Global Operations

Global Operations manages the development, production planning, sourcing, and distribution of our company’s products. The function strives to increase efficiency throughout the company’s supply chain and ensures the highest standards in product quality, availability, and delivery. With the consumer in mind, we deliver competitively priced products in a sustainable manner, when and where they are wanted.

CLEARLY DEFINED PRIORITIES FOR GLOBAL OPERATIONS

Global Operations delivers upon our company’s mission to be the best sports company in the world. First, the function creates the best products by establishing state-of-the-art infrastructure, processes, and systems that enable us to focus on innovative materials and manufacturing capabilities. Second, Global Operations is focused on delivering best services through innovative distribution capabilities by enabling product availability through the omni-channel approach to supply chain agility. Third, Global Operations strives to deliver the best experience to our customers and consumers in a sustainable way.

Global Operations in go-to-market process

Best product: Global Operations is driving innovation in new materials, such as recycled polyester, Parley materials derived from ocean plastic, or PFC-free materials, as well as new product constructions, and new ways of manufacturing (e.g. 3D technology, or direct-to-textile digital printing) that deliver consumer value and enable competitive advantage. By investing in tools that more directly connect design and factory production, Global Operations is changing traditional models of development to deliver constant newness and increased speed-to-market capabilities. The function also plays a critical role in driving operational efficiency to support the company’s growth ambition. To mitigate material and labor costs for the company, Global Operations is continuously reducing complexity through process improvements and consolidation of legacy structures.

Best service: Global Operations strives to develop, produce, source, and distribute ordered articles on time and in full. Therefore, a non-financial KPI ‘On-Time In-Full’ (OTIF) measures on-time delivery of our products to wholesale and franchise customers as well as own-retail stores toward the desired customer date. see Internal Management System In 2019, adidas delivered 79% of its adidas and Reebok brand products on time and in full (2018: 78%), which is broadly in line with the overall target of 80%. In Greater China and Russia/CIS, OTIF levels reached again above 90% of our order quantities.

OTIF 2019

79%

Best experience: Global Operations contributes to the adidas strategic business plan ‘Creating the New’ to accomplish our mission. The function strengthens brand desire by creating and providing the right product to consumers – in the right quality, size, color and style in the right place and at the right time, across the entire range of the company’s channels and brands. Global Operations builds capabilities that further improve supply chain efficiencies, while mitigating costs, thereby ensuring a continuously sustainable and competitive supply chain.

Strategic COMPANY priority ‘speed’

‘Speed’ is a strategic priority for the company. Our ambition is to be the first fast sports company in the sporting goods industry. We are consumer obsessed; thus, we want to respond quicker to consumer demand. We want to make our products available when and where they are wanted across our wholesale, retail, and e-commerce channels. Our aim is to always be on trend and always in stock. In 2019, we made further progress around our strategic priority with fast creation and fast replenishment, increasing the share of customer-defined short lead-time ranges, which allows fulfillment of an increasingly large share of quarterly business.

Fast creation: We are moving away from predominantly developing products in advance of seasonal merchandising calendars and are getting closer to responding quickly to consumer demands with in-season development and rapid replenishment manufacturing. We aim to ensure creation timelines of eight months or less. Bringing products to market faster allows our customers and direct-to-consumer channel to place orders closer to the actual time of sale, facilitating buying decisions that are based on better market knowledge.

Fast replenishment: To increase ‘Speed’ also on production timelines, in 2019 Global Operations continued to expand its efforts to enable later ordering and further reduced production lead times. The function succeeded in providing 60 days or less production lead times for the vast majority of our footwear, apparel and hardware products. In addition to shortening our overall production lead times, Global Operations has scaled its fast replenishment capabilities of best-selling articles and established 30-day production lead times for 20% of all articles across our product categories. Through this, we are enabling our brands to ensure constant freshness in store for our consumers, resulting in higher-quality sales and more productive inventory. see Corporate Strategy

Speedfactory: Together with Oechsler AG, adidas had opened two Speedfactories in 2017 to test new processes for faster production of athletic footwear and to develop new manufacturing technologies with the ultimate goal to transfer them to the company’s global supply chain. In the future, adidas will focus its resources and capacities even more on the modernization of its other suppliers and the use of 3D technology in footwear production. Production at the two Speedfactories in Ansbach, Germany, and Atlanta, USA, will be discontinued by April 2020. However, the Speedfactory technology will be deployed at Asian suppliers going forward. This will enable adidas to continue to respond to short-term trends in demand while using production capacities more flexibly and economically, and expanding the range of products with short production times faster. The company will continue to develop, improve and test manufacturing processes in the ‘adiLab’ at the adidas production site in Scheinfeld, Germany. see Corporate Strategy see Innovation

digitalizing the end-to-end creation-to-shelf value chain

In recent years Global Operations has focused on digitalizing the product creation process, leveraging digital capabilities and technologies across design and development teams. In 2019, we further expanded these efforts toward digitalizing the end-to-end creation-to-shelf value chain. Within a defined scope, the first two seasons of footwear and apparel products have been digitally designed, developed, sourced and sold into key accounts. End-to-end digital creation is a key strategic initiative of the digital pillar of our ‘Creating the New’ Acceleration Plan.

We aim to scale up our new way of working with one of our business units by the end of 2020. With digitally created products we support a more efficient creation process internally enabling a ‘right first-time’ approach. Externally, digital products will become more prominent in the interaction and communication with our partners, allowing us to make faster product iterations and take better decisions earlier in the process. This new way of working will enable a faster time-to-market and create a holistic and immersive digital sell-in experience for our key customers. Our ambition is to continue building the digital infrastructure for the future, gradually rolling out the new capabilities, broadening the involved supply base and working closer with our key customers during the product creation process.

future of material sourcing

Global Operations constantly looks for the next generation of materials by focusing, amongst others, on knitted footwear, direct-to-textile digital printing, and sustainable materials. Building on our partnership with Parley for the Oceans, in 2019, we continued to roll out Parley Ocean Plastic across our key categories. The demand for Parley Ocean Plastic and other sustainable materials continues to increase. Therefore, our dedicated sourcing operation working together with Parley for the Oceans ensures a steady and transparent supply chain. In 2019, we added the Philippines to the group of countries where we source ocean plastic to produce yarns. We also continued to expand sourcing from Small Island Developing States by onboarding the Dominican Republic. see Sustainability

automation to improve production efficiency

Driving the level of automation in our supply chain remains of overriding importance for Global Operations. In this context, automation technologies such as auto cutting, computerized stitching, robotic adhesive spray system, and auto-packing solutions are important focus areas, as they allow us to reduce our dependency on manual labor while ensuring consistent and highest quality standards. To further improve our production efficiency in all categories, we will continue to increase the level of automation in our supply chain in the years to come.

MAJORITY OF PRODUCTION THROUGH INDEPENDENT manufacturing partners

To keep our production costs competitive, we outsource almost 100% of production to independent manufacturing partners. In 2019, we worked with 138 independent manufacturing partners (2018: 130) that were producing in 336 manufacturing facilities (2018: 289).

The majority (73%) of our independent manufacturing partners are located in Asia (2018: 71%). While we provide our manufacturing partners with detailed specifications for production and delivery, they possess excellent expertise in cost-efficient, high-volume production of footwear, apparel, and hardware.

Independent manufacturing partners by region¹

In 2019, 45 of the 138 independent manufacturing partners (2018: 26 of 130) were considered key strategic partners, producing the majority of our products in 156 manufacturing facilities worldwide (2018: 82). This increase was due to the addition of new apparel suppliers in order to create more capacity and better meet the demand for 2019. We value long-term relationships: 85% (2018: 84%) of our key strategic partners have worked with adidas for more than ten years and 36% (2018: 42%) have a tenure of more than 20 years.

Key strategic partner relationships > 20 years

36%

All our suppliers are subject to specific performance criteria which are regularly measured and reviewed by Global Operations. To ensure the high quality that consumers expect from our products, we enforce strict control and inspection procedures of our manufacturing partners and in our own factories. Effectiveness of product-related standards is constantly measured through quality and material claim procedures. In addition, we track social and environmental performance criteria of our suppliers through the C- and E-KPI tracking system. Adherence to social and environmental standards is promoted throughout our supply chain. see Sustainability The current supplier lists can be found on our website. adidas-group.com/sustainability/s/supply-chain-approach

Vietnam remains largest footwear sourcing country

98% of our total 2019 footwear volume was produced in Asia (2018: 97%).Vietnam represents our largest sourcing country with 43% of the total volume (2018: 42%), followed by Indonesia with 28% (2018: 28%) and China with 16% (2018: 18%). In 2019, our footwear manufacturing partners produced approximately 448 million pairs of shoes (2018: 409 million pairs).Our largest footwear factory located in Vietnam produced approximately 8% of the footwear sourcing volume (2018: 11%).

Footwear production by region¹

Footwear production¹ in million pairs

Cambodia REMAINS largest source country for apparel

In 2019, we sourced 91% of the total apparel volume from Asia (2018: 91%). Cambodia is the largest sourcing country, representing 23% of the produced volume (2018: 24%), followed by China with 19% (2018: 19%) and Vietnam with 19% (2018: 18%). In total, our manufacturing partners produced approximately 528 million units of apparel in 2019 (2018: 457 million units). The largest apparel factory, which is located in China, produced approximately 9% of this apparel volume (2018: 9%).

Apparel production by region¹

Apparel production¹ in million units

CHINA REMAINS Main SOURCE of hardware products

In 2019, 81% of our hardware products, such as balls and bags, were produced in Asia (2018: 79%). China remained our largest sourcing country, accounting for 37% of the sourced volume (2018: 38%), followed by Pakistan with 22% and Turkey with 18% (2018: 18% each). The total hardware sourcing volume was approximately 127 million units (2018: 113 million units), with the largest factory accounting for 16% of production (2018: 18%) located in Turkey.

Hardware production by region¹

Hardware production¹ in million units

Optimizing distribution center network and supply chain organization

By creating a higher specialization of our distribution center landscape focused on the specifics of our products across the various channels, Global Operations ensures higher flexibility at each consumer touchpoint. This, in turn, enables a broader range of products to be available at the point of sale, including online orders for pick-up in our own-retail stores. see Sales and distribution strategy

In 2019, Global Operations focused on further optimizing its distribution center network, while at the same time preparing it for future consumer demand. In this context, we mainly focused on our distribution centers in the US. We built a new distribution center in Pennsylvania, and expanded our existing West Coast third-party facility, aimed at supporting our future growth expectations for North America, in particular around the company’s e-commerce and own-retail businesses. Our new distribution center in Suzhou and the extension of our distribution center in Rieste have been successfully integrated. Our newly added e-commerce facility in the UK has been created to improve our consumer experience there and prepare us for Brexit scenarios.

In addition, in our continuous effort to operate a best-in-class supply chain that is responsive to the consumer needs of today and tomorrow, we consolidated and centralized our planning and trading teams in one location to ensure the highest level of alignment and operational efficiency.