Sporting goods giant Nike Inc says it is "changing the rules of the game" with a new factory rating system that puts labour and sustainability standards to the fore when it comes to choosing - and losing - the factories making its products around the world.

The new Sourcing & Manufacturing Sustainability Index (SMSI) "changes the way we engage with contract factories, moving beyond compliance," the company says.

"Put simply, volume of orders will flow to the factories that can deliver on all elements of performance and that show commitment to doing so."

Whereas the traditional focus is on monitoring suppliers in areas like quality, cost and on-time delivery, Nike will assess contract factories in areas such as water use, energy consumption, carbon output and waste, health and safety, and labour management issues.

It also promises "progressive movement" toward the Fair Labor Association's definition of a "fair wage".

"Since we began setting targets years ago, we've learned the greatest opportunity to drive change is in the areas where we have the most impact," explains Hannah Jones, vice president of sustainable business and innovation.

"We know our materials create our greatest environmental impact. We control the design so this is where we began to focus when we rolled out our Considered Design ethos in 2009. We are now applying this same discipline and rigor in designing sustainability into the way we source and manufacture our products."

The Beaverton, Oregon-based firm wants all the factories it uses to meet the enhanced standards by 2020, and says SMSI ratings will be an important measure "when selecting factories with which to invest or divest".

Under the new rating system being introduced this year, its current top "A" and "B" graded suppliers will become a bronze status, with silver and gold above that. Nike wants all its contracted factories to reach the bronze level by 2020.

Noting that "changing the way an industry views its labour force doesn't happen by monitoring factories alone," but merely reveals the issues, Nike says its SMSI instead "provides filters for sourcing decisions and incentivises progress."

"We have aligned our sourcing practices and purchasing power to incentivise those contracted factories that prove they're going beyond compliance and demonstrate practices that build teams of motivated, productive and healthy workers who produce innovative, high-quality and sustainable products."

The company also says it believes products are best made in factories that have converted to a lean manufacturing approach that empowers workers and teams to solve problems to deliver quality products, as well as eliminating lost time and material.

It also plans to develop and test new models of manufacturing by the end of fiscal 2015. In particular, it wants to see "new approaches to compensation that are integrated into the lean manufacturing mode and reinforce the value of recruiting and retaining a stable, skilled and empowered workforce."

Ongoing challenges
Nike's latest efforts to improve the lives of the people making its products come as it admits some other goals are proving harder to meet.

The firm's 'FY10-11 Sustainable Business Performance Summary' shows it made "significant progress" in areas like waste reduction in footwear manufacturing, using its Considered Design Index guidelines to help reduce the environmental impact of a product's design, and human resource management training programmes in contract factories.

Positive progress against earlier goals has also seen just 5% of factory audits showing serious, repeated violations. And the number of contract factories with unknown conditions has fallen from 48% to 8% in two years.

Carbon dioxide emissions at footwear factories have also fallen 6% between fiscal years 2008 and 2011 - despite a 20% hike in production.

But the company says in some areas "progress was slower than targeted," including the reduction of excessive overtime within factories. Crucially, 68% of excessive overtime incidents in 128 factories were found to be due to factors that Nike itself could influence.

New sustainability goals
Looking ahead, Nike has also set out new goals to continue the momentum of its sustainability drive:

  • By end of fiscal 2015, all new Nike brand footwear will be designed to achieve a silver rating on the company's Sustainability index, which aims to reduce a product's environmental impact. All new Nike brand global apparel will be expected to achieve a bronze rating by the same timeframe.
  • By 2015 the company aims to cut CO2 emissions per unit by 20% compared with 2011 levels.
  • It wants to achieve zero discharge of hazardous chemicals for all products in its supply chain by 2020.
  • By 2015 it is aiming to improve water efficiency by 15% per unit in dyeing and finishing apparel materials, and footwear manufacturing.
  • Nike wants to cut waste from manufacturing by 10% by 2015, as well as reducing shoebox weight.
  • And it plans to invest a minimum of 1.5% of pre-tax income in communities annually.