Internal as well as external audits are conducted at our suppliers’ factories to ensure they are complying with our Standards. We have adjusted our methodologies and tools to the different sourcing relationships the adidas Group has in place with supplier factories. There are two models, direct sourcing and indirect sourcing:
There are suppliers we have a direct contractual relationship with. The strategy applied to these suppliers is based on a long-term vision of self-governance where they take ownership of their compliance programme. To help these suppliers, we conduct factory inspections, assessing risks and identifying root causes of non-compliance. This approach evaluates management commitment to compliance, the effectiveness of the factories’ compliance systems and in turn leads to a more precise evaluation of training needs. Factories are required to develop strategic compliance plans (SCP) in which they outline their strategies to meet our Standards. The plans include targets, programmatic actions, planned investments and timelines. Factory performance is measured annually through a key performance indicator (KPI) which is linked to our Sourcing organisation’s management and tracking systems.
Some adidas Group business entities, however, source products through intermediaries such as agents, and we also develop new market opportunities with licensees who independently manage production. We call this process indirect sourcing of products. The adidas Group business entities are obliged to develop three-year plans outlining their strategies, programmes and actions to ensure compliance in the indirect supply chains as well as commission audits by adidas approved external monitors who verify the outcomes of the compliance plans and activities. A licensee’s annual compliance performance is then measured by using a comprehensive scorecard.
In the area of environmental compliance, we use our Environmental Assessment Tool and supplementary remediation guidelines to check and rate our suppliers. Audit results are reflected in a specific Environmental Key Performance Indicator (EKPI). Those suppliers who have appointed a dedicated sustainability manager and made a conscious effort to address issues holistically (that is, considering social, health & safety and environment) score higher in their EKPI results. So we will be encouraging others to do the same and we will continue to use the EKPI tool to benchmark supplier performance while working with them on areas of improvement.
Mapping our supply chain risk is a very effective tool to ensure that all of our suppliers produce in a socially and environmentally responsible way while using our resources wisely. It combines regular processes to systematically monitor and support improvements with ad-hoc tools enabling us to react quickly to critical situations as they may arise and limit any negative effects this may have on workers or the environment. Critical sources of information for risk-mapping exercises include the review of data bases as provided by governments as well as regular engagement with civil society organisations, unions, employer federations and with workers directly.
Countries where we source product from and suppliers who we work with are regularly mapped and monitored for human, labour rights and environmental risks. Country and factory profiles determine the subject of issues to be prioritized as well as the frequency of monitoring and remediation activities.
Tailored risk-mapping approaches and tools that are applied are as follows:
- Country Level Risk Assessment: Country profiles are developed based on in-depth due diligence processes. Countries are categorised as high or low risk. Suppliers located in high-risk countries have to be audited at least once every two years.
- Business Entity Level Risk Assessments: A Business Entity’s actual performance as outlined in its Strategic Compliance Plan and Report Cards shows its individual performance and compliance risk. This influences the frequency of performance reviews and impacts the longer-term business development.
- Factory Level Risk Assessments: Regular audits, KPI assessments, factory risk-rating analysis. This information determines the frequency of re-audits and engagement with the factory.
- Crisis Protocol: Used by Business Entities and factories to report on the details on high-risk issues. Based on the information we receive, we may decide to conduct site visits, audits or other engagement with a Business Entity or factory on a case-by-case basis.
- Monthly Reporting: To executive management within the adidas Group. Depending on the issue, this may also lead to additional action on a case-by-case basis.
- Grievance Mechanism: Workers and other parties can reach SEA through Hotline Posters and Third-Party Grievance Mechanisms. We take information from workers and other parties regarding factory conditions very seriously and take care to provide safe and easy channels for them to get in touch with us. Information we receive this way may result in additional site visits, audits or other engagement with a Business Entity or factory at any time.
In addition to our own monitoring activities, we value independent and unannounced assessments by independent third parties to demonstrate the credibility of and provide verified information about our programme to stakeholders. As a member of the Fair Labor Association (FLA), the adidas Group is subject to external assessment by independent monitors, participation in the FLA third-party complaint system and public reporting. In 2005, the monitoring programme of the adidas Group was accredited by the FLA for the first time; re-accreditation took place in 2008. This decision was based on independent factory monitoring and verification reports of supplier facilities and a thorough audit of monitoring protocols, training programmes and auditing systems. Since joining the FLA, more than 300 independent assessments have been conducted at adidas Group suppliers. Read more about the FLA's monitoring activities on their website.
We audit our suppliers against our Standards and rate them according to their performance. We use an innovative way to rate the supplier on its ability to deliver fair, healthy and environmentally sound workplace conditions in an effective manner. With the Key Performance Indicator (KPI) rating tool we evaluate six fundamental elements of social compliance including management commitment, the quality of management systems in place, worker-management communication, training delivered, transparent reporting and measurement of compliance activities. According to the results, suppliers are assessed with a C-rating score between 1 and 5 (with 5 being the best rating) and then are clustered into three categories:
- The Risk Management cluster includes the lowest-performing suppliers. We help them to improve their performance and, if they respond, they are moved up to the partnership cluster. If not, we wind down and eventually terminate our commercial relationship with them.
- The Partnership cluster includes those suppliers who can benefit from significant training support so we focus on capacity-building programmes in collaboration with other companies and multi-stakeholder initiatives.
- The Self-governance cluster is for those suppliers that are capably managing a programme of good industrial relations, health and safety, and employer-employee communications. These suppliers must have an internal compliance policy and practice and transparently report these activities.
Compliance rating results are incorporated into the overall supplier rating that influences our decision on which suppliers to use. This is important, so our key business partners understand how their social compliance score impacts the business relationship. This transparency and integration with sourcing decisions is fundamental to the success of our efforts to drive improvements in workplace conditions.
When suppliers fail to meet our Workplace Standards, we apply the sanctions and remedies from our Enforcement Guidelines, which include:
- Termination of the manufacturing relationship
- Stop-work notices
- Third-party investigations
- Warning letters
- Reviewing orders, and
- The commissioning of special projects to remedy particular compliance problems.
Two types of non-compliance
Breaches of the Workplace Standards are categorised into zero tolerance points and threshold issues. Zero tolerance includes prison labour, serious, life-threatening health and safety conditions and repeated or systematic abuse. A finding of zero tolerance non-compliance means an immediate and urgent engagement with a supplier and, if verified, we will terminate the relationship with that supplier. Threshold compliance issues include serious employment issues, serious health, safety or environmental issues and any combination of the two. The Enforcement Guidelines for threshold issues can disqualify a new supplier or lead to enforcement actions with existing suppliers.
Warning letter system
When we find ongoing and serious non-compliance and a lack of commitment on the part of the management to address the issues, we will, when appropriate, issue a formal warning letter. In very serious cases or in cases of zero tolerance non-compliance, a ‘stop work’ letter will be issued, advising the offending supplier that SEA has recommended the business relationship be terminated.
Labour and Health & Safety Non-Compliances in 2015
The following chart presents the labour-related non-compliances identified during initial assessments and initial assessment follow-ups in supplier factories. Two-thirds of the labour-related findings belong to the top three issues: ‘Wages’, ‘Benefits’ and ‘Working Hours/Overtime’.
Besides identifying non-compliances with our Workplace Standards at factories, the adidas Group compliance team particularly focuses on the existence and implementation of management systems on the supplier’s side. The team identifies any gaps in policies and procedures related to specific non-compliance areas such as forced labour, child labour, freedom of association or discrimination. As a result, these findings must be seen as broad categories. The percentages shown indicate the systemic shortcomings of newly proposed suppliers, rather than the confirmed presence of specific non-compliances, such as child labour, forced labour, or discrimination.
The second chart shows the health and safety non-compliances identified in supplier factories. Fire and electrical safety are critical areas for any potential new supplier and together accounted for 20% of the non-compliances identified in 2015. The way chemicals were stored and used, including the presence of banned chemicals, accounted for 15% of non-conformances reported. A further 17% of the findings related to management systems, policies and procedures, and specifically a lack of conformance with our Workplace Standards and expectation for effective health and safety systems, including the recruitment and retention of qualified safety staff.