Chapter 3&4 :Examining the Internal Environment and External Environment

Profile of Factories

At the end of 2009, Nike contracted with approximately 600 factories in 46 countries to manufacture Nike products.

Nike is executing a long-term sourcing consolidation strategy and streamlining its supply chain operations, which has, thus far, resulted in a 10-percent decrease in suppliers from 2006 to 2009. In 2007 Nike began assessing the contract manufacturing base and undertaking a multi-year strategy to:

1. Streamline our supply chain to do business with a focused number of contract manufacturing groups
2. Build a strong and sustainable sourcing base for greater operational efficiencies and future growth
3. Align with contract manufacturing groups best positioned to deliver performance product and innovation that Nike consumers have come to expect
4. Continue to partner with contract manufacturers committed to Nike's corporate responsibility principles

Nike Brand Factories by Region and Product (at FY close, May 31 each year)

Nike contracted with 618 factories to manufacture product in FY09, down from previous years and reflective of our consolidation strategy that focuses on contract manufacturing group optimization to build a long-term sustainable sourcing base capable of delivering product, innovation and reinforcing relationships with factories committed to our corporate responsibility principles.

When you look at the reach of Nike's contracted manufacturing base and the potential risk, it becomes clear why global supply chains face such serious issues around working conditions. Working in different countries, each with different regulations and operating environments means there is no one-size-fits-all approach.

Contract Manufacturing Base

Nike overall manufacturing base is generally comprised of long-term partnerships, with some fluctuation based on product sourcing requirements, changing business and fashion trends or general factory performance.

Contract Factory Disclosure

In 2005, Nike was the first company in the industry to disclose its factory list. Nike is committed to supply chain transparency by updating public disclosure of the contract factories worldwide that are producing Nike-branded product. It also discloses those factories that make licensed collegiate apparel. Nike's goal in disclosing the factory base is to encourage transparency and collaboration with other companies to improve conditions across the industry.

All NIKE, Inc. affiliates are also working to increase transparency around their supply chains. This work will continue as we anticipate future reporting on all contracted factories serving NIKE, Inc. affiliates.

Focus Factories

In 07-09, Nike prioritized monitoring by focusing on the 20 percent of key contracted factories that account for approximately 80 percent of Nike's production by volume.

To identify focus factories, we rate high-volume factories using a risk index that assesses five primary factors designed to focus on the most vulnerable workers:

• Country in which the factory is located
• Factory worker population
• Type of factory operation
• Manufacturing process
• Management and environmental, safety and health (ESH) compliance performance

This index has evolved from 05/06, as we continue to refine our approach to assessing risk. To further understand the full range and nature of risks across the NIKE, Inc., supply chain, in 2009 we partnered with Maplecroft, a firm specializing in global risk assessment around areas such as climate change, pandemics, resource security, terrorism and human rights. The Maplecroft work will supplement Nike's current risk criteria around focus factories by providing an additional geographic and specialized issue lens to our current analysis. Nike expect their relationship with Maplecroft will deepen our understanding of existing and emerging challenges in work force and environmental, health and safety management.

In 09, approximately 180 factories met the criteria of focus factories. For many of our assessments and business targets, we report on efforts with these focus factories.

Nike continue to evaluate our risk-based monitoring approach. It anticipate revising their risk index to cover additional areas, including new source approval, new country approval and other factors.

New Sources

For new factories to enter Nike's supply chain, they must go through our new source approval process. Factories that have not actively produced with Nike in the past 18 months also must go through this process. In 07, we added 67 new factories to our contract manufacturing base through this process. In 08, we added 57 new factories and in 09 we added 42.

The majority of new factories were in apparel, due mostly to additions by licensed and agent business and sources needed for the local market.