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 improvement of workers’ welfare. We continued to uphold our standard manufacturing terms, including worker rights protection, and assisted key manufacturing partners in securing bank financing to help them weather the covid-19 crisis.

In 2021, covid-19 continued to impact all segments of society, including our manufacturing partners and especially workers in key sourcing countries in Asia: Cambodia, Indonesia, and Vietnam, all of whose governments, at various points in time, imposed government-mandated lockdowns to prevent the spread of covid-19. The longest lockdown occurred in Vietnam, where many stores and businesses were closed for three months by government order. In response to these challenges, we worked closely with our manufacturing partners to implement covid-19 safety measures and supported them in their vaccination drives, which resulted in high levels of protection for the workers. In Vietnam, we assisted with the supply of covid-19 testing kits and worked with the Vietnamese government, providing input to their guidelines and protocols for the safe reopening of the supplier factories, once the lockdown was lifted.

Ensuring business continuity and a functioning supply chain kept jobs, albeit sometimes with reduced working hours due to government-mandated lockdowns or temporary suspensions. We continued to be committed to ensuring legal compliance in terms of pay and benefits for all workers affected by operational changes due to covid-19 and tracked the working conditions in every manufacturing facility closely. Where we have seen downsizing, we ensured that laid-off workers received their legal severance and other entitlements in full. In 2020, we endorsed the International Labor Organization’s (‘ILO’) ‘Call to Action’ to address the impact of the coronavirus pandemic on the garment industry, and throughout 2021 we worked closely with the International Organisation of Employers and the ILO Better Work program on the ILO-driven ‘Call to Action’ plans, with a special focus on social protection mechanisms.

OUR APPROACH TO WORKING CONDITIONS IN OUR SUPPLY CHAIN

Our commitment to ensuring fair labor practices and safe working conditions in our manufacturing facilities 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 that is aligned with the Fair Labor Association’s ‘Workplace Code of Conduct’ and the ‘Principles of Fair Labor and Responsible Sourcing.’ The standards form a contractual obligation under the manufacturing agreements we sign with our manufacturing partners to ensure workers are employed in fair, safe, and healthyworkplaces which are environmentally sound. Our standards follow 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 supply chain. 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 and 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 began a transition from our compliance benchmark (‘C-KPI’), which is focused on management systems and supplier self-governance, to a new social impact KPI (‘S-KPI’). The S-KPI measures a set of social indicators, such as accident rates, worker satisfaction, and worker empowerment. By 2025, we aim for having 70% of Tier 1 strategic suppliers achieve at minimum ‘4S,’ and 100% of Tier 1 strategic suppliers achieve ‘3S’ or better.
• Transparency: As part of our broader risk management processes, we will increase the scope and application of ‘Human Rights and Environmental Due Diligence’ (‘HREDD’) efforts. By 2025, we aim to have a system in place to identify and manage high risk human rights issues in 100% of our value chain_. In conducting due diligence we seek to identify, prevent or mitigate potential adverse human rights or environmental impacts, with priority given to addressing the most severe impacts. In 2021, we have taken steps towards this ambition by working in partnership with our sourcing organization to enhance our mapping of Tier 1 manufacturing partners’ sub-contractors. In 2022, we will build on these actions by assigning accountability to our key Tier 1 manufacturing partners for implementing their own due diligence efforts and will track their implementation via our S-KPI tool. This will include requiring them to commission social compliance audits in their sub-contractor facilities.
• Fairness: This concept focuses on responsible sourcing practices, gender equality, and pay equity, that support fair compensation for workers. By 2025, we aim for progressive improvement in compensation, measured by fair wage benchmarks across our strategic Tier 1 suppliers.¹ We also strive to achieve gender wage parity for workers and their supervisors in our strategic Tier 1 suppliers.²

RESPONSIBLE SOURCING PRACTICES

In addition to regularly monitoring our supply chain to ensure compliance with the ‘adidas Workplace Standards,’ we invested time in 2021 to review our own purchasing practices. This was done to ensure that such practices were not negatively impacting our manufacturing partners’ ability to comply with our standards, in accordance with adidas’ ‘Responsible Sourcing Policy.’ Specifically, in 2021 we published adidas’ ‘Ten Buyer Commitments’ and integrated them into our ‘Responsible Sourcing Policy.’ We trained more than a hundred senior leaders within our Global Operations department on this policy and our ‘Buyer Commitments.’ As a subscriber to the Better Buying Institute, we reviewed our 2021 ‘Better Buying Report’ in detail and started internal discussions to further improve our program based on the report’s feedback. Finally, we began working with the Better Buying Institute to develop an e-learning training on responsible purchasing practices, which will be deployed to a broader section of adidas’ workforce in 2022.

GENDER EQUALITY

We aim to bring a gender lens to our key manufacturing partners’ operations ensuring that all workers enjoy the same opportunities, rights, and obligations.

In 2021, we developed a guidance document for our manufacturing partners, ‘Gender Strategy for Business Partners,’ which will officially be launched in 2022, to help them develop and implement their own gender strategy within their operations. The guidance document not only references various laws and regulations related to gender equality and non-discrimination, it also highlights six focus areas for action: ‘Respectful Workplace,’ ‘Compensation and Benefits,‘ ‘Gender Based Violence and Harassment,’ ‘Voice and Representation,’ ‘Leadership and Skills Development’ and ‘Health, Safety and Well-being.’ To complement our guidance, we selected six manufacturing partners, two from each region, to pilot the International Center for Research on Women’s ‘Self-Diagnostic Tool’ that we plan to rollout across all suppliers in 2022 and 2023. This self-assessment tool helps suppliers identify the gender-based gaps in their operating practices and procedures, and creates the building blocks for the development of their own gender strategy, with supporting improvement plans. Once submitted, we will track each improvement plan to see that gaps are being effectively closed and policies and procedures updated to address the six priority areas for action.

FAIR COMPENSATION

In 2021, we reviewed and updated our ‘Fair Compensation Strategy’ identifying five key levers that influence wages: legal obligations; responsible sourcing and purchasing practices; worker productivity; government involvement, and industrial relations.

Going forward, we will prioritize these five levers to influence wage improvements across our supply chain. To support that strategy, we are prioritizing increased tracking of wages and benefits-related findings and their accompanying remediation. As of June 2021, 96% of wages and benefits related threshold issues identified since the beginning of 2018 had been verified as having been remedied in full. Given the complex nature of many wages and benefits-related findings, it can take many months to address open issues in full. We do not characterize issues as ‘closed’ until the remedy has been verified as having been implemented completely and in a sustainable manner to avoid reoccurrence. As a result, these issues may take a longer period of time to be reflected as ‘closed’ in our compliance data management systems. In addition, we collected wage data from 50% of our key manufacturing partners in Southeast Asia (Cambodia, Indonesia, and Vietnam), which enable us to review/assess wage progression against credible and publicly available wage benchmarks. The three primary benchmarks considered are the World Bank’s published poverty line, government-mandated minimum wages and living wages as defined by the Global Living Wage Coalition.

MANUFACTURING FACILITY PERFORMANCE

We regularly assess our manufacturing partners 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.

Any cases of non-compliance identified during audits are given a clear time frame for remediation. Potential new manufacturing facilities are assessed in a similar way and orders can only be placed if approval by the Social and Environmental Affairs (‘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 received through our grievance channels are reviewed and investigated, and the outcome is reported on our corporate website. Manufacturing facilities’ 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 manufacturing facility inspections and external verification of our programs. Since then, our program has been accredited three times by the FLA.

According to the results of our assessments, 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 workplace systems or practices.

At the end of 2021, adidas worked with 509 independent supplier facilities³ (2020: 520) that manufacture products for our company in 46 countries (2020: 49). These numbers reflect the stability of our supply chain and our strategy to form long-term partnerships with our manufacturing partners. 67% of our manufacturing partners’ facilities (2020: 66%) are located in the Asia-Pacific region. The number of licensees we worked with increased slightly compared to 2020, with 60 licensees (2020: 56) that manufactured products in 418 factories (2020: 375) across 39 countries (2020: 37).

ONBOARDING

In 2021, our primary focus has been on maintaining partnerships with our existing manufacturing partners rather than onboarding new ones. At the same time, several existing licensees have expanded their supply chains, to add to those of four newly onboarded licensees. Consequently, 2021 saw 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, conducted in 142 factories (2020: 112). Of these, 48 factories (2020: 31) 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 (86%) of all initial assessments were undertaken in Asia (2020: 94%), with China accounting for 42% (2020: 50%).

Overall, at the end of 2021, the first-time rejection rate of 34% of all new factories visited was slightly higher than in the previous year (2020: 28%). Providing focused support to those factories that we have onboarded, has aided us in maintaining a ‘final rejection rate’ of under 2% in 2021. The remediation of manufacturing facility issues prior to their onboarding 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. Manufacturing partners 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, manufacturing facility-based digital grievance channel for workers. We have progressively improved and expanded the use of this grievance mechanism and in 2021 more than 600,000 workers employed in 123 manufacturing facilities across 18 countries had access to this system, reflecting a 99% coverage of strategic manufacturing partners.

A robust grievance mechanism is the fulcrum on which workers can raise their concerns and secure remedies. Access to a digital complaint mechanism has proven invaluable during covid-19. Close to 52,000 human and labor rights complaints (2020: around 46,000) were filed with the facility management teams in 2021, with 99% of these complaints being closed by the end of 2021. The top complaints were related to concerns over general facilities, benefits, health and safety issues associated with covid-19, and communication.

Responses received through the ‘Workers Voice’ platform are 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 manufacturing facility and track how the facility’s management and their HR teams resolve cases and communicate their findings. Our evaluation contributes to the facility’s overall social compliance score (‘C-KPI’/’S-KPI’). adidas provides ongoing capacity building to enhance the facility 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 to 71% in 2021. The increase in satisfaction is partly related to a significant improvement in the response time that it took the factory management to address workers’ grievances, which decreased from 49 hours in 2020 to less than 16 hours in 2021 due to improvements in communication and transparency in the workplace. The management teams in the manufacturing facilities have continuously engaged with the facility’s workers through e-newsletters and broadcast messages, which improved the workers’ engagement and the overall company culture.

Complementing the various grievance channels, we expanded the ‘Worker Pulse’ project that was launched in 2020, which is a digitalized short survey to capture workers’ perception and awareness of their labor rights on focused areas such as communication, harassment, and abuse, as well as grievance systems. It builds on what we learned from a previous survey process we initiated in 2016. In 2021, we undertook these digital surveys in 123 manufacturing facilities (2020: 63) across 16 countries (2020: 9), with more than 66,000 workers participating (2020: 22,000). The survey was conveyed to the workers through a mobile-phone-based application.

Significant increases in the workers’ positive response rates were identified in all six of the survey’s questions across all surveyed workers. This increase in the workers’ general satisfaction rates is also a factor in the increase in the average C-KPI score for our manufacturing partners’ facilities in 2021. This shows that when workers’ voices are being heard and acted upon by the facility’s management, it can have an impact in improving the overall working conditions within a manufacturing facility. Manufacturing partners are required to develop and track workplace improvement plans, based on the feedback received from the ‘Worker Pulse.’

Alongside facility-led training, we have also offered tailored training under our ‘Women Leadership Program,’ first launched in 2016. However, due to the constraints imposed by covid-19, this training was initiated only in three countries (China, Indonesia and the Philippines) in 2021.

2021 also saw an expansion of our mobile-phone-based ‘Digital Training’ project, which was successfully rolled out in 43 manufacturing facilities across Cambodia, China, Indonesia, and Vietnam in 2020. 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 more than 62,000 workers who took part in 2021 (2020: 11,000), they averaged a score of 92 out of 100 in the post-test questions.

MANUFACTURING FACILITY ENGAGEMENTS AND TRAINING SESSIONS

In 2021, while our ability to physically visit our manufacturing partners continued to be constrained in some locations by the pandemic, in other areas during the year our ability to do so was restored. We used these opportunities to maximize the impact of our facility engagements and training sessions. Through a combination of on-site and remote, or virtual interactions throughout the year, we completed 373 individual facility engagements in 2021 (2020: 644), and 149 training sessions for manufacturing partners, licensees, workers, and adidas employees (2020: 61). Training sessions covered a broad range of topics, from our Workplace Standards, guidelines, and supporting policies, through to targeted training on specific labor, health and safety, and environmental topics. The number of trainings delivered also reflected our focused efforts this year to educate our manufacturing partners on Worker Empowerment projects and the launch of our new ‘S-KPI tool.’ Where virtual training sessions could be held, we continued to utilize this format to attract larger audiences, reaching a total of 5,321 people, up significantly from the 2020 figure of 1,497.

Wherever possible, we were also able to exchange multiple, shorter virtual interactions, with longer, and more comprehensive, on-site engagements. In addition to our continuous tracking of covid-19 impacts on our manufacturing partners’ operations, we used these engagements to monitor remediation activities, KPI improvement plans, grievance investigations, and worker satisfaction surveys.

We continued to work with our licensee partners in 2021 to ensure that they were implementing adidas Workplace Standards into their manufacturing partners’ operations in a consistent manner. As in past years, we co-hosted, along with five other brands, a joint ‘Licensee Summit’ in 2021, providing a forum for discussion on supply chain sustainability challenges and best practice sharing. In addition, we also enabled our licensees to access the Fair Labor Association’s (‘FLA’) e-learning material, offering trainings devoted to Human Rights, Forced Labor, Responsible Manufacturing, and Worker Engagement, among other topic areas. Our team also continued to work within the FLA’s Responsible Licensing Principles Working Group that is charged with developing standards that the FLA will use to evaluate its members’ licensing and monitoring activities.

Since 2018 we have partnered with the International Organization for Migration (‘IOM’) to promote fair recruitment practices for foreign migrant labor employed by our Tier 2 materials manufacturing partners. In 2021, this engagement with ‘IOM’ resulted in a series of virtual trainings that were held with labor recruitment agencies in Indonesia, Thailand, Vietnam, and the Philippines – the main sending countries supplying most migrant workers to Taiwan. Taiwan has been a key focus country for our program. The online training sessions provided an overview of international standards and regulations related to recruitment fees and conveyed to the attendees adidas’ zero tolerance policy with regards to human trafficking and forced labor. In addition, the trainings provided a framework for the recruitment agencies, to ensure that they are undertaking a framework implementing the required due diligence, to comply with both adidas’ and international standards.

MONITORING

We audit our manufacturing partners regularly against our Workplace Standards. In 2021, in addition to our own audits, we have expanded our use of assessments under the ‘Social & Labor Convergence Program’ (‘SLCP’). As a signatory to the SLCP, we share its vision of industry collaboration and support its efforts to establish a robust methodology for the efficient collection, verification, and sharing of manufacturing facility compliance data. By using the SLCP’s Converged Assessment Framework, manufacturing partners are able to share their verified assessments with buyers, thereby helping to reduce duplicative audit activity and facilitate collaboration among stakeholders. In 2021, we have accepted 142 SLCP assessments in lieu of our own Performance Audits. The SLCP, as an industry assessment tool, will continue to evolve as it is adopted more widely across the sector, and its methodology is strengthened. We are pleased to contribute to this evergreening and will continue to test the tool in different supplier settings in 2022. As part of our ongoing evaluation, we will continue to provide this feedback to the SLCP and collaborate with like-minded industry partners in the pursuit of effective and impactful industry solutions.

With covid-19 continuing to place restrictions in some parts of the world on our ability to conduct our own on-site assessments in 2021, our monitoring approach had to remain agile to accommodate lockdowns and travel restrictions. Where possible, we continued to follow our regular on-site assessments, while also continuing the use of remote desktop assessments first piloted in 2020.

A total of 770 social compliance audits (initial assessments, performance audits, and SLCPs) were conducted in 2021 (2020: 624), 67 of which were conducted remotely. Of the 405 on-site Performance Audits conducted, 78% were carried out on an unannounced basis whereby the manufacturing facility is not informed in advance of the exact date of assessment. Our team continued to prioritize not only assessing our manufacturing partners’ labor, health and safety, but also their environmental compliance. We established a new Environmental Assurance team in 2021 along with a dedicated set of environmental Zero Tolerance and Threshold Issues pertaining to a manufacturing facility’s energy, water, and waste impact and environmental management systems (e.g., chemical, environmental, and wastewater management). Existing manufacturing partners are also being assessed against these environmental standards. In 2021, 204 facilities in 19 countries were assessed and evaluated to these environmental standards, which represented 181 of our key Tier 1 and Tier 2 manufacturing partners, and selected Tier 3 suppliers.

On top of these, in 2021, 78 self-governance audits and collaboration audits (2020: 88) were conducted. Under the C-KPI program, when a manufacturing facility 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 increased from 278 in 2020 to 395 in 2021. This reflects the expanded supply base of some of our licensee partners, as well as the sharing of SLCP assessments with us.

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 233 in 2021 (2020: 251), with 741 assessments performed by third-party monitors (2020: 569).⁴

• Audit coverage: A total of 54% (2020: 49%) of all direct and licensee facilities were audited in 2021. ‘High-risk’ locations in Asia, which is the most significant sourcing region for adidas, were the subject of extensive monitoring in 2021, with an audit coverage of 70% (2020: 64%). As a general principle, manufacturing facilities 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 2021, 97% of our key manufacturing facilities achieved a rating of ‘4C’ or better (on a rating scale of 1–5 with 5 being the best). These ratings show that our key manufacturing partners have continued to strengthen their compliance performance, despite the headwinds created by covid-19. Some 22% of our key manufacturing partners’ facilities have progressed even further, achieving a ‘5C’ rating, which shows that they have mature social compliance governance systems and practices in place. At the end of 2021, we retired our C-KPI rating system for assessing social compliance in our key manufacturing partners. In its final year of use, and despite the pandemic, the C-KPI scores in 2021 were higher than in 2020. We believe our work on Worker Empowerment projects, and close engagements with our manufacturing partners in preparing them for the new impact-oriented S-KPI tool to be launched in 2022, has helped improve the C-KPI results in this final year.

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

In 2022, we intend to strengthen our due-diligence practices and coverage by introducing new requirements to ensure that all key Tier 1 manufacturing partners take accountability in conducting annual social compliance audits at their sub-contractor facilities using adidas’ authorized external monitors.

Of our key licensees, 100% achieved a Licensee Compliance Rating (‘LCR’) of at least 4 (on a rating scale of 1–5 with 5 being the best), and of these, 29% received a rating of 5. This rating mechanism mirrors that of our C-KPI applied to manufacturing partners and reflects that these licensees have successfully demonstrated that they have embedded strong governance systems, supply chain management, and purchasing practices compliance requirements into their business practices. Licensees are also assessed on the existence of policies and systems to address stakeholder engagement, as well as levels of public reporting and communication.

NON-COMPLIANCES IDENTIFIED IN ACTIVE FACTORIES

Our manufacturing partners’ facilities 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, or 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 manufacturing partners’ performance audits, collaboration audits, self-governance assessments, and, since 2020, SLCP assessments. We follow up on all cases of non-compliance and require our manufacturing partners to remediate open issues within a specified timeframe. The identified issues in 2021 remained largely the same as those reported in 2020.

• 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 facilities’ 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 facilities, rather than the confirmed presence of a specific case of non-compliance.

Shortcomings in the area of labor identified during audits in 2021

• Non-compliances in the area of health and safety: Fire, electrical, and machine safety are critical areas for existing manufacturing facilities and together accounted for 30% of the non-compliances identified in 2021. The way chemicals were stored and used, including the handling of hazardous chemicals, accounted for 7% 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.

Shortcomings in the area of health and safety identified during audits in 2021

REMEDIATION

We follow up on all cases of non-compliance and require our manufacturing partners to remediate open issues within a specified timeframe. As an illustration of our efforts to support this remedy, in the period 2018 to June 2021, 95% of the threshold issues identified during our monitoring assessments have been verified as being remedied in full. A small percentage of issues identified over this period remain open, the majority of which were found during assessments conducted in 2020 and in the first half of 2021. While in many cases the actual issues will have been resolved, our approach is to only ‘close’ these in our systems when we have verified evidence of completion and established that corrective actions taken are sustainable and sufficient to avoid reoccurrence.

INDEPENDENT FLA AUDITS

The Fair Labor Association (‘FLA’) was able to resume monitoring coverage in 2021 by utilizing a variety of monitoring models (e.g., in-person, virtual, or a hybrid approach of both in-person/virtual), despite the ongoing challenges posed by covid-19. This resulted in adidas receiving four ‘Sustainable Compliance Initiative’ (‘SCI’) Assessments from the FLA in 2021. In addition to manufacturing facility monitoring, the FLA focused its efforts on enhancing virtual monitoring methodology; issuing specific country/topical guidance, supply chain mapping, grievance mechanisms; supporting company affiliates with their Fair Compensation Strategy; launching a new e-learning program for business affiliates’ manufacturing partners; revising its third-party complaint mechanism; developing responsible termination guidelines; and continuing its work to measure and mitigate impacts of covid-19 on the industry’s supply chain.

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 manufacturing partners’ facilities. We work closely with our manufacturing partners to help them improve their performance. However, where we face situations of severe or repeated non-compliance, we do terminate business relationships with facilities.

• Warning letters: In 2021, our close engagement with our manufacturing partners’ facilities has helped reduce the number of active warning letters to 13 (2020: 22) across six countries. Compared to the previous year, the overall number of active first-warning letters decreased significantly, from 19 in 2020 to 11 in 2021; the total number of second warnings also decreased to 2 in 2021 (2020: 3). Manufacturing facilities 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 team. No third-warning letters (which result in manufacturing facility terminations) were issued to our manufacturing partners in 2021(2020: 0).
• Terminations: In 2021, there was one instance of a termination of a supplier agreement for social compliance reasons (2020: 0).