Executive Summary

Executive Summary

Supply chain Management practices govern the selection and

practice of an appropriate mode for the movement of tangible and

intangible assets in a given industry. A detailed study on two of

the World’s leading sporting goods manufacturing companies Nike

and Adidas has disclosed strengths and weaknesses of both

companies in addition to a few limitations, especially in their

supply chain strategies. Though a healthy rivalry exists between

the companies, a constant pursuit of becoming the sole leader in

the industry drives day to day activities in both companies.

Present market analysis shows Nike’s competitive advantage over

adidas by a noticeable margin. Nike’s $17 billion touch down by

end of 2013 made it the World’s 24th most valuable brand

according to consultancy Interbrand while adidas just finished at

7.5 billion (EMMA THOMASSON, 2014). Even though Nike surpasses

Adidas in terms of brand recognition globally, adidas’ recent

$100 million sponsorship with FIFA during the World Cup has

seriously turned the tables around.

Research Methodology for this project

combined diverse sources from class room teachings to text books,

Artefacts from various reliable websites to current numbers

obtained from live web sources. A divide and conquer principle

was followed in obtaining the final structure of the report.

Analysis on

these firms brought to light some of the key findings which when

addressed would benefit the companies. Sporting equipment

targeting women athletes all over the world has been overlooked

for quite a while now. Growing participation of women in global

sports also entails a whole new segment for these companies to

explore. Also, both firms have been accused of their involvement

in Sweatshops based out in Asian markets

especially in Bangladesh, Indonesia and

Pakistan. A detailed report based on

performance metrics and a comprehensive list

of recommendations is provided below.

1 Company overview:

Adidas AG is a German multinational company that employs in

design and manufacture of sporting goods which mainly include

shoes, clothing and accessories. Headquartered at Herzogenaurach,

Germany, it was started in 1920 by Adolf Dassler with 47

employees (adidas-group, 2014). The official logo of Adidas which

features “Three Stripes” is its trademark which was interestingly

bought from Karhu Sports, a Finnish Sports subsidiary for

2081.52$ and two bottles of whiskey (Steve Douglas, 2010). With

50,728 employees in about 160 countries producing about 650

million product units annually and generating sales revenue of

$17.81 billion as of 2013 (adidas-group, 2014), it is currently

the second largest sportswear manufacturer in the World after

Nike Inc.

SEGMENTSports enthusiasts, Fitness freaks, Young Men,

Women and ChildrenTARGET GROUP Urban Upper-middle and Upper classPOSITIONING Sports Apparel and Accessories

1.1ORGANIC AND INORGANIC GROWTH

1.1.1 ORGANIC GROWTH: TaylorMade adidas group is a subsidiary of adidas AG founded in

1979 by Gary Adams is a manufacturer of Golf clubs, bags and

accessories based in California. It is the biggest and World’s

most profitable golf equipment manufacturing company and it

announced record sales revenue of $1.7 billion in the fourth

quarter of 2012 (John Holmes, 2013).

1.1.2 INORGANIC GROWTH:Adidas bought Reebok in August 2005 for $3.8 billion which doubled

adidas’ sales in the US market and made their presence felt when they

took over Reebok’s basketball and baseball contracts. (EMMA THOMASSON,

2014)

Rockport was sold to Reebok in 1986 and today is a subsidiary of

adidas AG. It produced 8 million pairs of shoes last year which

contributed sales revenue of about 350 million for adidas.

2 SUPPLY CHAIN: SYSTEMS FLOW

Adidas AG

R&D

Agent

License

Supplier

Supplier

Supplier

Agent

Production

Wholesaler

Sub-contract

or

Retailer

Custom

MATERIAL

INTELLECTUAL PROPERTY

TRUST

MONEY

The supply chain structure adidas followscategorized by top five countries perregion by number of supplier sites isgiven below:

The Americas: United States, Brazil,Canada, Argentina and Mexico

Asia: China, Vietnam, Korea, Japan and Indonesia EMEA: United Kingdom, Germany, Italy, Turkey and Spain.

(adidas-group, 2014)

2.1 SUPPLIER RELATIONSHIPS

2.1.1 Supplier Selection

(A) Verifying ComplianceAdidas sends out its own team to monitor activities and assess the overall performance of the supplier. In addition unannounced assessments by third-parties to determine the credibility of provided information and its verification is also supported. As a member of Fair Labor Association (FLA), it is made sure that the supplier is compliant to mandatory regulations and policies in every country.

Internal and external audits are conducted at supplier’s factories and a new methodology with respect to suppliers is being followed:

(B) Direct Sourcing:This strategy is applicable to suppliers with which Adidas have directcontractual relationships. They seek a long term partnership with these suppliers and with a vision of self-governance; they take up theownership of conducting compliance programs, factory inspections, riskassessment, root cause analysis for major problems which helps them personally connect to the supplier and understand their strengths and weaknesses. This helps them precisely evaluate their compliance

systems and then provide training facilities to them if they lack in some particular area. They make sure that the supplier develops a Strategic Compliance Plan (SCP) by which they can maintain their standards in par with Adidas’ policies.

(C) Indirect Sourcing:Some supplier entities source products to Adidas through secondary channels such as agents and also, new market opportunities are developed through with licenses for businesses who independently manage production. This is the indirect sourcing plan where suppliers are encouraged to develop three year plans outlining their strategies and actions to meet the standards of the indirect supply chain as wellas commission audits by adidas approved external parties to verify their activities.

2.1.2 Supplier RatingSuppliers are rated on how fair, healthy and environmentally sound their workplace conditions are. An effective tool uses Key PerformanceIndex (KPI) to evaluate 6 key elements of social compliance which are Management commitment, Quality of management systems, Worker-management communication, training delivered, transparent reporting and measurement of compliance activities. After analysis, a C-Score rating between 1 and 5 is provided to each supplier. Based on these ratings, suppliers are clustered into three main categories:

Risk Management Cluster: Lowest performing supplier that needs help and is terminated from the contract if they do not improve after providing training.

Partnership Cluster: Suppliers who are just below par and little training and support will benefit them.

Self-Governance sector: Top performers who are capable of managing allthe core aspects of production, supply and logistics.

2.2 CRITICAL SUPPLY CHAIN ISSUESWhen adidas decided to outsource all of its manufacturing

divisions to Asian markets, especially China, India, Thailand,

Bangladesh, Vietnam and Indonesia, it had closed down all its

factories in USA and Europe. Leveraging on the low cost labor in

Asian countries like many other companies, it looked at

maximizing its profits and in fact was the first apparel company

to sign the Bangladesh Accord (Shelby Mastovich, 2013). But with

outsourcing arise multiple issues. They apparently cannot control

the worker wages that subcontractors pay and then, after the

Dhaka garment factory incident which injured 2500 and killed over

1100 workers defamed the company all over the world (Shelby

Mastovich, 2013). Some of the issues are listed below:

2.2.1 Human Rights Striving to operate responsibly all over the supply chain is

almost impossible

Adidas Group workplace standards following conventions laid by

UN, specifically the Health, Safety and environment guidelines

which are not pertinent in international laws have an adverse

impact.

With presence in 100 countries and suppliers in more than 65

countries, it is highly not practical to assess human rights

impacts continuously over the entire chain that is linked to

their products (adidas-group, 2014).

2.2.2 Vulnerable GroupsChildren less than 15 years when employed under hazardous workconditions are deprived of potential, integrity and developmentand these are harmful for their mental and physical development.With such practices prevalent in Sialkot, Pakistan, Adidas havetaken an initiative in that area supported by UNICEF and ILOwhere access to schooling for children and their education isbeing sponsored (adidas-group, 2014). Special care is taken inareas such as migrant labor rights, forced labor, Humantrafficking and Women in the supply chain.

2.2.3 Fair Wages and Freedom of AssociationAdidas has been working since 2003 to provide fair wages to workers along the whole supply chain and has taken notable steps using an Ngo to tackle this issue in Indonesia and USA. A very stringent and clear mandate that suppliers should respect the rights of employees to unionize and bargain collectively has been laidout (adidas-group, 2014).

2.2.4 Health and SafetyWorkers face risk from accidents, chemicals, toxic materials and fire.So they require all the factories along the supply chain to adhere to OHSAS 18001 international standards (adidas-group, 2014).

2.3 Outsourcing Adidas took a quieter approach by spending less on revenue and marketing. They had to get their nuts and bolts right and so to reduce production costs, it recently outsourced all of its production operations to Asian markets dominantly China, Vietnam,Indonesia and Bangladesh. With 1200 independent factories all over the world operating in 65 countries, it is fighting hard to gain the lion’s share in sportswear industry in America and China withlittle positive results. Overall, with the help of its outsourcing strategy, it is planning to achieve an ambitious $2.7 billion sales target for its football division in 2014 alone. The acquisition of Reebok in 2006 also added up pressure of balancing outsourcing aspects of Reebok and adidas

and also understands Reebok’s structure to succeed. But many pundits predict that adidas’ novel approach and one of the best product research units that it carries along might help it leap over its rival Nike in the near future.

3 STRATEGIC PLANNING PROCESS

3.1 Strategic Leadership and Evolution:After the death of Adolf Dassler in 1978,

the company slid into the hands of his son

Horst Dassler who followed his father’s

footsteps by innovating at every turn and

kept boosting its revenue until 1987 which

marked the sudden death of Horst Dassler and the end of family

business. This tragic blow took the company into a downward

spiral course causing a record loss in 1992 and brought the

company near bankruptcy.

Robert Louis-Dreyfus, the new CEO at that point of time

rewrote history when he, along with his partner Christian Tourres

decided to simply give the company a new direction instead of

reinventing it. It was under the leadership of them that the

company produced path breaking athletic shoes and equipment which

brought them back its past glory. The company entered a new

innovation zone in 2001 when Herbert Hainer became the new CEO of

adidas AG. He introduced a new, first of its kind lifestyle

segment called the Sports-inspired Streetwear and then eventually

partnered with Yohji Yamamoto and Stella McCartney which produced

the World famous labels like Y-3 and Porsche Design Sport. It was

in 2004 that the famous slogan “Impossible is Nothing” was coined

which then became the synonym for reaching one’s goals. Analysis

of Hainer’s leadership using the below factors:

In percentages and EUR millions(MarketWatch, 2014)(MarketWatch, 2014)

3.2 Strategic Direction

Mission / Vision / Values:

Adidas Group strives to become the global leader in the sporting

goods industry with committed efforts to continuously improve its

competitive position. Their core values include Performance,

Passion, Integrity and Diversity which act as pillars for their

direction setting.

3.3 Strategic Analysis

SWOT [Strengths and Weaknesses v/s Opportunities and Threats]:

STRENGTHS WEAKNESSES

Brand image and Brand

value are its major

strengths and is one of

the most recognizable and

loved brands in the World

with a diversified product

range.

A top notch Innovation

team within the company

that handles all aspects

of Research and

Development.

Strong academic

partnerships with

University of Michigan and

University of Loughborough

which have the reputation

of designing and

developing “Jabulani”, the

official match ball of

FIFA 2014 (Lboro, 2009)

(JULIA LISS, 2014).

Huge celebrity

With more than 95% of its

production being

outsourced to Asian

countries, a few issues

have aroused with respect

to quality of the products

deteriorating. (The

Economist, 2013)

Absence of labor laws in

some of its outsourced

countries resulting in

child labor which again

deteriorates the brand

image

endorsements and sponsors

to individual sports stars

like David Beckham and

Reggie Bush (Michael

McCarthy, 2007).

Tie-ups with major

organizations such as

FIFA, UEFA, NBA and

Olympic Competitions.

Biggest market share in

Europe and the recent

acquisition of Reebok

allowing it to increase

its presence in the US

market as well.

OPPORTUNITIES THREATS

Huge untouched market in

terms of tech wearables

like smart-gear. Unlike

Nike, they are still not

fully exploring that

product genre.

Must continue to maintain

great relations with

global giants like UEFA,

FIFA, and NBA.

Opportunity to capitalize

on the positive brand

revival of Reebok over the

recent years and its

gradually evolving growth

curve.

Can focus more on Brand

image building by setting

up sport training camps

and academics.

Intense competition in

Sportswear Apparel and

footwear industry going

neck to neck with

companies such as Nike,

Puma, Lacoste.

In the recent years, there

has been an increasing

market for fake or pirated

imitations which is a big

issue when brand image is

considered.

High brand switching

practices due to changing

customer needs and their

changing perceptions of

brand value and styles.

3.4 Strategic FormulationAs mentioned in their website (adidas-group, 2014), the most

important thing as part of their strategy is to create as much

value to each and every stake holder as possible. For them it’s

like playing in the Champion’s League of Sporting Goods Industry

and all their dedication and hard work is in correlation with

their mission of becoming the global leader in the industry.

3.4.1 Business level StrategyThe business level strategy revolves

around three core elements; Product,

Process and Prospects.

Since adidas group have a diverse

brand portfolio, they follow a multi-

brand strategy to maximize their

customer reach by providing distinct and relevant products to a

wide spectrum of customers. They adopted a channel-focused

approach which includes Wholesale, Retail and ecommerce. On a

Global scale, the consumer buying behavior and retail landscape

differ largely, and so they act according to a tailor-made,

distinctive but coordinated strategy. Large emphasis is placed on

markets which offer them medium to high profitability and also

better growth opportunities such as China, USA and Russia.

As pointed out earlier about the

diverse markets and a global platform, it is necessary that they

play in all four quadrants of the Porter’s generic strategies.

Adidas F10’s were introduced into the market with lower industry

standard prices falling into the Low Cost Leadership strategy

targeted to secure a competitive advantage over the rivals.

While, Adidas Duramos were introduced with respect to the low

cost focus strategy attracting masses which turned out to be cash

cows for the company. Adidas Copa Mundial is a high end football

shoe designed to address athletes which falls in the

differentiation focus quadrant and Climacools fall into the

differentiation leadership zone.

3.4.2 Corporate Level Strategy: Vertical Integration to Outsourcing Adidas was vertically integrated where it manufactured all of its

products controlling all stages of development until recent

years, when it decided to outsource more than 95% of its

production to other countries, bulk of it to Asia. As monitoring

and regulatory compliance in each of those outsourced plants gets

complex every day, it strives to collaborate with organizations

such as Better Cotton Initiative (BCI), Fair Labor Association

(FLA), and Global Social Compliance Program (GSCP) to reduce the

impact of harmful substances and promote measurable improvements

in environmental and social impacts. With an ambition of

becoming a sustainable company, they thrive to strike the right

chord with respect to shareholder expectations and concerns

regarding the employees in their supply chain and environment.

3.4.3 Operational Level StrategyAdidas employs individual business units for Running, Soccer,

Tennis, Basketball, Cricket and so on. All these business units

are handled using a solution system which is applied in 91% of

the cases. Operating cash flow generation is given great

importance and to maximize that, a modified Economic Value Added

model (EVA) has been adopted to ensure long term improvements.

One

of their strategic priorities is to cut down the product creation

and production time by adopting better process chains, systems

and infrastructure. By narrowing down the gap between source and

point of sales, they acquire an integrated and closely connected

supply chain. By leveraging a common structure, standards,

processes and infrastructure, the group strives to enable

tailored solutions across all business units.

To extensively cater customer needs, a continuous sense

of innovation drives the need to overcome conventions and embrace

change. Six key pillars are mentioned as part of their strategy

on their website (adidas-group, 2014):

Diversify brand portfolio

Focus investments on highest potential markets and channels

Create a flexible supply chain

Lead through innovation

Develop a team grounded in our heritage of sports.

Become a sustainable company

3.5 Strategic Implementation

The Value Adding Chain

(Dispitscompral, 2014)

3.5.2 Customer Management:In 2001, adidas wanted to redefine a whole new way of reaching

their target market and handling consumer queries. This made

them outsource their customer communication center to EWA

which handled customer insights, CRM issues, and digital

marketing for adidas. Since the implementation, they have

been addressing the unmet needs of the customer, created a

dedicated customer care team for enquiries and complaints,

identified trends, profiles and opportunities at every walk

resulting in significant improvement in maintaining customer

brand loyalty (EWA, 2014). Adidas received a silver medal in

2011 by a federal consumer association called Verbraucher

Initiative for outstanding customer care service (adidas-

group, 2014).

3.5.3 PROCUREMENTIn 2004, during the European Soccer Championship, Greece won the

finals out of the blue and so, adidas had to deliver145,000

Greece team jerseys all over the European markets. This was

something unexpected but the firm’s global procurement strategies

are highly commendable that they pulled this off just in time.

All this was possible mainly because of the centralized supply

chain structure of the firm who contacted their country based

sales subsidiaries and made an impossible feat happen (Carlos

Niezen and Wulf Weller, 2006).

3.5.4 Elements of Environmental Strategy along the Value ChainIn 2007, labor committees, student groups and administrators at

universities of Wisconsin, UCLA, Notre Dame and Michigan were provided

with extended engagements to be transparent about their affiliates and

licenses (adidas-group, 2007).

In 2007, adidas Group played a key role in

assisting the World Federation of Sporting Goods Industry in

reinforcing the industry’s position on zero-tolerance for child

labor in the football stitching supply chain and supported the

Federation in shaping its global CSR program for 2008 (adidas-

group, 2007). Designers at the firm

standardize the patterns at every level just to eliminate wastes

and reduce emissions at the time of production (adidas-group,

2013). A target to reduce relative energy

use by 20%, Carbon by 30%, Water by 20% per employee and 50%

paper savings per employee by 2015 shows its commitment towards

social and environmental responsibility (adidas-group, 2013).

4 Porter’s Five Forces AnalysisHigh Bargaining Power of Buyers

Adidas mostly has standardized products

Switching costs are verylow

Threaten to buy rival’s products

Wide range of rival brand products available

Low bargaining power of suppliers

Huge, diverse supplier base

Relatively low cost negotiation threat

Similar standard qualityof raw materials

Threat of purchaser’s making decision instead of buying from suppliers.

Low Threat of new entrants Large economies of scale Discouraging entry

barriers Large capital costs

needed for branding, advertising, production etc.

High brand power of

Medium Threat of substitute products Higher costs relative to

innovative products of rivals

Increasing revenues, stock value, brand imageand value of adidas AG.

existing players

5 Ethical ResponsibilityLaunching a sustainability report in 2001 made adidas Group the first company in the sporting goods industry to do so.

5.1 PeopleTaking a stand for human rights is an integral part of the company’s code of conduct statement. Adidas gains top rating in ethical rating when compared to other big players in the sportswear industry. A great initiative in Uzbekistan on how ethically it utilizes cotton resources and workers is commendable.

But a more recent War on Want report regarding Bangladesh’s sweatshops tells another story. A basic salary of 72 paisa a day and illegal employment of staff for over 60hours a week is said to be rife (Ethicalconsumer, 2013).

5.2 Environment Adidas along with Nike and Puma committed publicly that they

would completely eliminate the discharge of hazardous chemicals throughout their supply chain by 2020 (Ethicalconsumer, 2013).

Substantial increase in factory ratings – 86% of the company’s strategic suppliers now have a 3C-rating or better, and 37% have a 4C-rating or better (Ethical Performance, 2013).

adidas Group employees achieving more than 26,000 volunteer hours in community projects in 22 countries (Ethical Performance, 2013).

Launch of the adidas DryDye collection, where the company was first to market with the revolutionary DryDye technology(that uses zero water in the dyeing process) (Ethical Performance, 2013).

But there has not been adequate action taken towards the consumption of leather for which it is being attacked by major organizations like Green Peace (Ethicalconsumer, 2013).

Where do Nike and Adidas stand in terms of Social ethical

responsibility?

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6 RECOMMENDATIONS

Short Term

Adidas:Investing time and money in developing diverse patterns and products is really necessary in the present situation as their products’ having similar standard design is turning out to be a weak spot for them.

Startup athletic training camps and academic ventures in USA, India and China would help them improve their brand image and value among other Asian younger population.

Innovate at every step and embed more ground breaking principles into their products. This can be achieved by taking up partnerships and tie-ups with top universities in USA, Europe andespecially Asia.

Participation of women in global sports has vastly increased but still, that segment of the market has been neglected by adidas for some time now. Enforcing mechanics and styles with respect towomen would open up a whole new segment for them to explore.

Nike:

Long Term

Adidas:Concentrate parallely on “Tech Gear” segment which it presently lacks focus on. Its Micoach products are limited and have not grabbed much attention when compared to Nike’s Fuel bands and tech wearables.

Outsourcing some of its research and development operations to competitively stronger countries like India will result in cost effectiveness. It would also help generate better solutions with

respect to the fact that they have a proven caliber of providing top notch technical support operations.

Nike: