Besides our own employees, workers in our suppliers’ factories play a central role in our sustainability program. 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 and incorporated into the overall supplier rating that influences our decision whether and to which extent we continue the business relationship with a specific supplier. This transparency and integration with sourcing decisions is fundamental to the success of our efforts to drive improvements in workplace conditions.
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 program 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 program 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 programs and auditing systems.
Working closely with key strategic partners, the vast majority of our products are produced in around 100 manufacturing facilities worldwide. We value long-term relationships: By the end of 2018, 84% of our strategic suppliers have worked with adidas for more than ten years and 42% have a tenure of more than 20 years. The length of our supplier relationship is determined by specific performance criteria which is regularly measured and reviewed.
adidas has outsourced most of its production. Overall, we work with around 700 independent factories from around the world that manufacture our products in more than 50 countries (Status: 2018). 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 2018, the top five countries per region by number of supplier sites were:
- Asia: China, Vietnam, Korea, Indonesia and India
- America: United States, Brazil, Argentina, Canada, and El Salvador
- EMEA: Germany, Turkey, Italy, United Kingdom, and Spain
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 manages the development, prodcution, planning, sourcing and distribution of the vast majority of our products.These suppliers produce the predominant share of the total sourcing volume of the company.
- Indirect sourcing model: The remaining minor part of our product volume 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 authorization from the Social and Environmental Affairs team for production.
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.
- Agents. Independent companies that act as intermediaries to source product manufacturing, manage the manufacturing processes, and sell finished products to the company.
Complexity of the supply chain
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 organizations, 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, labor 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 categorized 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.
In close cooperation with our business function Global Operations and other Sourcing entities, all potential new suppliers are assessed by the adidas Social and Environmental Affairs (SEA) team, with the goal 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.
Overall, at the end of 2018, the ‘first-time rejection rate’ of 30% of all new factories visited was similar to the previous year (2017: 29%) and the ‘final rejection rate’ was at 3% (2017: 2%).
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 2018, we trained more than 1,200 staff and personnel through 143 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 labor, 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 program 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 Factoires Clearinghouse: The Fair Factories Clearinghouse (FFC) is an external, non-profit program which utilizes 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.
- Human Resources Management Systems: After years auditing in factories, adidas recognized 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 program 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.
- 'Energy and Water Investment Plan' project: In 2018, we started the ‘Energy and Water Investment Plan’ project with facilities located in five of our main sourcing locations (Cambodia, China, Indonesia, Vietnam and Taiwan) that were off track to achieve their 2020 targets, or that were recently added to the scope of our monitoring. These facilities are required to conduct on-site assessments and develop an investment plan enabling them to deliver on their energy and water reduction targets, with the aim to identify potential efficiency measures and achieve actual savings by implementing these saving opportunities on-site before the end of 2019.
- 'Energy and Water Efficiency’ project: In 2018 we also saw the successful completion of an 18-month ‘Energy and Water Efficiency’ project that we cofunded together with the International Finance Corporation (IFC) and which benefited six supplier facilities in Vietnam. The aim of this partnership was to provide access to advisory services as well as low-cost financing for suppliers who wish to invest in improving their energy and water footprint but need technical support or the upfront capital to do so. Since the start of the project in 2017, suppliers have implemented more than 60 saving opportunities, with notable annual savings in energy consumption, greenhouse gas emissions and water consumption. As part of the project with the IFC, we conducted a renewable energy assessment, identifying those
suppliers with the feasibility of using renewable energy.
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 parallel to our existing grievance systems such as anonymous local language-based worker hotlines, we implemented additional digital tools that enable workers to ask questions and raise concerns directly with their employers. Following the successful piloting of an innovative ‘SMS Worker Hotline’ in supplier factories in Indonesia back in 2012, we have progressively improved our suppliers’ operational grievance mechanisms, using an application-based ‘Workers Voice’ platform that was available and used in 97% of our strategic factories across ten countries by the end of 2018. Strategic suppliers account for around 75% of all production volume.
|DEVELOPMENT OF WORKER GRIEVANCE APPLICATION|
|Empower our supply chain workers by expanding and refining grievance systems and skill training programs. This includes the full expansion of the Workers’ Greivance Application to 100% of our strategic suppliers.||97%||
Complementing the various grievance channels, we measure the level of worker satisfaction through annual in-factory surveys. The survey results are shared with auditors and the factory management and offer insights into worker concerns, as well as potential areas for workplace improvement. By the end of 2018, worker satisfaction surveys were conducted in 123 supplier factories in twelve countries (2017: 47 factories across nine countries). Upon completing the survey, factories are required to develop improvement plans for the ‘top three’ issues and then track progress regularly. Based on the feedback captured by the surveys we have seen, for example, constructional improvements in canteens and worker dormitories as well as a positive drive to develop better training programs for workers and supervisors.
Alongside factory-led training, adidas has also offered tailored training for supervisors since 2016. Up until the end of 2018, more than 700 supervisors in 55 factories across five countries received such training. Supervisors have shown a strong commitment to the training courses and post-event assessments. And we have received very positive feedback from trainers and factory management regarding the supervisors’ improved work performance. As part of our larger efforts to empower female workers in our supply chain, we initiated a ‘Women’s Empowerment Program’ in Pakistan to train women on how to secure better career opportunities in the workplace. Since its start in 2015, the program has benefited more than 400 on-job women as well as women workers made redundant (Status: end of 2018)
Internal as well as external audits are conducted at our suppliers’ factories to ensure they are complying with our standards for social and environmental compliance.
STRATEGIC SUPPLIERS (C-KPI)
The strategy applied to suppliers we have a direct relationships with is based on a long-term vision of self-governance where they take ownership of their compliance program. To help these suppliers, we conduct factory audits, assessing risks and identifying root causes of non-compliance. With the Compliance Key Performance Indicator (C-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).
Our target for 2020 is to have at least 80% of our strategic suppliers rated at 4C or better. By the end of 2018, 62% of strategic Tier 1 suppliers reached 4C rating or better (2016: 51%), which reflects functioning management systems and effective worker’ communication and grievance channels. Strategic suppliers account for around 75% of all production volume.
STRATEGIC SUPPLIERS (E-KPI)
In the area of environmental compliance, a tool called ‘E-KPI’ measures suppliers’ environmental compliance overall and assess their performance and progress toward the 2020 targets. Using a benchmarking approach, the E-KPI allows for a high level of transparency into suppliers’ actual consumption intensity, hence supporting us in defining suppliers’ specified areas for improvement and training needs that match their respective situation. We will continue to support suppliers to identify
resource efficiency measures and rollout in our supply chain.
We set ambitious reduction intensity targets for our strategic suppliers at Tier 1 and Tier 2 level, aiming to systematically improve their environmental performance. By 2020, we expect them to reduce their overall energy consumption, water use and waste volume by 20% compared to their performance in 2014. We also set a 35% target for reduction in water use for our strategic apparel material suppliers 2 at Tier 2 level. 2018 results show the promising efforts we are putting into driving resource efficiency. Suppliers are on track to meet their 2020 reduction targets across all categories (footwear, apparel, and accessories and gear), with overachievers compensating low performers in the aggregated reduction results.
LICENSEES (REport CARDS)
Some adidas business entities 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 licensees are obliged to adopt our 'in-house' monitoring approach 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 Report Card. Our target for 2020 is to have at least 80% of strategic licensees in a mode that allows them to monitor their own supply chain aligned with SEA standards, and support their suppliers to continuously improve workplace condition (“self-governance”). By the end of 2018, 80% successfully embedded governance systems, supply chain management, purchasing practices and product safety compliance requirements into their business practices. 20% achieved a ‘Sustainability Leadership’ level, signaling that in addition to achieving high scores in other sections, they also scored above 80% in the sustainability section of the Report Card, which measures the existence of policies and implementation, stakeholder engagement, public reporting and communication.
Breaches of the Workplace Standards are categorized into zero tolerance points and threshold issues. Zero tolerance includes prison labor, 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. 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.
Any cases of non-compliance identified during audits are given a certain time frame for remediation. For a full list of non-compliances identified in 2018 please see our Annual Report. 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. In 2018, we had a total of 39 active warning letters (2017: 42) across 16 countries, and we terminated agreements with one supplier for compliance reasons (2017: 4), as the supplier refused to grant the SEA team access to audit the factory.
OUR APPROACH TO SUPPLY CHAIN MANAGEMENT
Our supply chain is large, multi-tiered and varied. We have an in-depth approach to managing the relationships with our suppliers and we continue to develop approaches for engaging suppliers who are part of indirect sourcing models. For years, adidas has been running leadership programs that address this topic; important steps have been:
- In 1997, building on existing initiatives, adidas developed its initial supplier code of conduct (Standards of Engagement) and established a Compliance Team. The Standards of Engagement, which are now called Workplace Standards, reflect international human rights and labor rights conventions. They are contractual obligations under the manufacturing agreements adidas signs with its suppliers.
- In 1999, adidas joined the Fair Labor Association (FLA) as founding member.
- In 2000, adidas started reporting about its sustainability performance, the first company in the sportswear industry to do so.
- In 2001, adidas played an instrumental role in the development of the International Labor Organization (ILO)’s Better Factories Cambodia initiative, addressing working conditions and labor rights in the apparel sector. Since the program began, all adidas garment factories in Cambodia have been monitored on a regular basis.
- In 2004, adidas spearheaded the introduction of Human Resources Management systems in major footwear factories.
- In 2005, the FLA accredited adidas’ SEA program and Reebok’s apparel program.
- In 2006, a revised code of conduct, the ‘Workplace Standards’, was introduced replacing the adidas Standards of Engagement and the Reebok Human Rights Production Standards, which dated back to 1988.
- In 2006, adidas joined the Fair Factories Clearinghouse, an industry-leading compliance data-sharing platform, which Reebok had initially developed as its Human Rights Tracking System. All social compliance information is recorded in this central database.
- In 2007, adidas disclosed its global supplier factory list. The list is being updated twice a year, and includes T2 suppliers and licensee suppliers.
- In 2008, adidas developed Strategic Compliance Plans (SCP) for the licensees and business entities that source through agents. A Report Card (RC) section was added to the SCP in late 2010.
- In 2010, as the official Sponsor, Licensee and Outfitter of the 2010 FIFA World Cup South Africa™, adidas disclosed the list of factories involved with the production of World Cup products. The first and only FIFA sponsor to do so.
- In 2010, adidas acted as the lead party in a supplier-brand caucus formed to engage with Indonesia's trade union movement. Its aim was to develop a basic framework for the exercise of trade union rights in the workplace. An agreement was finally reached and signed in Jakarta in June 2011. The protocol is recognized as a landmark achievement in Indonesian labor rights.
- In 2010, adidas started its collaboration with ILO Better Work, an innovative partnership program between the ILO and the International Finance Corporation (IFC). Operational since 2009, the program’s objective is to improve both compliance with labor standards and competitiveness in global supply chains. adidas then joined the program Better Factories Cambodia; since the program began, all adidas garment factories in Cambodia have been monitored on a regular basis.
- As official partner of the London 2012 Olympic Games, in 2011, adidas disclosed its supply chain for Olympic products, becoming the first Olympic partner to disclose its factory list for an Olympic Games.
- During 2011 and 2012, 25 adidas suppliers in eight countries completed Fair Wage self-assessment questionnaires and four factories underwent full Fair Wage assessments. The countries were Philippines, Indonesia, Mexico, Brazil, Vietnam, China, El Salvador and Thailand. Also in 2012, adidas introduced the SMS for workers project at one of the company’s main footwear suppliers in Indonesia to improve the communication between factory workers and management, offering workers the possibility to anonymously ask questions and raise concerns.
- In 2014, the company joined the Bangladesh Accord on Fire and Building Safety (‘The Accord’). adidas has a very small sourcing footprint in Bangladesh, with very few suppliers currently enrolled in the Accord. Despite our small footprint, we have seen a strong commitment by our suppliers to fulfill the safety requirements of the Accord. In 2017, the Accord announced that adidas was ranked 9 out of 206 signatory companies in terms of the remedial effort of our suppliers.
- In 2015, adidas continued to apply and strengthen its own global Human Rights Due Diligence (HRDD) approach by further improving and deepening our transparency and our dialog with key stakeholders as well as addressing severe human rights risks in our wider supply chain. We were the first brand in our industry to develop an operational grievance mechanism to address human rights impacts, wherever they occur – be this operationally or in the supply chain. In June 2015, we were also the first company to publish a record of the third-party complaints received in the past year related to labor or human rights violations. The record, which is updated annually on our website, details the nature of the complaint and its current status.
- In 2016, the Fair Labor Association publicly applauded adidas’ comprehensive work in Turkey to help Syrian refugees find decent work and to improve working conditions for local and displaced workers. From 2011, adidas was an early supporter of the FLA advocacy efforts with the Turkish government to guarantee legal work permits for refugees. In the same year, the Modern Slavery Outreach Program was launched, focused on assessing and addressing risks in our extended supply chain, i.e. those tiers that fall outside our mainstream social compliance and labor rights monitoring program. Also, adidas ranked first on KnowTheChain’s benchmark, which assessed 20 leading footwear and apparel brands for their efforts on tackling modern slavery in their supply chains.
- In 2017, we were the overall winner, heralded as ‘Outstanding Achiever’ at Thomson Reuters Foundation’s Stop Slavery Awards. The award is given to businesses who are leading the way in the global fight against forced labor in their supply chains.
Moreover, we continue to promote and support collaborative actions within the sportswear and apparel industry to gain greater leverage in improving the environmental impacts of factory operations. This is shown through our active membership within key industry groups. For example, the Sustainable Apparel Coalition, the Roadmap toward Zero Discharge of Hazardous Chemicals, the AFIRM Working Group on Restricted Substances, the Chemicals Management Working Group of the Outdoor Industry Association (OIA) and in the Global Social Compliance Program (GSCP).