Adidas Group

Warning letters are an essential part of our enforcement efforts and are triggered when we find ongoing serious non-compliance issues that need to be addressed by our suppliers. In 2010, we issued a total of 50 warning letters across twelve countries.

The largest number of warning letters continued to be issued in Asia, where nearly 70% of all supplier factories are located. Compared to the previous two years, the number of first warning letters has increased considerably which automatically results in a higher number of total warning letters issued to suppliers. The increased number of first warning letters reflects SEA's overall efforts in 2010 at raising the bar on supplier performance, with reduced tolerance for ongoing non-compliances. It also reflects pressures within the supply chain, due to capacity constraints that resulted in a higher frequency of excessive working hours' cases across Asia. It is difficult to generalise as to the grounds for a warning letter, as this may be issued based on a single non-conformance which is unresolved, or multiple breaches of our Standards. The range of issues that resulted in warning letters in 2010 included poor management commitment, excessive working hours, falsified time and payment records, underpayment of wages, non-payment of back-wages, inadequate social security, medical insurances or other benefits, poor electrical, fire or chemical safety, insufficient training to workers, supervisors and managers, poor communication and transparency problems.

The reduction in warning letters 2 and 3 shows that suppliers are reacting to the first warning letter and correcting the identified threshold, non-compliant issues more expediently.

We work closely with our suppliers to help them improve their performance. However, in the past where we have faced situations of severe or repeat non-compliance we have terminated our business relationship with suppliers. In 2010, we did not terminate agreements with any supplier for compliance reasons.

We also work closely with Global Operations and other business entities to pre-screen potential new suppliers. Our so-called Initial Assessments are uncovering threshold or zero tolerance issues. A total of 447 Initial Assessments (pre production audits) were conducted in 2010, and 93 of them resulted in a rejection. This means 20.8% of potential new supplier factories were rejected for threshold or zero-tolerance non-compliance issues. The number of factories rejected on the first visit was greater still, but suppliers who have threshold issues (that is, serious but remediable non-compliances) are given three months to remediate those issues prior to re-auditing for final SEA acceptance. As in previous years, China dominates the number of new supplier Initial Assessments and corresponding rejection rates are high. In India, newly disclosed or proposed suppliers were also subject to rigorous assessments and due to weak remedial efforts resulting in a high rejection rate.