New Balance: Keeping America Running
In an industry that has gone overseas for manufacturing, New Balance is made in America and on track for success.
New Balance is a privately-held, Boston-based athletic shoe brand that was founded in 1906. The company began as an arch support manufacturer, named after founder William J. Riley observed that chickens use three claws to maintain balance and was inspired to incorporate similar principles in his designs, and produced its first pair of shoes in 1938. New Balance has grown tremendously since Jim Davis bought the company in 1972 and has expanded into athletic apparel and equipment. Sales grew 21% to $3.3B in 2014, and this year the company opened its new world headquarters in a modern Boston building that it hopes will attract new, young employees.
Until recent years, New Balance differed from its competitors in that it did not historically spent enormous amounts of money on obtaining celebrity endorsements. Instead, it targeted elite and everyday athletes who value high-quality footwear. While recent changes in management spurred larger marketing efforts, including collaborations with the likes of J. Crew, Heidi Klum, and many professional athletes, the company’s emphasis on quality has remained. To accommodate different types of feet and allow for optimal shoe fit and performance, New Balance offers multiple widths in each shoe size. Additionally, the company just announced expansion of its “Made in the USA” line, which features shoes that derive at least 70% of their value domestically and allows customers to design custom shoes and receive them the next day.
The business’s emphasis on performance and service over marketing makes it critical that its manufacturing processes are optimized to allow for high levels of quality and quick customization. In order to compete for market share in the $55B industry with the likes of Nike and Adidas, who exclusively make their shoes abroad where labor is cheap, New Balance has adopted a business model that capitalizes on the company’s domestic manufacturing despite having higher costs.
Jim and wife Anne Davis are committed to domestic manufacturing, as evidenced by the fact that New Balance is the only remaining major athletic shoe business that still produces shoes in the U.S. New Balance has five manufacturing facilities across MA and ME 1and one wholly-owned distribution center in the U.S, and about 25% of the company’s shoes are manufactured or assembled in the U.S. using imported soles and uppers.
In the early 2000s, New Balance recognized the need to optimize its labor-intensive operations to be competitive with industry giants Nike and Adidas and implemented the New Balance Executional Excellence (NB2E) program, which was modeled after Toyota Production System concepts and pushed New Balance to improve its operating efficiencies. Management received 100 hours of training in the new operations concepts, and the company switched from batch production, in which a pair of shoes took nine days to produce, to cell-based production, in which operations that were previously separated by departments were arranged in U-shaped formations. New production time for a pair of shoes has since improved to just hours.
The shorter production time has allowed New Balance to ship orders within 24 hours from receipt of order so that retailers are able to reduce their inventories and ensure that shoes are still in fashion when they are received in the U.S. In contrast, retailers dealing with big footwear businesses who ship from abroad must often wait months for their shipments to arrive. Additionally, domestic assembly has undoubtedly provided New Balance with insight into production and helped improve its operational efficiency in all factories.
By focusing on operational efficiency and promoting continuous improvement, New Balance has created a culture that its employees thrive in and that communities are proud to support. Its New England manufacturing facilities have created jobs for 1,300 employees, and the average tenure for manufacturing workers, referred to as “associates,” is 13 years. NB2E encourages associates to take pride in their work, continuously ask “why,” and act as problem solvers. New Balance’s domestic manufacturing also gives it the chance to play up its position as a supporter of social responsibility and local community. Finally, the company’s position as the only remaining shoe company dedicated to domestic manufacturing has given it the ability to sell its shoes for a higher price on the basis of higher quality.
New Balance is an example of a US-based company that has successfully connected its business and operating models. New Balance’s commitment to domestic manufacturing is a differentiating factor that the brand has utilized to its advantage, pricing its shoes at a premium and providing faster delivery on custom orders. From a public perception standpoint, New Balance stands for “the little guy” and a supporter of local communities and social good.
Moving forward, New Balance must address proposed changes in legislation in which a tariff on imported athletic footwear could be eliminated. While this change would benefit all footwear companies that manufacture abroad, as well as consumers who pay a premium on shoes, the move would put New Balance’s New England manufacturers at a significant disadvantage, as it would make it nearly impossible for U.S. manufacturing to compete against low-wage foreign labor. New Balance lobbied against the change, arguing that the tariffs serve to keep its U.S. manufacturing viable.
New Balance’s patriotism continues to work as a competitive advantage and present opportunities for the future. Since the 2014 announcement that athletic shoes would need to comply with the Berry Amendment, which requires military outfits be manufactured domestically, New Balance has invested in new equipment to produce Berry-compliant shoes. The company also opened an “Experience Store” New York that showcases its commitment to American manufacturing, incorporating a livefeed from a Massachusetts manufacturing floor and a live demonstration of shoe assembly. New Balance rolled out its first global advertising campaign this year in hopes of challenging the biggest players in athletic footwear.
Sources:
http://assets.newbalance.com/nb-us/about_nb/leadership/documents/factory_tour_book.pdf
http://www.forbes.com/profile/jim-davis/
http://www.lean.org/common/display/?o=812
http://www.newbalance.com/press-releases/id/press_2012_nb_releases_first_rl_report.html
http://www.inboundlogistics.com/cms/article/managing-domestic-supply-chains/
http://www.cnbc.com/2015/06/09/new-balance-the-us-company-shaking-up-the-sneakernomics.html
http://www.dailyherald.com/article/20150703/business/150709802/
The recent growth at New Balance seems to be somewhat driven by the company’s expansion of its product set away from just the “classics” and more into running and training shoes. It seems like the fashion risk with these products would potentially be higher than the walking and casual shoes the company is better known for, making one potential benefit of being US-made higher for these new products. That said, setting up a new plant in the US to focus on a relatively unproven product category seems risky. Any idea how the company thinks about what products to make in the US versus abroad?
Seems like products that have relatively known demand should be made abroad and can be shipped according to a set schedule, while custom shoes or orders that require fast turnaround are best suited for domestic production. I agree that higher-risk fashion products that could benefit from closer attention could benefit from being produced in the U.S. Setting up a new plant seems like a big investment, though. I imagine they invest in product-specific training or purchase new equipment, as they did for Berry-compliant shoes, to make these products.
Very good article and very ‘TOM appropriate’. I truly enjoyed reading it particularly since now I understand what all that manufacturing terminology means. I also found interesting how the company’s US based manufacturing facilities provide them with insight that can be applied to their global operations. One thing that i would be interested to lear more about is how this 70% domestic value rule is formulated. I would expect that the business model of New Balance is to capitalise on the popularity of the ‘Made in USA’ label and the operational model is structured in such a way as to minimise any domestic manufacturing processes (in particular manual labour) just to scrape by the compliance with the 70% rule. I wonder it I am wrong.
My sense is that New Balance’s operations are a little less sketchy than what you suggest. The company’s website says that 4 million shoes are made or assembled in its five U.S. manufacturing facilities every year. However, I definitely see your point, and the company has been subjected to criticism for making a big deal about domestic manufacturing despite the fact that “Made in the USA” shoes account for only 25% of production (the remaining portion is made in China/Vietnam).
Great writeup, Carol!
I had no idea that NB adopted a TPS-type system at its US factories, and I also was not aware that it has shifted to cell production in those factories. It’s pretty impressive how much the throughput time dropped for a single pair of shoes.
Love the very obvious links to TOM here — how cool that they managed to implement their own version of TPS (and I see some good FIN / FRC themes in here too with their ability to minimize days inventory)! It’ll be interesting to see what happens to the company if the import tariff on athletic shoes is lifted. Obviously it would hurt NB’s ability to maintain 25% of production in the US from a cost perspective, but I wonder if in the long run it would actually present a bigger marketing (than operations) challenge: NB would be trying to figure out how / if to maintain their “Made in the USA” slogan, but could be forced to move more or all of their production overseas. Do you have a sense of how likely this tariff is to be lifted, and therefore pose a threat to NB’s current business / operating models?
It’s looking fairly certain that the tariffs will be eliminated. The Trans-Pacific Partnership (TPP) is the trade agreement that’s expected to reduce the shoe tariff, and negotiations finished in October. Congress still needs to pass the bill (likely in 2016), but the basic gist of the deal is that tariffs on imported footwear will be phased out and eliminated by the 12th year. New Balance says it’s hopeful that the agreement will include provisions for protecting American jobs, but that hasn’t stopped protestors in Maine from appealing to congressional reps to “Flush the TPP.” Definitely curious to see how New Balance adjusts its business / operating models in reaction to the upcoming changes and how this will affect its performance.