Working Conditions in our Supply Chain

Managing the impact of covid-19

From the very outset, adidas has sought to mitigate the impact of the coronavirus pandemic on the workers in its global supply chain, providing guidance on infectious disease control, occupational safety and workers’ welfare. The company continued to uphold its standard manufacturing terms, including worker rights protection, and assisted key suppliers in securing bank financing to help them weather the covid-19 crisis. Ensuring business continuity and a functioning supply chain has kept workers in jobs, with the vast majority of our supplier factories having retained their workforce, albeit with reduced working hours due to lockdowns or suspensions. adidas continued to be committed to ensuring legal compliance in terms of pay and benefits for all workers and tracked the working conditions in each and every factory. Where we have seen factory downsizing, we ensured that laid-off workers received their legal severance and other entitlements in full.

We recognized that these actions alone would not be enough and endorsed the International Labour Organization’s (ILO) Call to Action to address the impact of coronavirus pandemic on the garment industry. The ILO convened a global working group, charged with securing funding to ensure business continuity, payment of wages, income support and job retention initiatives sufficient to protect garment workers’ income, health, and employment. The effort included a commitment to support the development and expansion of social protection systems for workers and employers in the garment industry, consistent with recommendation ILO 202.

adidas’ covid-19 response was assessed by the labor rights advocacy community, which includes the Worker Rights Consortium and duly recognized in Baptist World Aid Australia’s ‘2020 Covid Fashion Report’ which surveyed close to 100 brands on their commitment to address the covid-19 crisis in their supply chain.

Our approach to working conditions in our supply chain

Our commitment to ensuring fair labor practices and safe working conditions in factories throughout our global supply chain is fundamental to our human rights approach. 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 we sign with our suppliers to ensure workers’ health and safety and environmentally sound factory operations by following ILO and United Nations 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). We also seek to extend our reach by cascading responsibilities to our partners, to capture and address potential and actual risks related to possible labor rights violations upstream and downstream of our product creation. Specific reference to the code provisions of the ILO core labor 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.

Our social compliance program continues to evolve, and is built around three core concepts:

• Performance: In 2021, we will transition from our compliance benchmark (C-KPI), which is focused on management systems and supplier self-governance, to a new set of social indicators (S-KPI) that measure outcomes such as reduced accident rates, higher retention levels, or improved worker satisfaction. Through our new S-KPI tool, we will report annually on workplace conditions, including the effectiveness of our worker empowerment initiatives. The targets for 2025 will be defined in 2021.
• Transparency: As part of our broader risk management processes, we will increase the scope and application of Human Rights Due Diligence (HRDD) efforts. Our 2025 ambition is to achieve a 100% coverage of all ‘at risk’ activities, ensuring HRDD compliance is embedded across the organization. ‘At risk’ activities are those activities identified in our annual human rights risk mapping and flagged as having potential adverse human rights impacts that require prevention or mitigation.
• Fairness: The focus lies on gender equality, pay equity and responsible sourcing practices that support fair compensation for workers. Our ambition is to see progressive improvement across all fair compensation benchmarks and achieve gender wage parity for workers and their supervisors in each of our strategic Tier 1 suppliers by 2025.

Factory performance

We regularly assess factories on their ability to provide fair, healthy and environmentally sound workplace conditions by conducting announced and unannounced audits through our own team and accredited external auditors. We use a KPI rating system for social compliance (C-KPI) and attach scores between ‘1’ and ‘5’, with ‘1’ being the worst and ‘5’ being the best. According to the results, our sourcing and SEA teams jointly decide the course of action, ranging from trainings to enforcement actions, such as sending warning letters or hiring external consultants to help improve their program.

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. We operate several grievance channels allowing workers or third parties to submit complaints about violations of the Workplace Standards and human rights generally. All third-party 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 (FLA), which we joined as a founding member in 1999, demonstrating our commitment to independent and unannounced factory inspections and external verification of our programs. Since then, our program has been accredited three times by the FLA.

At the end of 2020, adidas worked with 520 independent supplier facilities¹ (2019: 631) that manufacture products for our company in 49 countries (2019: 52). The decrease is due to our overall ambition to further consolidate our supply chain, mostly in South Korea in 2020. Our intention is to work with fewer factories, forming long-term partnerships and provide them with more orders. 66% of our suppliers’ factories (2019: 69%) are located in the Asia-Pacific region. The number of licensees we worked with declined slightly compared to 2019, with 56 licensees (2019: 62) that manufactured products in 375 factories (2019: 372) across 37 countries (2019: 38).

Onboarding

In 2020, our primary focus has been on maintaining partnerships with our existing suppliers rather than onboarding new ones. We conducted initial assessments, the first approval stage for a new entry into our supply chain or, in the case of existing sites, where there is the construction of new facilities, in 112 factories (2019: 143). Of these, 31 factories (2019: 49 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 (94%) of all initial assessments were undertaken in Asia (2019: 84%), with China accounting for 50% (2019: 38%). 

Overall, at the end of 2020, the ‘first-time rejection rate’ of 28% of all new factories visited was slightly lower than in the previous year (2019: 34%). Onboarding fewer factories, and providing focused support to those we have onboarded, has aided us in also lowering the ‘final rejection rate’, to below 2% in 2020. 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 that have threshold issues are normally given three months to remediate those issues before being re-audited for final acceptance.

Worker engagement and empowerment

Since 2017 we have reduced our reliance on local worker hotlines as a complaint mechanism, by building an application-based ‘Workers Voice’ platform: a bespoke, factory-based digital grievance channel for workers. We have progressively improved and expanded the use of this operational grievance mechanism and in 2020 almost 450,000 workers employed in 111 factories across twelve countries had access to this system. Due to the covid-19 pandemic, two strategic suppliers had to postpone the implementation of the platform, which is why we missed our 2020 target of having the ‘Workers Voice’ platform implemented at 100% of our strategic suppliers.

A robust grievance mechanism is the fulcrum on which workers can raise their concerns and secure remedies. Access to a digital complaint mechanism proved invaluable during covid-19, with a 128% increase in worker grievances being reported. Close to 46,000 human and labor rights complaints were filed in 2020. The top three types of complaints were related to concerns over benefits, general facilities and communication. 98% of these complaints were successfully resolved by the factory management.

Responses received through the ‘Workers Voice’ platform are carefully tracked by adidas, using KPIs and dashboard reviews, case satisfaction ratings and on-site worker interviews. This allows us to evaluate the efficacy of the grievance channels, see major cases in real time and undertake timely interventions, where necessary. It also helps us understand the main challenges and labor rights issues in a factory and track how the factory management and their HR teams resolve cases and communicate their findings. Our evaluation contributes to the factory’s overall social compliance score. adidas provides ongoing capacity building to enhance the factory teams’ capability to improve the effectiveness of the grievance mechanism. It is notable that the case satisfaction rate, which allows workers to input their level of satisfaction with the resolution of complaints, has risen steadily from 39% in 2019 to 58% in 2020.

Complementing the various grievance channels, we rolled out the ‘Worker Pulse’ project in 2020, a digitalized short survey to capture workers’ perception and awareness of their labor rights on focused areas such as communication, harassment and abuse and grievance systems. We undertook these digital surveys in 63 factories across nine countries, with more than 22,000 workers voluntarily participating. The survey was conveyed to the workers through a mobile-phone-based application.

Of the participating workers, 78.6% reported their willingness to recommend their workplaces to their friends and relatives as a favorable place to work, and 77% believed that complaints raised through the grievance mechanisms are taken seriously by factory management. Factories are required to develop and track workplace improvement plans, based on the feedback received from the ‘Worker Pulse’.

The ‘Worker Pulse’ builds on our existing Worker Satisfaction Survey (WSS) process, which was first launched in 2016. WSS is a comprehensive survey consisting of around 60 questions that helps suppliers gain insights into the workplace environment, from both a worker’s and a supervisor’s perspective, and target those areas requiring improvement. For example, workers are asked for their feedback on the effectiveness and performance of their factory grievance mechanisms, which in turn helps inform ways to improve and further refine those systems.

Alongside factory-led training, we have also offered tailored training under our Women Leadership Program (WLP), first launched in 2016. As of the end of 2019, more than 1,300 workers had participated in this program. The WLP provides training and skill-sharing sessions, managed through a Women Supervisor Forum (WSF): a platform for female supervisors to upgrade their knowledge, learn best practices, and gain support, information and guidance on a range of topics to improve their abilities as a supervisor. With the arrival of the global pandemic, opportunities for face-to-face training in the factories were severely constrained. As a result, only 195 supervisors were able to take part in the WLP skills training program in 2020, and the expanded rollout of the WSF had to be paused.

2020 also saw the successful launch of our mobile-phone-based ‘Digital Training’ project, which was successfully rolled out in 43 factories across Cambodia, China, Indonesia, and Vietnam. The digital tool assesses workers’ awareness of their labor rights and remedies, e.g. harassment and abuse, fire safety and use of grievance channels. Of the 11,000 workers who took part in 2020, 83% secured a 75% pass rate in the post-test questions.

Factory engagements and training sessions

In 2020, just as our ability to conduct onsite audits was restricted by the pandemic, so was our capacity to engage in onsite visits and training sessions at our suppliers. We addressed this by increasing our levels of remote, or virtual engagements throughout the year, increasing from 426 individual factory engagements in 2019, to 644 in 2020. In addition to our continuous tracking of covid-19 impacts on suppliers’ operations, these engagements covered monitoring of remediation activity, KPI improvement plans, grievance investigations and worker satisfaction surveys, as well as our regular supplier training programs, where it was practical to do so. Nevertheless, some of our programs could not continue at the same levels, in the absence of face-to-face training workshops. In total, through our fundamental, performance, and sustainability training sessions, we conducted 61 training sessions and workshops for suppliers, licensees, workers and adidas employees (2019: 123). Where virtual training sessions could be held, we were able to attract larger audiences, reaching a total of 1,497 people, only slightly down from the 2019 figure of 1,697. 

As part of our forced labor risk assessment and trainings for Tier 2 material suppliers that employ foreign migrant labor, we engaged remotely with many suppliers covered under the umbrella of our partnership on responsible recruitment with the International Organisation for Migration. These engagements and trainings ranged from desktop reviews to online supplier trainings on labor recruiter due-diligence via the International Organization for Migration’s e-campus foundation course on ethical recruitment.

As part of our efforts to scale the adoption of renewable energy within our supply chain, we conducted an extensive training on ‘How to perform a solar PV rooftop feasibility study and installation’ (also known as ‘Rooftop Solar Guideline’) which was translated into four languages. The training provided a comprehensive overview for suppliers to facilitate the transition to renewable energy, reducing scope 1 and 2 emissions, and eventually supporting commitments to the UNFCCC targets. The objectives of the training were to ensure consistency across the entire adidas supply chain, provide guidance on how to select a vendor, or conduct feasibility studies, among others. It covered two main sections: the feasibility study and the installation process.

Also in 2020, adidas launched the adidas Chemical Management (aCM) training, conducting 15 training sessions in China and Taiwan with 141 participants. Through this chemical management academy our aim is to:

• ensure facilities have the right competence and responsibility on site to manage the facilities’ operation
• enable facilities to implement a chemical management system in the production process on a long-term basis
• share best practice/available technology among industry peers, and
• drive continuous improvement

Monitoring

We audit our suppliers regularly against our Workplace Standards. In 2020, however, we had to adjust our monitoring approach to accommodate covid-19 lockdowns and travel restrictions. Where possible, we continued to follow our regular onsite assessments, including wastewater testing, while also piloting the use of remote ‘Desktop Assessments’. Of the total 921 social compliance audits and environmental assessments conducted in 2020 (2019: 1,191), 128 were conducted remotely. Despite the constraints imposed by covid-19, we successfully completed 256 test assessments according to the ZDHC Wastewater Guidelines (2019: 234), which also count toward our environmental assessments.

In 2020, 88 self-governance audits and collaboration audits (2019:102) were conducted. When a factory reaches a compliance maturity level of 4C or 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 317 in 2019 to 278 in 2020.

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. As we continue to increase our focus on added-value advisory services and empowerment projects, which go beyond our regular audit routine, the number of audits conducted by our own in-house team has decreased to 251 in 2020 (2019: 299). Similarly, audits conducted by third-party monitors also decreased to 612 at the end of 2020 (2019: 658).

• Audit coverage: A total of 48% (2019: 49%) of all direct and licensee facilities were audited in 2020. ‘High-risk’ locations in Asia, which is the most significant sourcing region for adidas, were the subject of extensive monitoring in 2020, with an audit coverage close to 64% (2019: 75%). As a general principle, factories located in high-risk countries are 100% covered in our auditing scope, which means they receive audits annually (unless they are rated as ‘self-governing’, in which case they are subject to audits every two years), while low-risk countries with strong government enforcement and inspectorate systems, such as Germany, are considered out of scope for our audit coverage.
• Audit results: In 2020, 91% of our strategic factories achieved a rating of 4C or better, compared to 54% of all direct factories. This exceeded our 2020 target, which called for 80% of our strategic suppliers to reach 4C or above. As such, these higher ratings show that our strategic suppliers have continued to strengthen their compliance performance, despite the headwinds created by covid-19. Some 12% of our strategic suppliers’ factories have progressed even further, achieving a 5C rating, which shows that they have mature social compliance governance systems and practices in place.

Of our strategic licensees, 82% successfully embedded effective 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 their annual report card, which measures the existence of policies and implementation, stakeholder engagement, public reporting and communication.

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

Non-compliances identified in active factories

Our suppliers’ factories are evaluated against a number of critical compliance issues. While threshold issues are considered 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. Over the course of each year, we continuously track the non-compliance findings identified through suppliers’ performance audits, collaboration audits, self-governance assessments and, as of 2020, Social & Labor Convergence Program (SLCP) assessments. We follow up on all cases of non-compliance and require our suppliers to remediate open issues within a specified timeframe. As can be seen below, the identified issues in 2020 remained largely the same as those reported in 2019.

• Non-compliances in the area of labor: Besides identifying non-compliances with the Workplace Standards, our team focuses on the use and effectiveness of the factories’ HR management systems, including 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 2020

• Non-compliances in the area of health and safety: Fire, electrical and machine safety are critical areas for existing factories and together accounted for 32% of the non-compliances identified in 2020. The way chemicals were stored and used, including the handling of hazardous chemicals, accounted for 10% of non-compliance findings reported. A further 8% 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 2020

Independent FLA audits

Due to covid-19 related restrictions, unannounced and independent assessments by the Fair Labor Association (FLA) were heavily limited resulting in one Sustainable Compliance assessment for the year for adidas. Nevertheless, FLA focused its efforts on:

• supporting company affiliates’ ability to manage covid-19-related risks by issuing various guidance notes to address labor and health- and safety-related risks resulting from the pandemic,
• continuing capacity building on responsible recruitment and forced labor,
• issuing guidance to prevent forced labor risks and issuing statements on sourcing in Xinjiang, and
• completing a comprehensive review and update to the FLA Compliance Benchmarks.

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 2020, our close engagement with our supplier’ factories has helped reduce the number of active warning letters to 22 (2019: 41) across ten countries. Compared to the previous year, the overall number of active first-warning letters decreased significantly, from 34 in 2019 to 19 in 2020; the total number of second warnings also decreased to 3 in 2020 (2019: 6). Factories that receive second-warning letters are only one step away from being notified of possible termination of the manufacturing agreement and are subject to focused monitoring by our SEA team. No third-warning letters (which result in factory terminations) were issued to our suppliers in 2020 (2019: 1).
• Terminations: In 2020, we had no terminations of supplier agreements for social or environmental compliance reasons (2019: 2).