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The dilemma of sourcing globally

The adidas Group outsources almost 100% of its production to its suppliers globally. Here is why and how.

The cradle of fashion

It all started towards the end of the 18th century in the United Kingdom, when textile manufacturing became a key element of the Industrial Revolution. Until then, people would manufacture or repair their own clothes on their premises. The introduction of newly invented cotton-spinning machinery contributed to bringing the garment industry to mass production.

Cotton became the most important textile, and to process large numbers of garments more and better organised sewing factories were built. Thanks to the improvement of roads and transportation in general, it was possible to start moving products around the globe. It didn’t take very long for society to get used to the broad offering of clothing and ask for even more.

The world of fashion as we know it today was born.

It’s a colourful world full of creativity; a world that enables people to express themselves.

But it’s also a complex and demanding world: demanding for consumers who always want to be on top of trends, demanding for designers to always come up with fresh ideas but also demanding for companies that want to succeed in this highly competitive market – the hunger for new products and new designs at an increasing pace in the best possible quality and the aspiration to be available in pretty much every place around the world is constantly growing. If you want to successfully cater for that demand as a top player in the industry you have to be fast and efficient, you need to minimise your sourcing risks and you have to partner with the best possible suppliers you can find, no matter where.

Economic boost for developing countries

So consequently the world has not only changed a lot for consumers and apparel/footwear brands over the last two centuries but also for many countries that therewith started playing a major role in actual production.

Since its early beginnings in the late 18th century, the apparel and footwear industry has developed exponentially and now forms a major part of manufacturing production, employment and trade in many developing countries. This huge development meant and still means job creation, as apparel and, to a certain extent, footwear production still primarily requires manual work. Consequently, millions of job opportunities were opened, especially for women – roughly 80% of the workforce in the adidas Group supply chain for instance is female.

What it takes

But why do some countries become interesting sourcing territories while other countries don’t? The manufacturing of basic clothing could potentially get started in many developing countries.

Key factors for decisions on where to source products usually include infrastructure, innovation, competitive price structures and political stability. International trade also has an impact. Cambodia, for example, became an interesting sourcing place thanks to trade agreements which made it easier for products manufactured there to be exported to Europe or the US. Similar things can be said for other countries such as Laos, Vietnam and Pakistan.

These trade agreements more and more contain human rights clauses, meaning that for a country to be able to benefit from duty relief, some preconditions need to be in place, such as the respect of human rights, etc. Accordingly, Myanmar (Burma) has recently started to benefit from an advantageous trade arrangement with the European Union following the country’s efforts to improve its political, social and labour environment.

The dilemma of the apparel and footwear manufacturing industry

Provided that the above-mentioned relevant conditions are in place, sourcing countries not only benefit from the creation of jobs and economic growth based on the apparel and footwear industry. Often, the evolution of this basic industry paves the way for a more diversified production and economy at a later stage. Taiwan is a clear example of this evolution: from an apparel-based economy, the country has now moved to more complex electronic and financial services.

However, the apparel and footwear manufacturing sector also faces numerous challenges as it is often associated with human rights abuses, poor environmental performance as well as questionable purchasing practices – challenges that sometimes dwarf the millions of jobs created by the industry and its contribution to the country’s economy.

The adidas Group sourcing model

In order to address these challenges, the adidas Group strongly believes that long-term partnerships with its suppliers are of utmost importance.

Within the company, the Global Operations department, specifically Sourcing, looks into these aspects in collaboration with Social and Environmental Affairs (SEA). And while the company spreads its sourcing over multiple countries, 80% of its global production comes from the so-called ‘strategic’ suppliers.

Our sourcing strategy embodies the very spirit this company is built upon: only the best for the athletes. We do not simply buy products from our suppliers, but we instead have built outstanding, long-term partnerships with them which ultimately allow us to develop and bring the best-performing product to market.   

John McNamara, adidas Group Senior Vice President for Sourcing

Long-term partnerships

Instead of frequently changing suppliers depending on which one can offer the same product for the cheapest price, the adidas Group focuses on key long-term partners that are transparently disclosed in its global supplier list. The relationship with these core suppliers has existed for over a decade. For example, this year the company celebrated more than 25 years of sourcing in Indonesia.

Celebrating more than 25 years of sourcing in Indonesia

Not even increasing labour costs in some of these countries have produced challenging effects on these relationships. In fact, business in Cambodia, Vietnam and Indonesia has been growing, not shrinking. To have an idea, the wage increase over the period 2011 to 2013 has been 19% in China, 45% in Vietnam and 54% in Indonesia.

In the long run, it is these long-standing partnerships that carry greater benefits for both parties rather than constantly changing to maximise short-term profits.

Together we win

The terms of business with suppliers are not based on a purely order/purchase relationship. Over time, the adidas Group has for example also developed specific programmes to address productivity, efficiency and quality at supplier level.

More interestingly, substantial investments on both sides are made. This is why the company also places its own personnel in the strategic factories, where they work closely with the local personnel on developing the next innovation. Take Brazuca, the 2014 FIFA World Cup™ icon and the ultimate example of innovation in ball manufacturing.

Brazuca was produced in China by a long-term partner and supplier of the adidas Group, Longway. Why in China? Why at this factory? Since the beginning of the cooperation with the adidas Group in 1997, Longway has established itself as the expert in high-tech ball production. In 2006, engineers and developers from Longway and adidas set up a Centre of Excellence at the factory: this is where Brazuca was brought to life.

These two-way relationships generate synergies, trust, dynamism and technology transfer, which are all key to fostering innovation.

It is more than just business

Many also question the industry’s approach when it comes to social and environmental considerations. In the case of the adidas Group, the business relationship with suppliers is guided by the company’s Workplace Standards, which contain clauses to ensure fair labour practices, fair wages, safe working conditions and environmental standards in factories.

Thanks to hundreds of factory visits every year, the company consistently reviews and evaluates suppliers, works with them to address issues and makes improvements where necessary. In 2013, nine manufacturing relationships were terminated with suppliers who failed to adhere to the standards and requirements.

This is not all we do. We also proactively engage with governments to tackle critical issues such as minimum wages, freedom of association or environmental standards. Ultimately, business can thrive only if the right conditions are in place and as a responsible company we want to drive positive and long-lasting change.

Frank Henke, adidas Group’s VP for Social & Environmental Affairs.

For example, back in 2010, the adidas Group successfully led a group of suppliers and brands to develop a protocol ensuring the exercise of trade union rights in the workplace in Indonesia. More recently, the company has joined the U.S. Business Call on Climate Change, urging federal policymakers to collaborate on a bold response to climate change.

A long journey

Over the last two decades, the adidas Group has been working on defining the key elements of effective management of its supply chain; the current challenges require changes that will not happen overnight, though. From fair wages to women’s rights, from migrant labour to chemical management – there is still a lot to do to maintain the balance between shareholder expectations, economic success and social and environmental advancement.

The adidas Group is convinced that commitment to long-term solutions is the right way to achieve this balance, so that all sides can benefit: the developing countries through social and economic advancement as well as the adidas Group through best-in-class products and economic value. As John McNamara concludes:

It is a challenge but we want to keep leading the game – on the pitch and off the pitch.

John McNamara, adidas Group Senior Vice President for Sourcing