Working Conditions in our Supply Chain

Core to the human rights approach of adidas is its commitment to ensuring fair labor practices, fair compensation and safe working conditions in factories throughout its global supply chain. Our active efforts are guided by the adidas Workplace Standards, our supply chain code of conduct. The standards form a contractual obligation under the manufacturing agreements adidas signs with its main business partners to ensure workers’ health and safety and environmentally sound factory operations by following International Labour Organization (ILO) and United Nations (UN) conventions relating to human rights and employment practices, as well as the model code of conduct of the World Federation of the Sporting Goods Industry (WFSGI). Specific reference to the code provisions of the ILO conventions is provided in the adidas Guidelines on Employment Standards. The Sourcing and Social & Environmental Affairs (SEA) senior management reviews and approves all policies and implementation processes of the labor rights program.

adidas regularly rates factories on their ability to provide fair, healthy and environmentally sound workplace conditions by means of conducting announced and unannounced audits through adidas personnel or an approved external auditor. We use a KPI rating system for social compliance (C-KPI) and attach scores between 1 and 5, with one being the worst and five being the best. According to the results, our sourcing and SEA teams jointly decide the course of action, ranging from the definition of training needs or other improvements at the factories to enforcement mechanisms such as sending warning letters or even termination of contracts.

Any cases of non-compliance identified during audits are given a certain time frame for remediation. Potential new factories are assessed in a similar way and orders can only be placed if approval by the SEA team has been granted. adidas operates several grievance channels allowing workers or third parties to submit complaints about violations of the Workplace Standards or human rights generally. All complaints are reviewed and investigated, and the outcome is reported on our corporate website. Factory conditions are also inspected by independent auditors through our participation in the Fair Labor Association, which we joined as a founding member in 1999, demonstrating our commitment to independent and unannounced factory inspections and external verification of our programs.

At the end of 2019, adidas worked with 631 independent factories¹ (2018: 684) that manufacture products for our company in 52 countries (2018: 51). The decrease is due to our overall ambition to further consolidate our supply chain (mostly in Japan in 2019). Our intention is to work with fewer factories and provide them with more orders. 69% of our suppliers’ factories are located in the Asia-Pacific region. The number of licensees we worked with remained relatively stable compared to 2018, with 62 licensees that manufactured products in 372 factories across 38 countries.

Onboarding

In 2019, we conducted initial assessments (IA), the first approval stage for new entry into our supply chain, in 189 factories (2018: 221), a decrease of 14% compared to 2018, mainly due to our decision to grow in existing factories rather than onboarding new ones. 49 factories (2018: 55 factories) were either rejected directly after the initial assessment identified zero-tolerance issues, or were ‘rejected with a second visit’ due to identification of one or more threshold issues, which means they were rejected but given the chance to remediate the non-compliance issues within a specific timeframe. The vast majority (84%) of all initial assessments were undertaken in Asia (2018: 90%), with China accounting for 38% of these assessments (2018: 41%).

Overall, at the end of 2019, the ‘first-time rejection rate’ of 34% of all new factories visited was slightly higher than in the previous year (2018: 30%), as was the ‘final rejection rate’, which increased to 4% in 2019. The latter was due to the rigor applied to the initial assessments. The remediation of factory issues is beneficial for workers as it raises the bar in terms of better and timelier pay, improved benefits, reduced hours, and the legal protection of formal employment contracts, and it results in significant improvements in basic health and safety within the workplace. Suppliers who have threshold issues are normally given three months to remediate those issues before being re-audited for final acceptance.

Factory visits and training sessions

During 2019, 426 factory visits (2018: 546) were undertaken. This represents a decrease of 22%, due in part to a reduction in the intake of new factories into the supply chain, which led to a decline in the number of fundamental or introductory training sessions. There was also a reduction in the number of advisory visits to individual factories, with a preference given to group learning through adidas hosted workshops. In total, we conducted 123 training sessions and workshops for suppliers, licensees, workers and adidas employees (2018: 143), reaching a total of 1,697 people (2018: 1,282).

Worker empowerment

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 ‘SMS Worker Hotline’ back in 2012, we have progressively improved the operational grievance mechanisms at our factories into an application-based ‘Workers Voice’ platform that was available and used at 98% of our strategic factories across eleven countries by the end of 2019. The top three types of complaints in 2019 were related to the categories of benefits, general facilities and communication. Responses received through this platform are carefully tracked and help us understand the main challenges and worker rights issues in the factories, ultimately allowing us to monitor how the factory management teams find solutions and communicate back to their workers.

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. Throughout 2019, we expanded this exercise, completing follow-up surveys but also adding newly onboarded factories to the scope. Upon completing the survey, factories are required to develop improvement plans for the top three issues and then track progress regularly. Since the start of these surveys in 2016, we have engaged and secured feedback from around 35,000 workers. In 2019, more than 8,500 workers in more than 50 factories across twelve countries participated in these surveys.

Alongside factory-led training, adidas has also offered tailored training for supervisors since 2016. Up until the end of 2019, more than 2,200 supervisors completed such training. In 2019 alone, more than 1,300 supervisors in almost 70 factories across six countries participated. Throughout 2019, we expanded the activities to also strengthen the ability of female supervisors to pass on their knowledge to their peers in dedicated sessions. We initiated a Women Supervisor Forum, a platform for female supervisors to upgrade their knowledge, learn best practices, get exposure to inspiring guest speakers and also gain support, information and guidance on a range of topics to improve their ability as a female supervisor. This forum has been established in Indonesia and Vietnam and will be rolled out to the remainder of countries in scope from 2020 onward. As part of our wider 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 420 on-job women and women workers who were laid off from jobs in the football manufacturing sector. Results were very positive, showing that the program helped redundant women to succeed in getting new jobs, and it supported women on the job to secure on-job promotions by improving their professional performance.

Monitoring

We audit our suppliers regularly against our Workplace Standards. In 2019, a total of 1,191 social compliance audits and environmental assessments (2018: 1,207) were conducted. This included 234 test assessments according to the ZDHC Wastewater Guidelines (2018: 233) as part of our environmental assessments. As in 2018, 102 self-governance audits and collaboration audits were conducted in 2019. When a factory reaches a compliance maturity level of 4C and above, we empower the supplier to conduct their own self-governance audits and develop appropriate remediation plans, which we periodically review. Collaboration audits are conducted in partnership with other brands, or as part of joint remediation exercises. The number of audits in factories manufacturing goods for licensees decreased slightly from 323 in 2018 to 317 in 2019, in line with the overall reduction in the number of licensee factories.

The number of audits using in-house technical staff decreased to 299 (2018: 354), while audits conducted by third-party monitors commissioned by suppliers and adidas business entities increased to 658 at the end of 2019 (2018: 620). The decline in internal audits shows the increased focus on additional advisory consultancy and empowerment projects that go beyond our regular audit routine.

• Audit coverage: A total of 49% (2018: 47%) of all direct and licensee facilities were audited in 2019. ‘High-risk’ locations² in Asia, which is the major sourcing region of adidas, again received extensive monitoring in 2019 with an audit coverage that was close to 75% (2018: 65%). As a general principle, factories located in high-risk countries are 100% covered in our auditing scope, which means they receive audits annually or every two years while low-risk countries (i.e. with strong government enforcement and inspectorate systems) are considered out of scope for our audit coverage.
• Audit results: In 2019, 68% of our strategic factories achieved a rating of 4C or better, compared to 37% in all direct factories, indicating that strategic factories have achieved much more advanced compliance levels. While this is yet again significant progress compared to 2018, it still falls short of our 2020 target to reach 4C or above in 80% of our strategic suppliers. For the first time, 12% of our strategic factories achieved a 5C rating, indicating that they have mature social compliance systems and practices in place. Of our strategic licensee factories, 86% successfully embedded governance systems, supply chain management, purchasing practices and product safety compliance requirements into their business practices. 14% 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.

Our audits help us rate our suppliers according to their social and environmental compliance performance with a C-KPI and E-KPI rating tool, respectively. An evaluation of E-KPI is contained in the description of the environmental performance of our supply chain.

Social compliance performance rating of strategic supplier factories by C-KPI rating

Shortcomings identified in active factories

Our suppliers’ factories are evaluated against a number of critical compliance issues. While threshold issues are serious but correctable non-compliances that can be addressed in a specified timeframe through remedial action, zero-tolerance issues – such as forced labor, child labor practices and critical life-threatening health, safety and environment conditions – immediately trigger a warning and potential disqualification of a supplier. We report these non-compliance findings that were identified through performance audits, collaboration audits and self-governance assessments in 2019. We follow up on all cases of non-compliance and seek to remediate them within a given timeframe. As can be seen below, the identified issues in 2019 remained largely the same as those in 2018.

• Shortcomings in the area of labor: Besides identifying non-compliances with our Workplace Standards, the adidas compliance team focuses on the use and effectiveness of the factories’ HR management systems and identifies any gaps in policies and procedures related to specific risk areas, such as forced labor, child labor, freedom of association or discrimination. As a result, the percentages shown indicate the systemic shortcomings of active factories, rather than the confirmed presence of a specific case of non-compliance.

Top 10 shortcomings in the area of labor identified during audits in 2019

• Shortcomings in the area of health and safety: Fire, electrical and machine safety are critical areas for existing factories and together accounted for 33% of the non-compliances identified in 2019. The way chemicals were stored and used, including the presence of banned chemicals, accounted for 11% of non-compliance findings reported. A further 7% of the findings related to management systems, policies and procedures, and specifically a lack of compliance with our Workplace Standards and expectation for effective health and safety systems, including the recruitment and retention of qualified safety staff.

Top 10 shortcomings in the area of health and safety identified during audits in 2019

Independent FLA audits

In 2019, the FLA deprioritized factory assessments and remediation verification under its Sustainable Compliance Initiative (SCI), in favor of other impact areas, including fair wage compensation and factory training³. Consequently, adidas received only one SCI verification, compared to three in 2018.

Enforcement

Warning letters are an essential part of our enforcement efforts and are triggered when we find ongoing serious non-compliance issues that need to be addressed by our suppliers’ factories. We work closely with our suppliers to help them improve their performance. However, where we face situations of severe or repeated non-compliance, we do terminate business relationships with factories.

• Warning letters: In 2019, we had a total of 41 active warning letters (2018: 39) across 14 countries. The largest number of warning letters continues to be issued in Asia. Compared to the previous year, the overall number of active first warning letters decreased slightly; the total number of second warnings increased from one in 2018 to six in 2019. Factories that receive second warning letters are only one step away from being notified of possible termination of the manufacturing agreement and receive focused monitoring by the SEA team. The number of third warning letters issued to business partners (which result in factory terminations) remained stable in 2019 (2018: 1). It is difficult to generalize about the grounds for a warning letter as it may be issued for a single unresolved non-conformance or for multiple breaches of our standards. The range of issues that resulted in warning letters in 2019 due to non-compliance regarding fire safety practices, receipt of wages, social and medical insurance, hazardous chemicals management, overtime, deductions, transparency or safety controls in high-risk areas remained the same compared to the previous year.

• Terminations: In 2019, we terminated agreements with two suppliers for compliance reasons (2018: 1). In one case there was inadequate progress in remediating serious migrant labor issues and in the other the supplier refused to grant the SEA team access to audit the factory. While terminations happen at our existing factories, we pre-screen all new factories and if our initial assessments uncover zero-tolerance or threshold issues factories are rejected.