Executive Summary In analyzing the New Balance case we were asked to address four core topics: the current

operations strategy of the company, the cost of maintaining 25% of manufacturing in the United States, the impact of the Adidas/Reebok merger on New Balance, and the future of the NB2E initiative. We organized our paper around the key areas of the business; beginning with an overview of the current operations strategy, followed by manufacturing and supply chain, and finally finishing up with marketing and sales. Within each of these sections we provide a summary of the current situation as well as our recommendations for New Balance moving forward in the wake of the Adidas/Reebok merger. The four core topics we were asked to analyze are addressed throughout the paper in the appropriate areas. In the overview of current operations we suggest that New Balance maintain its current strategy as a company focused on performance and operations rather than fashion and marketing, even in the face of the Adidas/Reebok merger. The manufacturing and supply chain section includes the calculations of the cost of maintaining 25% of production in the US and, based on these cost figures, suggests several strategies for reducing inventories, lead times, and costs. In the marketing section we recommend that New Balance utilize the Adidas/Reebok merger as a way to remind customers of who New Balance is and what the company stands for: quality and performance, not big business. Finally, in the sales section we recommend that New Balance continue to operate using independent sales representatives, but that it implements the latest ERP technologies to facilitate more efficient communications.

Overview/Analysis of Current Operations Strategy Throughout its lifetime, New Balance has made many key operating decisions that have set it apart from much of its competition. New Balance has always maintained that it is a company focused on manufacturing and operations rather than on marketing. This foundational principle guides the strategy around which the company is organized and run. This is a strategy that greatly differs from much of its competition, which focuses on very outwardly on publicity and celebrity to create reputation. One of the key differences between New Balance and its competitors is that New Balance has remained a private corporation. In doing so, New Balance has the ability to be a much more flexible and free-flowing company than its publicly traded counterparts. This freedom has allowed the company to use slightly unorthodox marketing, manufacturing, and sales techniques to attract a loyal customer base. From its founding in 1906, New Balance has made its focus on the fit and quality of the shoe, rather than on aesthetic features. This function-over-fashion approach differs from other major manufacturers, such as Nike, Adidas, and Reebok, giving New Balance a unique position in the athletic shoe market. For example, while the competition is switching out shoe lines very frequently because of a focus on fashion, New Balance has a single franchise shoe that has been

around for 25 years, which it then supplements with some additional product lines that are more fashionable and, thus have a shorter life cycle. Recently, New Balance has started to focus more on design and innovation in its product offerings in order to stay competitive in the marketplace. This is a strategy that we believe New Balance needs to continue to pursue, especially since the Adidas/Reebok merger. However, we also think it important that New Balance remain true to its identity and continue the legacy of carrying a franchise product. New Balance has always utilized a much unique marketing and advertising approach as compared to its competitors. As opposed to using celebrity endorsements, New Balance, using its Endorsed by No One campaign, emphasizes its refusal to endorse professional athletes, citing the importance of letting the consumers discover the quality of the product for themselves. This campaign strategy has been very successful with the 20-49 year old market and should be expanded upon in order to further differentiate from the competition, especially with an Adidas/Reebok merger. On the corporate level, a major decision that New Balance has made is the New Balance Executive Excellence (NB2E) initiative. This goal is to increase emphasis on improving the products quality as well as the efficiency of their manufacturing processes. Setting a goal of 100% delivery within 24 hours, NB2E has forced the company to focus on implementing lean techniques in the manufacturing of its products. Using lean manufacturing, New Balance will be able to produce much more efficiently and fulfill orders almost instantaneously. Lean manufacturing will also allow the company to reduce inventory levels and associated inventory, manufacturing, and production costs. By staying true to the identity that it has built for itself, New Balance can continue to remain a viable player in the athletic shoe market. Rather than being overly concerned by the Adidas/Reebok merger, New Balance should continue to focus on producing a high quality shoe, using unique marketing techniques, and expanding the NB2E initiative in the future to cut costs.

Manufacturing and Supply Chain While most competitors in the athletic shoe industry have outsourced almost all of their production to manufacturers in Asia, New Balance continues to manufacture 25% of its volume as final product assembly in one of five factories in the northeastern United States. Some of these domestically assembled shoes are cut-through-assembly product, meaning New Balance imports finished soles and the raw material for the uppers from Asian suppliers, allowing the company to finish manufacturing the uppers in the United States and then attaching the uppers to the soles. The other domestically assembled shoes are sourced-upper products, meaning New Balance imports finished uppers and soles from Asian suppliers and then finishes the assembly by attaching the uppers and soles in the United States. Although the company relies on foreign suppliers for the majority of its production, it still manufactures about a quarter of its products in the United States, which is more expensive than
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using foreign companies. Assuming that the total American market for athletic footwear is 400 million pairs in 2005, it is possible to determine the approximate cost of the companys decision to maintain 25% of its manufacturing domestically. In the United States, New Balance accounts for approximately 11.36% of athletic footwear sales. Therefore, New Balance would sell about 45.424 million shoes in 2005. Based on the fact that 25% of the companys total production occurs in the United States, about 11.356 million pairs are produced domestically. Of these shoes that are produced domestically, one-third are manufactured by cut-through-assembly, while the other two-thirds are manufactured with sourced-uppers. Using these facts, New Balance produces approximately 3,785,333 pairs of cut-through-assembly shoes and approximately 7,570,667 pairs of sourced-upper shoes in the United States. Because these shoes are produced domestically, there is a higher cost associated with their manufacturing in the United States as compared to the cost if the shoes were completely produced in Asian countries. In 2005, the cost of a cut-through-assembly pair of shoes assembled in the U.S. was about $13 higher than if the pair was produced in Asia, while the cost of a sourced-upper pair of shoes assembled in the U.S. is only 50 cents more expensive, due to import duties on finished goods entering the United States. Taking all of this information into consideration, the decision to maintain 25% of the Companys manufacturing in the United States costs the company about $52,994,662.50 annually. While this may seem like a costly decision, the fact that New Balance is able to maintain a quarter of its production domestically while its competitors do not, allows the company to have a distinct image in the minds of its customers. This is one way that the company is able to set itself apart from the likes of Nike and Adidas. Another advantage to producing shoes domestically is the fact that the transportation period from manufacturing to warehouse is significantly shortened. Even with these positive aspects, the company may want to look at ways to decrease this total cost, possibly by outsourcing a portion of the cut-through-assembly shoes to an Asian supplier, since it is $13 more expensive for each pair of shoes produced domestically. This would lower costs and increase profit, while shoes are still produced domestically to help maintain the companys positive image. Another option is to increase the number of sourced-uppers produced in the United States, since it is only 50 cents more expensive to produce domestically while at the same time decreasing the amount of cutthrough-assembly units produced in the United States. This option may allow the company to maintain its current 25% production in the United States, while lowering the total cost of producing domestically. If New Balance takes this recommendation and outsources a larger portion of the cut-throughassembly shoes, less manufacturing will be done in the United States and therefore, some plants in the country can be closed. We suggest that the plants in Norway, Maine; Norridgewock, Maine; and Boston, Massachusetts be closed, as they are located farthest from the materials warehouses. Additionally, the distribution center in Ontario, Canada should be closed. Because

the material warehouses hold 4.5 weeks of inventory and the distribution centers hold nine million dollars worth of inventory or, assuming the same 400 million market as previously presented, about 7 weeks of finished products, there is an unnecessary safety stock of 11.5 weeks being maintained. The safety stock, should not be above the nine weeks it takes for each new order to arrive, but could potentially be less when striving for a just-in-time supply chain. Furthermore, when the number of distribution centers is lowered, the total safety stock goes down as well, which helps to achieve the proposed objective. The use of foreign suppliers by New Balance causes lengthy lead times in the supply chain; however the company has worked to improve this. In the past, once New Balance placed a purchase order for parts, it took about one week to be accepted by the Asian suppliers. Then, it took approximately six weeks for the supplier to manufacture the specified components of the order. Finally, it took about five more weeks for the order to be shipped across the Pacific Ocean and transported across the country to the selected warehouse in the northeastern United States. More recently, the company has taken many actions to reduce the lead times from suppliers. One way the company has achieved this reduction is through the placement of smaller orders on a weekly basis, instead of the former large, monthly orders. Another action that caused a reduction in lead times was allowing the suppliers to pre-buy raw materials on behalf of New Balance, which shortened the time required to fulfill an order. The steps that New Balance has taken over the years have reduced the total order time of placing an order with an Asian supplier to the delivery of the order to the companys warehouses from twelve weeks to nine weeks. As a result of the Adidas/Reebok merger, it will be even more important for New Balance to focus on the New Balance Executive Excellence (NB2E) initiative. The initiative seeks to achieve a more efficient manufacturing process and implement lean techniques in the supply chain. The emphasis on lean manufacturing will drive down costs and increase the quality of New Balance products, which is what sets the company apart from its competitors. Focusing on improving the quality of products will allow New Balance to continue to succeed, even with the merger of some of its biggest competitors. In addition, the decrease in manufacturing costs will increase the companys profits, which will further allow the company to compete in the marketplace. Another way in which New Balance can continue to improve as a company is through the reduction of inventory on hand. While its competitors demand that retailers give six months advance notice on what products they want in their stores, New Balance maintains a large percentage of its product in inventory for replenishment, so that the product can be filled-in once it has been sold or dealers can be given the specific sizes and widths that they require. This high inventory level could simply be masking underlying problems of the company, which will be revealed once inventory levels are reduced. Once these problems are revealed, they can be taken

care of appropriately, which may also achieve the goals of the NB2E initiative. In addition, reduced inventory will reduce space, which lowers costs.

Marketing New Balance has a distinctive marketing strategy that provides the company with a unique way to differentiate itself from its competitors. Rather than using celebrity endorsements like many of its counterparts, New Balance created the Endorsed by No One campaign. This campaign reinforces the message that New Balance is an authentic, quality brand that is focused on creating a reputation for itself rather than relying on celebrity athletes. By investing its money in research, design, and domestic manufacturing instead of celebrity endorsements, New Balance creates a product that can speak for itself. By positioning itself as a brand for performanceoriented runners, New Balance is trying to steer away from the stigma of being known as a fashion-oriented and celebrity-worn brand like its largest competitors. Moving forward in the face of the Adidas/Reebok merger, we would suggest that New Balance create a new advertising campaign that emphasizes that New Balance is still the same great company focused on delivering the highest quality products to its consumers. This campaign would be like the Endorsed by No One campaign in the sense that it would fly directly in the face of what the companys competitors are doing. For example, this campaign could have a message that even though the rest of the athletic shoe industry has gone big business, New Balance hasnt. New Balance has always taken a bold approach to marketing in ways that are counter to its competitors and we see the Adidas/Reebok merger as another opportunity to utilize this strategy in a new advertising campaign.

Sales New Balance has a unique and effective distribution strategy. It divides its distribution among small retailers; running specialty shops, family footwear stores, and larger retailers like Foot Locker. According to John Withee, ...we are heavily focused on supporting the smaller type of service-oriented customer (pg. 6). This focus has aided in the creation of a brand image. Fran Allen, Executive Vice President for Sales and Service said, The importance of independent, specialty retailers to the image of our brand far exceeds their 25% share of sales volume (pg. 7). New Balance utilizes 3,500 retailers on 12,000 sites with its largest distributor, Foot Locker, having 3,000 of those sites. A large benefit from using small retailers is that they have highquality customer service interactions. Instead of having in-house sales representatives like many of its competitors, New Balance uses independent sales agents; a strategy that has proven to be valuable. The sales agents, while independent, are exclusive to New Balance. These exclusive contracts have developed a
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dedicated sales force with an entrepreneurial spirit. A large benefit from using independent sales agents is that no expenses are associated with them, as all of their income is derived from sales commissions. New Balance has 100 sales agents for small specialty retailers, who are managed by 5 regional New Balance managers. Orders are placed through an automated system that either the sales agents or storeowners can use. This automation eliminates the need for a middleman and thus decreases New Balances salary expenses. Also, to reduce inventory levels, all orders are processed and sent to shipping within one day. Small retailers have been able to increase profits due to the automation. For its larger accounts, New Balance has 10 head sales agents. Using enterprise resource planning would allow New Balance to facilitate communication between the various functions in the organization. Linking the automated order placements with inventories is one of the applications that New Balance has already integrated into its business model. If New Balance adds functions to build relationships along its entire supply chain, it will be able to know the exact status of a customer order. In doing so, New Balance can adjust its flow of production to meet its demands. Reducing inventory levels for its competitors has helped its sales, but New Balance also needs to ensure that it has the lowest inventory levels possible. Using an ERP system will allow for New Balance to achieve that goal.

Conclusion Given the recent Adidas/Reebok merger it is important for New Balance to assess its current operations strategies in terms of manufacturing, supply chain, marketing, and sales to determine which strategies should be continued and which need to be altered in order to stay competitive in the changing athletic shoe industry. After looking through the case materials, we made a number of recommendations regarding each of these different areas of the companys operations. We suggested that a number of the current strategies in marketing and sales be maintained. Regardless of changes occurring in the industry, we believe it important for New Balance to stay true to its identity and the legacy it has created for itself over the years. However, in order to remain competitive we recommended a number of changes in the manufacturing and the supply chain areas of the company to increase efficiency and cut costs.