In 2011, Thailand’s annual rainfall was higher than its 61-year precipitation record resulting in the country’s most damaging floods to date. The insured losses from the flood totaled $12 billion, making it the highest ranked fresh-water disaster worldwide1. A 2010 World Bank study found that a global temperature rise of 1.2 to 1.9°C would likely increase precipitation in Thailand by 2-3%. In addition, rising sea levels threatened to result in severe floods like the one in 2011 several times per decade2.
Nike Inc., the leading global retailer of footwear and sports apparel, has factories in 42 countries, many of which are in Southeast Asia3. During the 2011 Thailand flood (and previous floods), Nike was forced to shut down factories, leading to delays in production and massive disruptions to its global supply chain. In addition, there has been an increased frequency of droughts in areas where the company grows cotton for its production4. Droughts limit supply of cotton, resulting in higher prices and lower product margins.
Given the increased prevalence of unfavorable weather conditions due to climate change, Nike has taken precautionary measures to prevent future supply chain disruptions. The top four materials used in Nike production are cotton, polyester, leather and synthetic leather. With disruptions to cotton sourcing, Nike is increasingly exploring how to use polyester, specifically recycled polyester, to produce high performance products. For example, the Legend Pant and Nike Pro Bra were among the first to make use of recycled polyester. In addition, the Flyknit shoe utilizes recycled polyester with new sewing technology to reduce waste by 60% on average. These improvements in production have not sacrificed quality or profitability, as the Flyknit has grown from one model to 28 in three years3.
Another way in which Nike is adapting to climate change, specifically the regulatory environment, is by reducing the carbon footprint of its facilities. From 2011 to 2015, Nike’s absolute carbon emissions increased by 14%. In 2015, Nike set out a plan to use 100% renewable energy by the end of 2025. A major caveat to this is that the plan only applies to its owned or operated facilities because these are the only facilities that Nike is able to directly control. However, owned or operated facilities comprise only a small portion of their carbon footprint. Thus, despite the improvement, it likely will not impact overall emissions. The company is also making significant investments in lighting and energy managements systems in their retail stores with the goal of using 40% less energy. Again, however, Nike only operates 930 stores though its product is sold at 110,000 retail locations so the overall impact of this change will be minimal3.
While Nike is taking critical steps towards managing its operating model in light of climate change, I believe that there is more Nike can do. First, from a supply chain management perspective, Nike should continue to produce in diverse locations to mitigate risk of natural disasters – to the extent that Nike can move production facilities out of regions that are more susceptible to these risks, it would make production management less complex. Another way to mitigate the risk of one-off events would be to hold additional inventory – since demand for Nike’s classic products is fairly predictable, the company could produce additional units to have on hand in case of production issues. While they would incur holding costs, it would be likely be cheaper than the lost revenue from unfulfilled demand.
With respect to reducing its carbon footprint, I believe that Nike should force its third-party managed factories to comply with high standards of energy efficiency. Given the volume of production Nike contributes to these factories, the company should have significant bargaining power to change operations. From the factories’ perspective, losing Nike’s business would be a more significant hit than the cost to improve energy efficiency.
1 Gale, Emma and Saunders, Mark. “The 2011 Thailand flood: climate causes and return periods.” Royal Meteorological Society, September 2013. http://onlinelibrary.wiley.com/store/10.1002/wea.2133/asset/wea2133.pdf?v=1&t=iv47pmdt&s=beaf52c556acd22568da9bbb0687ea3ec6ecb5a0, accessed November 2016.
2 Jeff Masters, “Thailand’s flood gradually subsiding; climate change increasing Thai flood risk,” Wunderblog, Weather Underground, November 14, 2011, https://www.wunderground.com/blog/JeffMasters/thailands-flood-gradually-subsiding-climate-change-increasing-thai-f, accessed November 2016.
3 Nike Inc. 2015 Sustainable Business Report.
4 Davenport, Coral. “Industry Awakens to Threat of Climate Change.” New York Times, January 23, 2014. http://www.nytimes.com/2014/01/24/science/earth/threat-to-bottom-line-spurs-action-on-climate.html?_r=4.