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Supply Chain Approach

We have a systematic approach to managing the relationships with our suppliers.

As our supply chain is large, multi-tiered and varied, we have a detailed and systematic approach to managing the relationships with our suppliers.

Besides our own employees, workers in our suppliers’ factories play a central role in our sustainability programme. It was our concern for their working conditions and well-being that led us to establish our "Workplace Standards", the supply chain code of conduct which also covers workers’ health and safety and provisions to ensure environmentally sound factory operations.

To enforce compliance with our Standards we have a multi-level monitoring and enforcement process in place, including the use of an innovative rating system for the assessment of our suppliers. The rating results are shared with our Sourcing teams which then decide whether and to which extent we continue the business relationship with a specific supplier.

SUPPLY CHAIN STRUCTURE

adidas has outsourced most of its production. Overall, we work with around 800 independent factories from around the world that manufacture our products in more than 55 countries. Our supply chain is global and multi-layered, with many different types of business partners, some of whom are directly contracted factories, while others are not.

In 2017, the top five countries per region by number of supplier sites were:

  • The Americas (20%): United States, Brazil, Argentina, Canada, and Mexico
  • Asia (68%): China,  Vietnam, Korea, Indonesia and India
  • EMEA (12%): Germany, Turkey, Italy, Spain and South Africa

DIFFERENT SOURCING RELATIONSHIPS

Our influence in terms of social and environmental compliance is linked to the strength of our partnerships, and is often proportional to the scale and stability of the orders placed with our suppliers.

  • Direct sourcing model: adidas holds direct contractual relationships with its core suppliers who are centrally supervised by Global Operations. Global Operations is a corporate function which manages product development, commercialisation, distribution and supervision of the manufacture of apparel, footwear and accessories for the adidas, Reebok and adidas Golf segments. These suppliers produce the predominant share of the total sourcing volume of the  company.
  • Indirect sourcing model: The other part of our product volume, which is a minor portion, is sourced by agents or is made under licence. Agents place orders with their preferred suppliers. Licensees may either place orders directly with their suppliers or use agents as intermediaries. Our indirect supply chain complements our direct sourcing by meeting specific requirements that cannot be serviced through Global Operations.
  • Local market production: In order to quickly seize short-term opportunities in their local markets, to satisfy a niche market requirement, or in some cases to react to certain trade regulations, adidas subsidiaries may also source from local suppliers in a specific country that are not overseen by Global Operations; these suppliers do require authorisation from the Social and Environmental Affairs team for production.

TYPES OF SUPPLIERS

Our suppliers fall into five broad categories:

  • Main suppliers. They have a direct contractual relationship with adidas for the supply of products, whether for export or domestic market consumption.
  • Subcontractors. These are factories that have been subcontracted by our suppliers to perform manufacturing operations the main suppliers are not capable of doing in their own facility.
  • Material and other service providers. These suppliers may not have a direct business relationship with adidas, but supply goods and services to our main suppliers.
  • Licensees. Independent companies which manage the design, production and distribution of specific products, under licence to adidas. In 2017, adidas worked with 62 licensees whose suppliers sourced products from 360 factories in 44 countries.
  • Agents. Independent companies that act as intermediaries to source product manufacturing, manage the manufacturing processes, and sell finished products to the company.

WORKING WITH SUPPLIERS

  • Checking the rules are followed: In order to check if suppliers comply with our Workplace Standards, the adidas SEA team and commissioned third-party experts visit and audit the factories we work with. In addition, independent auditors verify compliance and evaluate our programmatic activities to implement our supply chain code of conduct. To facilitate workplace improvements in factories we support our suppliers with training and capacity-building initiatives, either conducted by our own staff or by other stakeholders and third-party service providers.
  • Selecting new suppliers: In close cooperation with our business function Global Operations and other Sourcing entities, all potential new suppliers are assessed by the adidas SEA team. The goal is to ensure that new suppliers meet our Standards. Our Sourcing teams can only place orders with a new supplier if the SEA team has given approval. If factories do not meet our standards, we reject them, but if the issues are ones that can be fixed we give them a rigorous timeline to correct the issues, and go back and check again to see if they have improved. If they have improved, they are approved as a supplier producing for adidas. 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.
  • Rewarding good performance: Once a factory is approved, we continue to check working conditions there. For those suppliers who manufacture directly for adidas, we regularly check how the factory is performing: is it continuing to make an effort to improve, to provide training and to meet our expectations with regard to the fair treatment of the workers and safety in the workplace? At the end of each year, the factory gets a score and that score is given to our Sourcing managers, who add it to their own scores for quality and delivery, etc. They then decide how many orders the factory should receive in the future. We want our factories to know that if they do well and are meeting our Standards they will remain our partner and continue to receive orders. This is a carrot. We also have a stick.
  • Taking action over poor performance: When we check factories and find that the factory management is not treating their workers fairly or if they don't have a safe and healthy workplace or are not meeting environmental requirements, we take action. We issue warning letters asking that the problems we have found be fixed. If the problems are not fixed after the first letter, we send a second letter to stop orders, and if we have to send a third letter, we ask our Sourcing team to stop working with the factory. If we find very serious issues at a factory, such as life-threatening safety issues, we may immediately end our business relationship and write to the local government and ask for their help to fix the issues that we have found. This whole process is called enforcement.
  • Providing information for workers: Giving workers the opportunity to air grievances in confidence is a key element in helping us to ensure fair, safe and healthy workplace conditions. An approved factory has to place open letters on the notice boards that tells workers whom they can contact to address issues of concern. The letters inform workers that we will help them find solutions to factory issues, if they cannot find solutions through the factory’s usual mechanisms. Workers are also provided with local numbers to call and addresses to write to. In some cases the telephone hotlines that we use are run by non-profit organisations and in other cases our own field staff take the calls and respond to the workers' concerns. A lot of our time is spent following up on calls or requests from workers about hard-to-fix issues, such as the wrong salary payment, working too many hours, or being unfairly let go. In 2012, we piloted a new management-worker communication project with one of our suppliers in Indonesia: workers can now send SMS text messages to hotlines to raise the alarm if they think their rights are being compromised. Workers' mobile numbers are being anonymously gathered so factory management can send out group texts reminding workers of safety issues or letting them know about changes in policy. Read more about this pilot project.
2020 Target2017 20162015
Empower our supply chain workers by expanding and refining grievance systems and skill training programs. This includes the full expansion of the Workers’ Hotline to 100% of our strategic suppliers.

69 factories in 4 countries (Cambodia, China, Indonesia, Vietnam).

63 factories in

4 countries (Cambodia, China, Indonesia, Vietnam)

58 factories in 3 countries (Cambodia, Indonesia, Vietnam)

  • Working with Licensees: adidas continues to grow, and one way it grows is by entering agreements with other ‘specialty’ businesses to make, sell or distribute our products. This is what we call licensing. Because of licensing and the use of agents, adidas also has many indirect suppliers. These are factories working not directly for us, but for other customers. To manage this part of our supply chain we ask our agents and licensees to copy our own ‘in-house’ monitoring approach and have people check the factories and help them stay true to our rules. In many cases, the companies managing our indirect suppliers use external social auditing firms to do the checking. We call these consultants external monitors.

MONITORING

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 adidas 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 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. adidas 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.

RISK MAPPING

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 adidas. 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.
VERIFYING COMPLIANCEIn 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), adidas 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 adidas was accredited by the FLA for the first time; re-accreditation took place in 2008 and in 2017. 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 suppliers. Read more about the FLA's monitoring activities on their website.
RATING SUPPLIERS

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.

RATING RESULTS 2017

By the end of 2017, 50% of strategic Tier 1 suppliers reached 4C rating, which reflects functioning management systems and effective worker’ communication and grievance channels (2020 target: at least 80%). In addition, by the end of 2017, 55% of strategic licensees operated mechanisms to monitor their own supply chain aligned with SEA standards, and support their suppliers to continuously improve workplace condition (“self-governance”) (2020 target: at least 80%).

 

 

2020 Target20172016

At least 80% of strategic Tier 1 suppliers will reach a social compliance rating of 4C (out of 5).

50%17%

At least 80% of strategic licensees manage their own supply chain in self-governance mode.

55%50%

 

SOURCING DECISIONSCompliance 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.
DEALING WITH NON-COMPLIANCES

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.

 

> For an overview of Labour and Health & Safety Non-Compliances in 2017, please see our Annual Report 2017.

TRAINING

As part of our continuous efforts to achieve more effective and sustainable practice within the supply chain, we have initiated a system of multi-level and cross-functional training sessions with our global supplier network. In 2017, we trained more than 1,900 staff and personnel through 132 training sessions. We have three main approaches to training content:

  • Fundamental training: includes introductory training for the Workplace Standards, Fair Factories Clearinghouse (FFC) data entries, new factory approval process and the SEA operating guidelines.
  • Performance training: includes detailed training on specific issues on labour, health, safety and environmental practices, as well as initial assessment monitoring methods.
  • Sustainability training: includes training in the KPI and rating tools, sustainable compliance planning and supplier self-assessment methods.

There is an ongoing programme of training our suppliers to help them improve their social, health, safety and environmental performance. We focus our efforts on the following key training initiatives:

FAIR FACTORIES CLEARINGHOUSE

The Fair Factories Clearinghouse (FFC) is an external, non-profit programme which utilises technology that allows members to share information, to collaborate on productivity and to facilitate safe, humane working conditions. adidas' Social and Environmental Affairs (SEA) team trains selected factories to use the FFC system which builds more transparent reporting. adidas has participated in the FFC platform since 2006 and has used the platform to share supplier audit and monitoring information since 2008. Find out more about the FFC programme.

BETTER WORK

Better Work (BW) is a unique global partnership between the International Labour Organization (ILO) and the International Finance Corporation (IFC). It unites the ILO’s expertise in labour standards with the IFC’s expertise in private sector development. Launched in February 2007, the programme aims to improve compliance with labour standards and competitiveness in global supply chains by building cooperation between governments, employers’, workers’ organisations and international buyers.

Since 2007, all adidas garment factories in Cambodia have been monitored by BW on a regular basis. Currently, we have a total of 10 factories enrolled in the programme. In June 2009, BW launched its programme in Vietnam. By mid-2013, 14 adidas suppliers in Vietnam had joined the BW programme and committed to regular monitoring. We are also actively engaged in the newly launched Better Work programme in Indonesia, where four apparel suppliers are nominated to participate in training and capacity building. Find out more about the Better Work programme.

HUMAN RESOURCES MANAGEMENT SYSTEMS

After years auditing in factories, adidas recognised there was a lack of fundamental HR systems in the Asia Pacific region factories. The introduction of more sophisticated production set-ups such as lean manufacturing required more sophisticated HR practices.

 

The Human Resources Management Systems (HRMS) training programme started in 2006 and focuses on training supplier managerial staff in the Asia Pacific region, in particular China and Vietnam. Training topics are designed for key HRMS elements covering hiring, compensation and benefits, training and development, performance management and human resource planning. The training has contributed to operational efficiencies, as well as growing worker satisfaction and staff morale. In addition, we evaluated the modules on freedom of association and industrial relations to more closely link with the FLA’s Sustainable Compliance Initiative monitoring tool. The outputs support long-term social compliance in the supply chain.

EHS+ CENTERRecruiting and retaining qualified occupational health and safety staff has been an ongoing challenge for our suppliers, especially in those countries where there is a lack of trained professionals. Faced with the high turnover in factory-appointed safety officers, it became apparent that adidas-led training was not sustainable and a more institutional approach was needed: one that would build capabilities at an industry level.

In 2007, adidas and a number of other global companies entered into a partnership with the International Sustainable Community (ISC) – a US-based development NGO – to create an Environment, Health and Safety (EHS) Academy, to expand the pool of qualified EHS managers in southern China. The first academy was launched in 2009, hosted by Lingnan (University) College’s Business Faculty in Guangzhou. A second facility opened in Jiangsu Province in 2011, with a specific focus on environmental topics and energy management. Currently, there are three active Centers – one in Jiangsu (China), one in Puni (India) and in Dhaka (Bangladesh). Find out more about EHS+ Center on the website of the Institute for Sustainable Communities.
OHSO PROGRAMME

In October 2010, we launched a new and upgraded Occupational Health and Safety Officer (OHSO) programme to strengthen the technical capability of the safety teams within our key business partners' factories. The training programme consists of three modules covering ‘Basic Occupational Health and Safety’ issues, ‘Risk Assessment and Communication’ topics and ‘OHS Management’ issues.

The first two courses were delivered to almost 600 trainees representing 300 suppliers in six countries in the Asia Pacific region. In 2016, the focus is on OSHO re-fresher trainings in Vietnam (covering about 100 participants from around 50 suppliers) and China (covering around 80 suppliers).

SUSTAINABLE MANUFACTURING INITIATIVEThe OECD defines sustainable manufacturing as “the creation of manufactured products that use processes that minimise negative environmental impacts, conserve energy and natural resources, are safe for employees, communities, and consumers and are economically sound.” The Sustainable Manufacturing Initiative (SMI) is a project which aims to identify and build the capabilities required by suppliers to plan, implement and manage sustainable manufacturing activities and improvements in order to meet the adidas’ 2015 Environmental Strategy targets. The project, which has been piloted in Indonesia, involves Tier 1 and 2 apparel and footwear suppliers.
ENERGY MANAGEMENT TRAINING IN INDONESIA

To support our suppliers in achieving the 2015 targets for energy reduction, adidas and ‘Deutsche Gesellschaft für Internationale Zusammenarbeit’ (GIZ) initiated an Integrated Public Private Partnership (IPPP) project named 'Greening Global Supply Chains - Focus on Energy in Indonesia'. Launched in August 2011, the project aimed to build internal capacities within factories to be able to:

  • Monitor energy use consistently and analyse the data
  • Propose cost-saving measures
  • Identify and review energy management options and the impact of actions taken.

During the course of the programme, train-the-trainer courses and networking meetings were conducted, and best practices as well as key findings were shared with the wider adidas supply chain and the industry in general within Indonesia. In May 2013, the training programme came to an end. Overall, the outcome of the project is promising as all participating suppliers established their own internal energy team. With this commitment, the total energy consumption in the factories started to decrease already in the first year of the programme. Some participants are now even aiming for ISO 50001 energy management system certification of their sites. Please do also read about this topic on our adidas Blog.