Supply Chain

Adidas

Swati Rawat

– 2nd sem
SUPPLY CHAIN: ADIDAS

Adidas AG is a German-based sports apparel manufacturer. The "Three Stripes" were bought from the
Finnish sport company Karhu Sports in the 1950s. Company revenue for 2008 was listed at €10.799
billion and the 2007 figure was listed at €10.299 billion, or about US$15.6 billion. It was started by Adolf
Dassler post world war I and later his brother Rudolf Dassler joined. Post World War II brothers split to
make two separate shoe manufacturing firms i.e. Adidas & Puma. In August 1998, following the merger
of Adidas and Salomon, the then named ADIDAS-SALOMON.

SUPPLY CHAIN: - They work with more than 1,070 independent factories from around the world
who manufacture the products in 67 countries. Many of these are in one of the following six countries:
China, India, Indonesia, Thailand, Turkey or Vietnam. Their supply chain is global and multi-layered, with
many different types of business partner, some of whom are directly contracted and others who are not.
Influence in terms of social and environmental compliance is linked to the strength of the partnerships,
and is often proportional to the scale and stability of the orders placed with the suppliers. For this
reason they plan a further consolidation of the Group’s supply chain: contracting fewer, larger factories,
with higher order volumes.

The adidas Group’s Global Operations function manages product development, commercialisation and
distribution and also supervises the major part of manufacturing for the adidas, Reebok and Taylor
Made-adidas Golf segments. In addition, Global Operations leads our Group’s efforts in supply chain
optimization. Due to different sourcing requirements in their respective fields of business, Rockport,
Reebok-CCM Hockey, Sports Licensed Division, Taylor Made and specific business segments are not
serviced through Global Operations but instead use their own purchasing organizations that are used to
sourcing products through intermediaries such as agents. In order to quickly seize short-term
opportunities in their local market or react to certain trade regulations, Group subsidiaries may also
source from local suppliers that are not overseen by Global Operations. Local purchases, however,
account only for a minor portion of the Group’s total sourcing volume.
TYPES OF SUPPLIER
The suppliers fall into five broad categories:

 Main suppliers

 Subcontractors

 Material and other service providers

 Licensees

 Agents.

MAIN SUPPLIERS

These are suppliers that have a direct contractual relationship with the adidas Group for the supply of
products, whether for export or domestic market consumption. They are called Tier 1 suppliers. The
largest of these have multiple factories and manufacturing sites across several countries.

SUBCONTRACTORS

These are factories that have been subcontracted by their suppliers. They have no direct contractual
relationship with the adidas Group; however, they do require them to be compliant with their
Workplace Standards before authorizing them as subcontractors.

MATERIAL AND OTHER SERVICE PROVIDERS

These suppliers may not have a direct business relationship with the adidas Group, but supply goods and
services to the main suppliers. Within this category, there are nominated material suppliers with whom
they work.

LICENSEES

Independent companies which manage the design, production and distribution of specific products,
under licence to the adidas Group. In 2007, the adidas Group worked with 44 licensees whose suppliers
manufactured products in 248 factories in 38 countries.

AGENTS

Independent companies that act as intermediaries and determine where products are manufactured,
manage the manufacturing processes, and sell finished products to the Group. Reebok has historically
placed a significant number of apparel orders through agents and licensees. In 2007, Global Operations
phased out Reebok’s former sourcing agents. This means that Reebok-branded apparel is now primarily
sourced through our own supply base, utilizing the established network of the adidas brand. Other
Reebok apparel business units continue managing supplier relationships through agents or licensees.

Supply chain design:-

MANAGING OUR SUPPLIERS

Their ability to influence change in social and environmental compliance strongly depends on the type of
relationship the Group holds with its suppliers and the volume of orders placed there.

The adidas Group holds direct contractual relationships with its core suppliers who are centrally
supervised by Global Operations. These suppliers produce the predominant share of the total sourcing
volume of the Group, and can be characterized as our ‘direct supply chain’.
The other part of our product volume is sourced by agents or is made under licensee. Agents place
orders with their preferred suppliers. Licensees may either place orders directly with their suppliers or
use agents as intermediaries. This portion of their sourcing volume is ‘indirect supply chain’.

‘PARTNER FOR CHANGE’ – MANAGING OUR DIRECT SUPPLY CHAIN

Their strategy is based on a long-term vision of self-governance in the supply chain where suppliers take
ownership of their compliance programme. To achieve this, they need to act both as inspectors and
advisors – assessing management commitment to compliance and the effectiveness of the programme,
and providing help and support to suppliers to ensure success in the long term.

They promote effective human resources, health, safety and environmental management systems as an
effective way to internalize continuous improvement, and have now made implementing a health and
safety management system mandatory for all our core suppliers. Strategy development and execution
must be in the hands of qualified, committed and capable middle managers who are supported and
empowered by senior management. The Lean manufacturing initiative and SEA activities strive to be
collaborative and ensure that suppliers establish systems that support fair, healthy and safe work
conditions and deliver improved efficiency and productivity.

HOW THEY WORK WITH SUPPLIERS

Over the past ten years, they have continually refined the methods, tools and techniques to promote
compliance in their supply chain. The principal cornerstones of management approach are described
below.

Beginning with the foundation of the programme - our Workplace Standards - the following are the
steps they go through to manage their supply chain and improve workplace and environmental
conditions.

Standards and guidelines – They have had a supplier code of conduct for ten years – the latest version is
Workplace Standards. Based on extensive experience of applying the Standards, they have produced
guidelines for suppliers, which help to work together to find solutions to problems in the workplace.

Capacity building and outreach – They train the suppliers so they understand the importance of
establishing and maintaining management systems and open lines of communication with those
concerned about how they operate, such as government officials, local communities or the workers
themselves.
They offer training on all key issues including labour, health and safety, and environment – either led by
SEA or a qualified external service provider. This training can be customised for a single supplier, or be
provided to a number of suppliers in large group sessions. Normally they follow up the training with
consultation and progress review activities, to help the factory in achieving its training objectives. They
also provide training with other brands that source from the same factory.

Monitoring and verification – They have a dedicated team of auditors which monitors a supplier’s
performance against our Standards.

Effective compliance needs committed management that is responsive to feedback. They have refined
their auditing approach to be able to close the compliance gap where suppliers are delivering practices
in a superficial, opaque and ineffective way.

They also value independent monitoring by third parties because it helps to improve how they work
and adds credibility to their programme. So in 1999 they joined the Fair Labor Association (FLA) in the
United States, which is a non-profit organization dedicated to improving working conditions in factories
around the world.

By working cooperatively with companies, NGOs and universities, the FLA developed a workplace code
of conduct based on International Labour Organization standards, and appoints accredited inspectors to
conduct unannounced factory visits and check if suppliers are meeting the standards.

Rating – They audit their suppliers against Standards and rate them according to their performance.
They use an innovative way to rate the supplier on its ability to deliver fair, healthy and environmentally
sound workplace conditions in an effective manner.

Sourcing decision – Rating results are incorporated in the overall supplier rating that informs decision of
which suppliers to use.

MONITORING COMPLIANCE

They audit their suppliers to ensure they are complying with their Standards. Independent monitoring of
suppliers has also been carried out since 2000.

STRATEGIC MONITORING

Over the years their approach to monitoring their suppliers matured and has been permanently refined
to include the lessons learnt from supply chain compliance programme.

The monitoring approach we actually apply for our core supply chain is called ‘strategic monitoring’.

HOW STRATEGIC MONITORING IS DIFFERENT

Previously suppliers 'waited' for audits by SEA field staff that identified non-compliances before taking
any remedial action. This reactive compliance model proved ineffective, leading to incremental or
sometimes purely cosmetic changes in performance rather than sustainable compliance.

Strategic monitoring rigorously assesses compliance risks and identifies the root causes of non-
compliance. Auditors do more preparatory work and then check performance against a risk list
customised for each factory that is monitored.

As well as monitoring compliance performance, the new system evaluates the effectiveness of
compliance systems and the work of their administrators. This in turn leads to a more precise evaluation
of training needs and encourages suppliers to implement HSE and HR management systems.

This approach means deeper monitoring of fewer suppliers, where factories may be visited two or three
times more often than previously.

For audit numbers, see the Audits and training page of our Performance data section.

PRE-APPROVAL OF NEW SUPPLIERS

All potential new suppliers undergo an initial assessment carried out by the SEA team, and orders
cannot be placed with a new supplier without SEA approval. By setting a high entry bar for potential and
new suppliers, we avoid getting into business relationships with suppliers that have serious workplace
issues and insufficient means of improving unacceptable conditions.

LINKS WITH THE KPI

Both the initial assessment and monitoring approaches for active suppliers have been successfully linked
to the KPI factory rating and the strategic compliance planning process. The latest version of the KPI,
which measures the delivery and effectiveness in six compliance units, has been in full use since 2006.

Strategic compliance planning is used with selected core suppliers. While neither tool replaces the
monitoring process, they have been designed as management benchmarks to track overall factory
compliance performance and to inform decisions about investment activities.

Major trends in the supply chain:-

They see several major trends in their supply chain that have a direct bearing on the scale and focus of
social and environmental program:

 Growing business with strategic suppliers producing for the international export market. These
suppliers have invested in additional production capacity and established factory facilities in
various countries.

 Associated reduction in the number of agents managed by Global Operations.

  Growth in licensee business as the adidas Group develops new business segments.

In 2007, the top five countries per region by number of supplier sites were:

 The Americas: United States, Canada, Brazil, Mexico and Argentina

 Asia: China, Vietnam, Japan, Korea and India

 EMEA: Turkey, Italy, Spain, South Africa and Russia.

Supply chain complexity: -

With its wide assortment of product lines, is challenged by an increasing individualization of demand.
Increasing purchasing power of the consumer & having individual product choice made planning &
forecasting for Adidas difficult. The result was High overstocks, an increasing fashion risk, an enormous
supply chain complexity, and the necessity to provide often large discounts to get rid of unwanted
products and uncontrollable work environment.

Targets for superior supply chain: - Product should be delivered on time and to go an extra
mile for retailers. Supply chain need to become the strength of the future companies. Supply chain
integration & IT agility to support better planning & forecasting. Upgrade the current software to better
technology & integrating disparate operating environments: Windows, OS/400 and HPUX.
Implementing made-to-order manufacturing, instead of made-to-stock variant production. Integrating
consumers and retailers with Canadian distribution and Asian manufacturing operations. To top it all off,
they were integrating three merged companies and eight major brands. Reducing all the costs prior to
the IT integration.

The solutions: - IT integration is being the ultimate solution to most of the challenges. Adidas-
Salomon Canada upgraded to a new IBM iSeries and acquired Magic Software’s eDeveloper and later
added the iBOLT Integration Suite. By using iBOLT, adidas will be able to create visual maps of supply
chain and other business processes/flows as well as execute those flows in a service-oriented
architecture (SOA).
Three basic portals have been created: one for consumers, one for business customers and another for
employees. Launching mi adidas focusing on mass customization. Carefully selection & training of the
suppliers according to the change and conducting frequent audits of the suppliers.

Benefits: - The new site extends adidas-Salomon Canada’s current supply chain solution to allow
customer access to sales, order status and payment information via the Web. iBOLT was selected
because of its rapid development and integration capabilities and strong training and customer support,
as well as its tight interface to the IBM iSeries platform. Made-to-order manufacturing instead of made-
to-stock largely minimizes the risk of forecasting, eliminates distribution stocks, and decreases the
fashion risk. Integrating customers early into product definition increases the flexibility of a company to
react fast to changing market trends. Customer integration can lead to open innovation.