Analysis Of Adidas’ Supply Chain Management

Introduction

German company Adidas was established in 1949 and has evolved into a global athletic footwear and apparel company, employing over 57,000 employees across North America, the United Kingdom and Asia. Their supply chain is credited as one of the world’s most effective models and has been instrumental in their advancement.

Adidas Group (2018) Annual Report outlines their “Creating the New” Acceleration Plan as a strategic priority, categorized by the following objectives:

1. Mitigating complexity by focusing on their core competence
2. North America becoming a strategic priority, given its market opportunities
3. The promotion of “ONE Adidas”; a philosophy to align all supply chain components
4. Digital transformation through the incorporation of technology within their supply chain.

According to Barney (1991), the basis for sustainable competitive advantage requires a company to have capabilities that are rare, valuable and difficult to imitate, with the organizational configuration to exploit these factors. Although Adidas enjoy a level of competitive advantage within the soccer Industry through the marketability of significant sole-sponsorships, the simplicity of their commodities doesn’t afford them sustained competitive advantage throughout the international sports Industry. Christopher (2011) suggests that effective supply chain management can enable companies a source of competitive advantage. Hence, Adidas’ value-proposition could be embedded within their capacity to create elements within their international supply chain that can contribute to customer satisfaction.

Adidas’ cost-competitiveness mandate as well as their necessity to satisfy demand efficiently in an increasingly complex market, has influenced their adoption of a Hybrid Supply Chain Strategy. The Hybrid strategy uses a lean methodology up to the de-coupling point, indicative of Adidas’ strategic outsourcing, followed by an agile approach to final integration. This exercise seeks to examine Adidas’ supply chain structure, which includes approximately 100 outsourced production facilities world-wide. The feasibility of the current system will be analyzed to uncover any current constraints which may be inhibiting Adidas from further increasing its market share.

Key Issues and Challenges

Demand Forecasting Constraints

Adidas’ 2011 to 2015 financial publications revealed they lacked liquid assets to address short-term financial obligations. Their inventory-turnover for that period also stagnated, precipitating their strategy to reduce inventory and consequently, its liabilities, through a just-in-time approach to inventory management. Inventory has inherent risks of obsolescence (in Adidas’ case, going out of seasonal fashion) and also incurs associated storage-requirement costs. Adidas’ 2017-2018 financial publications also validate their reduced inventory. The commoditization of athletic footwear and apparel means switching-costs of consumers to competitor products remain low. Consequently, reducing inventory magnified the need for supply chain efficiency.

Through their Digitization initiative, Adidas’ exploration of 3D printing technology to reduce inventory and offer customizable products is a key strategy to attain manufacturing flexibility. However, these “speed-factories” remain a work-in-progress and are not yet established across all markets. This constraint redirects the emphasis on demand forecasting. The statistics suggest that production had reached an output of diminishing marginal returns in 2018. However, Adidas’ 2018 Financial Report reflected an increase in sales, implying demand was not met toward the end of 2018.

Adidas Group (2018a) annual report confirmed this for their North American market, citing an inability to immediately meet demand in full. Given Adidas’ focus on North America as a strategic priority, this opportunity-cost could afford their chief competitor, Nike, a chance to redeem market share. Forecasting seasonal fluctuations in demand has been further complicated by developing lifestyle and fashion trends such as the use of yoga pants and sneakers as casual wear. These have made an unpredictable impact on forecasting. To counter this, organizations like Adidas must ensure supply chain responsiveness to the volatility of the external environment.

Structural Complexity and Its Related Concerns

Adidas initially adopted a Vertical Integration approach to its supply chain as they valued control and ownership of critical elements within their process. However, to increase their competitiveness, they began outsourcing functions they weren’t cost-efficient at. Manufacturing was eventually outsourced to facilities that could execute at a lower cost. Outsourcing allowed Adidas reduced overhead costs across its human, infrastructural and production capital. However, outsourcing does not come without considerable risks either. Adidas Group (2018a) Annual Report cites 71% of their manufacturing being outsourced to Asia; the disclosed source of its 2018 supply chain challenges. Some of the challenges faced through outsourcing in Adidas’ Supply Chain are given below.

Communication

Controlling material and information flow is critical within Supply Chain Management. Effective communication presents a challenge, particularly across geographies with different languages and time-zones. The structure of Adidas’ Supply Chain illustrates the complexity within which they operate.

Transportation

Integrating business processes across a wide geography can challenge transportation feasibility, particularly if there are delays in forecasting. This would mean increases in expedited manufacturing and shipping, which would raise operational costs.

Geo-politics

Inter-territorial regulations such as tariffs and trade barriers impact supply chain fluidity. International developments such as the impact of China-U.S.A relations and the influence of Brexit are prime examples of these challenges. Adidas’ China operations for example, may not be able to competitively supply Adidas’ excess demand in North America because of on-going trade disputes. This inhibition consequently puts a strain on their Supply Chain flexibility.

Cultural Variances

Despite Adidas’ strategy on supply chain alignment (“ONE Adidas”), integrating and managing their diversified global structure presents a challenge. Resource competences vary across nations. Although Adidas tries to regulate wages, capacities and motivation across its supply-chain, outsourcing diminishes much of their control and influence in the actual operations within their supplier domains.

Conclusion

Gunasekaran et al (2008) emphasized supply chain integration as a key enabler to its responsiveness. However, responsiveness firstly requires an understanding of the external environment. With globalization, change is occurring faster than ever. Porter’s 5 forces model and the PESTEL framework could be means of re-analyzing the external environment to determine the relevance of Adidas’ current strategies. Determining how to respond to those findings may then require an internal analysis of Adidas itself. Revisiting Adidas’ value chain may present conclusions on whether outsourcing is still necessary and a revisit of Kraljic’s matrix may reflect the best way to reconfigure their structure. Strategy requires adaptability and responsiveness toward the dynamic external environment. The success of Adidas’ “New Acceleration Plan” will therefore depend on how it addresses these highlighted issues going forward.

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