1. Introduction
This master thesis presents a Discrete Flow Model (DFM) to assess the implications of closed-loop supply chain decisions, and to provide assistance while making supply chain decisions. Recently, executives realize the importance of sustainability, and search for ways to unlock its potential as a core competency (McKinsey, 2014). Even though the attention
received is a good indication, there are still challanges to reveal that potential. Literature treats sustainable supply chains as special cases (e.g. Sadok et al., 2015; Turki et al.,2017).
Although there are papers covering sustainable supply chains, they usually treat a specific problem instead of treating the network as a whole. Therefore, we consider a setting where problems at hand are considered as an entire system (e.g. financial&environmental), and solved by the methods from literature. Nike makes extreme efforts to increase the
sustainability awareness, aiming for closed-loop supply chains. However, they do not possess a methodology to estimate the impacts of their supply chain decisions, which creates the motivation to apply a case study at Nike. In the end, we will clarify the DFM developed for Nike, then discuss its robustness and applicability to similar cases for other industries that would benefit from closed-loop supply chains. In the following chapter we introduce Nike Inc. in section 1.1. Secondly, we mention the scope and objective of this research in section 1.2. In section 1.3 we define the problem that company faces within the scope, followed by the research questions related to that problem in section 1.4. Section 1.5 intorduces the methodology that is followed in this study to achieve an answer to the problem. Lastly, section 1.6. provides an overview on the timeline of this thesis study.
1.1. Company Description
Nike Inc. is a global sportswear company with a product portfolio comprising apparel (APP), footwear (FTW) and equipment (EQP). Company was founded in Beaverton, Oregon United States in 1972 by the partnership of Phil Knight and Bill Bowerman in order to enhance the athlete’s performance. In 1991, European Headquarters were established in Hilversum, Netherlands. In 1994 operations & logistics were centralized.
Products are diversified based on categories such as: running, basketball, Nike Sports Wear, football and Jordan. Nike is the largest supplier of the athletic products, and recently
generated the revenue of $32,376 billion in the fiscal year 2016, holding the position of 331st
2
in the Fortune’s Global 500 list (Fortune Global 500, 2017). A large share of revenues (56%) is derived outside North America. Furthermore, Nike was ranked 8th in Gartner’s supply chain list in 2016-2017. Geographical allocation of business is the following: North America (NA), Europe, Middle East & Africa (EMEA), Asia-Pacific & Latin America (APLA) and Greater China (GA). Nike has no owned production facility, thus supplying products from contractors that are divided into different regions, mainly in Asia.
EMEA Headquarters contain the following functions: Design, Marketing, Product &
Merchandising, Brand, Finance, Human Resources, Innovation and Operations. Within the Operations, the department that I currently conduct my internship is “Direct to Consumer Supply Chain”. Company oversees nearly 900 stores in several continents, which entails a highly complex and dynamic supply chain.
Core of this research is regarding the impact of remanufacturing operations with end-of-life products, and their distribution flow at Nike EMEA. We will consider the
manufacturing/remanufacturing facilities, manufacturing warehouses, ELCs, stores and customers. Stores are diversified based on their product portfolio. Nike Stores Owned (NSO), Nike Factory Stores (NFS) and Nike Stores Partner (NSP). Nike owns the NSO and NFS stores, and conducts a partnership-based business with NSP, meaning that Nike does not own these stores. Nevertheless, for this study, we will simplify these to one store type.
Since we live in a resource-constrained world, Nike focuses on materials that deliver superior performance and reduce the environmental impact, as measured by Nike Materials
Sustainability Index.
Figure 1.1. Sustainability Index
3
Since this study focuses on closed-loop supply chains, reuse will be the entity that we place our focus on.
1.2. Scope of the Research
This research project considers products that finish their life cycles in customer use, which are returned from customers to be remanufactured. In the next parts of this paper, we will refer to these products as end-of-life products. We assume that once the product finishes its life cycle, it can be received by Nike Stores to be used in remanufacturing, in order to have a closed-loop supply chain. Return ratio of these products will vary. Those products will be re-sold to another customer after remanufacturing. We assume that there is no difference in terms of quality between a product manufactured from raw material, and a product re-manufactured from an end-of-life product, which is a strong assumption. Cost of these different
manufacturing systems; however, can be different to assess the implications of closed-loop supply chain management. Currently, Nike can only recycle footwear products that do not carry metal part, which ought to be 70% of footwear products. Nike must decide on how to operate on these products, more specifically, “What percentage of the sold products should be deployed in the remanufacturing operations?”. In our model, we assume that not all of the end of life products are remanufactured but only the ones that are returned from the customer.
Below there is a demonstration of the scope starting from raw material to the customer. This project will formulate the problem as a discrete goods flow.
4
Figure 1.2. Scope of the closed-loop supply chain network at Nike EMEA.
1.2.1. Research Objective
Objective of the study is first to analyze the current process thoroughly, then to comprehend whether it could be improved by manipulating the current operations, and finally contribute to the existing literature by creating valuable insight. Manipulating the current operations could be explained as the following: In the current setting, end of life products are incinerated or disposed in waste management facilities. Our aim is to understand whether it is more feasible to involve these products in a closed-loop supply chain. Obviously, one contribution to Nike is that company will have a method to quantify the impact of closed-loop supply chain in terms of carbon emission through NTM methodology, which ought to assist top management in decision making process. Our reference article is recent (Turki et al., 2017), however, authors only capture the financial management with some strong assumptions. Contribution to literature is that; we capture the benefits and downsides between cost figures and carbon emissions in a complex network.
5
1.3. Problem Definition
Nike does not know how to quantify the impact of using end of life products, in terms of both financial and environmental aspects. In other words, there is no method of assessing the closed-loop supply chain and its implications on performance indicators; both financial and environmental.
Figure 1.3. Cause and effect diagram of Nike’s sustainable supply chain quantification problem.
This study aims to understand the implications of incorporating end of life products to create a closed-loop supply chain. Specifically, we will attempt to understand the optimal
percentage of sold products to be returned to the manufacturing operations. There are certain aspects to consider in for a retailer like Nike, such as demand behavior of the business, manufacturing failure behavior, lead time, life cycle of a product, cost-emission parameters and perhaps legislative constraints. Furthermore, it is important to understand the
transportation time in the following perspective: Obviously, transporting returned products to Asia by a plane will take less time than a maritime transportation, however, amount of carbon emission would significantly differ. Consequently, embedding a remanufacturing system to the current operations may cause additional cost and emission, which may impair supply chain performance. The problem as mentioned before, is the absence of a methodology to quantify this change in operations. We will first capture the cost structure of this problem by Discrete Flow Model (DFM). Secondly, our model will attempt to capture the environmental impact of this change by NTM methodology, which should supposedly reduce company’s footprint as well. Therefore, our model will provide insights for assessing between
environmental and financial implications of initiating a closed-loop supply chain. Obviously, there are many measurements to capture the emission by any sort of operations. We will
6
quantify overall environmental impact with carbon emission values, which ought to simplify the model and direct our attention to a higher-level analysis; the number of returned products to be included in re-manufacturing operations.
1.4 Research Questions
Even though the essential idea of a closed-loop supply chain is pleasant, we need a solid basis for understanding its feasibility with a business perspective as well. For instance, the question of how many end of life products to remanufacture can be answered with our proposed methodology. First question reflects on the 2nd root cause shown in figure 1.3. regarding cost structure.
Research question 1: How should the closed-loop supply chains be operated so that they are financially beneficial?
Since Nike does not have a methodology to measure their environmental impact during supply chain operations, it is hard to make decisions. Second question reflects on this need of quantifying carbon emission, which is shown as root cause 3rd in figure 1.3.,
Research question 2: How should the closed-loop supply chains be operated so that they create environmental benefits?
Third question reflects on the root cause 4th as shown in figure 5. This question is the combination of question 1 and question 2, which eventually creates the solution of the root cause 1, for the defined problem.
Research Question 3: What is the trade-off between financial and environmental benefits while operating in a closed loop supply chain?
7
1.5. Methodology
This thesis is conducted based on an empirical quantitative method to observe and test the implications of existing theory on operations research. Quantitative model-based empirical research is focused on validating the scientific models deployed by the theoretical quantitative research (Bertrand and Fransoo, 2002). The model of Mitroff et al., (1974) identifies the phases of problem solving, additionally highlights different research approaches and styles towards management science. The following four stages were implemented in this research project. We first treat the problematic areas separately, with the literature assistance. Then we create a model that conceptually captures the situation presented in the problem definition.
Scientific model is then developed to solve the problem, and to validate the proposed solution.
Figure 1.4. Research Model of Mitroff et al. (1974)
Figure 1.5. Process map of this research project
8
To begin with, we identified the root causes that lead to the problem, which is the absence of a methodology to estimate the impact of a closed-loop supply chain at Nike EMEA. As already defined, research questions direct our focus to the relevant problems shown in figure 1.3. Literature review is an iterative process that takes place during the entire project. Main goal is to comprehend the relevant theories in the literature and exploit the scientific insights to shape and conduct the thesis work. We attempt to validate the relevant theory within the scope (real-life setting). Nike supply chain is highly relevant for the model being studied in this work. Initial literature study seems to have already created value to the project regarding methods to tackle the existing problem. The gap is identified in the existing literature, and we aim to contribute to scientific literature by treating this gap. Research proposal comprises the previously mentioned stages and gives an indication on the deliverables of the project.
Current state should be analyzed with empirical data to understand relevant parameters such as demand behavior. Furthermore, Nike supply chain is modeled as a closed-loop network.
After the modeling, we first assess the financial management of remanufacturing end of life products by the DFM. Moreover, we improve the model by treating the carbon emissions due to remanufacturing operations by NTM. Feasibility analysis will be conducted in terms of financial/environmental perspectives. We report on the contribution to the existing literature by explaining insights derived from this study. By the end of our research, numerical results will be shared to clarify the impact of closed-loop supply chains at Nike, and the impact of placing end of life products into the scope.
9
1.6. Timeline of the Project
The project starts at 15th February 2018. Based on the required methodology and project maturity, this project will be completed in 23 weeks. Project steps are explained in Table 1.
Comprehending Supply Chain Operations at the Company Week 1
Literature Study Weeks 2-5
Data Collection/Analysis of the Problem Weeks 6-9
Gathering insight from ELC and Carriers Week 10 Modelling the Closed-Supply Chain within the Scope Weeks 11-14 Developing methods to improve goods flow Week 15-17 Implementing the Improvements in the model Week 18-20 Verification of added value from the improvements (Model) Week 21-22 Evaluation of the project/ Deliverables Week 23
10