing the relationship between workers and management. This led to a partnership with the International Youth Foundation so they could survey the 67,000 female workers in Nike contract factories. In an interview with HBR, Conway said:
“We made a pact with the women that we would keep their identities completely anonymous so that they would be safe to say what they wanted to say. Our relationship with the International Youth Foundation was very, very helpful, because they were used to doing survey research with young people and sometimes nonliterate people... We got a huge body of data as a result. It gave us a lot of insight into how to improve the situation and how to train the supervisors—training the supervisors was one of the big problems.”
By 1998, Nike was facing weak demand and unrelenting criticism. So, instead of denying every allegation, Knight publically articulated Nike’s new commitment to corporate social responsibility: “The Nike product has become synonymous with slave wages, forced overtime, and arbitrary abuse,” he said. “I truly believe the American consumer doesn’t want to buy products made under abusive conditions.”
Amongst concerns about delivery time, product quality, working conditions, and manager-worker relationships, Nike began to secure commitments from longstanding suppliers to implement a Lean transformation.
Lean describes a systematic approach to maximizing customer value whilst minimizing waste. Lean Thinking therefore changes the focus on management from optimizing assets and vertical departments to optimizing the flow of products and services through entire value streams that flow horizontally across technologies, assets and departments to the customer.
The term “Lean” was first coined to describe The Toyota Way management system, which is built on two pillars: Respect for People and Continuous Improvement.
Whereas mass manufacturing has workers focus on a single task, the Lean manufacturing principles popularized by Toyota teach line workers to accomplish a range of different tasks (eg. rather than repeatedly making a single stitch, the factory worker may learn how to sew an entire shirt.) Lean empowers individual workers by encouraging them to take responsibility for quality control and identify ways to improve overall production, thereby increasing their skill set and value to the business.
Lean also incentivises the contract factories to improve the working conditions, reduce waste and inefficiencies, and safeguard employee satisfaction.
Compliance Programmes Aren’t Enough
The usual means by which multinational organisations attempt to improve social responsibility and sustainability in their supply chain is by introducing compliance programmes. While these initiatives are important, research has repeatedly proven that they yield very limited improvements in this area.
Instead, as Distelhorst explains, businesses should focus on capability improvement:
“Capability improvement, such as the introduction of Lean manufacturing, attempts to create value for both the buyer and supplier, so that both sides have an incentive to cultivate and sustain these new management practices. If global buyers, supplier management, and the production workforce simultaneously derive benefit from this approach to manufacturing, Lean capability building may represent a form of self-enforcing institutional change that supports improved working conditions in emerging markets.”
Transforming Contract Factories to Lean
The transformation to Lean manufacturing was a huge commitment for the contract factories. They had to appoint managers to be responsible for the Lean transformation and send them to Nike’s training facility in Sri Lanka. Several factories also had to change the physical layout of the shop floor.
But, just two years after certifying their first Lean manufacturing line, the factories improved their score by more than a half grade on their audits compared to those who had yet to adopt a Lean line. This amounted to a 15 percent reduction in labour noncompliance.
In 2005, Nike was the first company in its industry to demonstrate transparency, when it published a complete list of its contract factories. In the same year, it also published its first version of a CSR report — detailing pay scales and working conditions in its factories and admitting continued problems.
Reducing Overtime with Lean
An interesting example of how Lean thinking benefitted Nike relates to reducing overtime in contract factories. Nike was able to increase factory worker wages, but they couldn’t address the issue of overtime. They were “beating up on the factories about that, but not very much happened,” admits Conway.
Using Lean, they found that most of the problems that lead to overtime are created at the front end of the supply chain. Whilst the company cannot prevent sudden surges in demand, particularly at the beginning of a new season, they can eliminate late orders, sudden changes in materials, and other factors that were increasing waste and hours of preventable overtime. As well as reduced overtime, the Lean factories saw productivity increase by 10 to 20 percent, up to 40 percent faster delivery lead times, and 50 perfect lower defect rates.
A Leaner Supply Chain
Nike realized their ability to influence their supply chain is partly dependent on how they build the right incentives and sanctions into their business relationships. So, over the last two decades, the organisation focused on developing quality, long-term partnerships with fewer factories and setting a new industry standard when it comes to worker wellbeing.
All of the factories in Nike’s supply chain are now subject to a rigorous set of compliance requirements. To establish their “current state”, the appraisals start with a risk analysis of the host country and Nike’s Code of Conduct. The contract factory is then supported by an internal team of over 150 trained experts who monitor, remedy, and provide tools and methodologies for continuous improvement.
Nike’s goal is to bring all factories to a bronze rating – their lowest acceptable level – or above. A bronze rating reflects factory compliance with Nike’s Code of Conduct and Code Leadership Standards, which are designed to protect the rights of workers and create a safe working environment. Any factories that reach silver and gold demonstrate an additional commitment to progressively embedding Lean manufacturing and performance management systems.
In 2012, Nike introduced the Manufacturing Index (MI) to score factories on sustainability – including labour practices. To assess the level of sustainability, Nike created a Sourcing & Manufacturing Sustainability Index (SMSI). The SMSI has become an important tool in factory selection, encouraging performance improvement, eradicating underperformance in factories, and driving business to the best performers.
Using Lean to Advance Sustainability
Nike’s manufacturing revolution includes both modernization, improving what they are currently doing, and innovation, which looks to new methods of enabling large-scale changes in processes, people and products.
It has embedded sustainability across its business, setting aggressive sustainability targets whilst investing in disruptive innovation, "all in service of driving company growth, delivering performance innovation for athletes and acting as a catalyst for change in the world."
As part of those efforts, Nike set the following goals for sustainability improvement by 2020:
- To source 100% of products from contract factories meeting the company's definition of sustainable.
- To have zero waste from contracted footwear manufacturing sent to landfill or incineration without energy recovery.
- To create products that deliver maximum performance with minimum impact, seeking a 10% reduction in the average environmental footprint and an increased use of more sustainable materials overall.
- To reach 100% renewable energy in owned or operated facilities by the end of 2025.
Turning PR Woes into Brand Value
Nike pursued systemic change through a Lean transformation to improve corporate social responsibility and the results speak for themselves. In less than a decade, Nike went from being the primary target of an anti-sweatshop campaign to becoming an industry leader in sustainability and corporate social responsibility, and is now one of the most Lean manufacturers in the world. Let’s hope that other organisations who outsource their manufacturing will follow suit.