As our supply chain is large, multi-tiered and varied, we have a detailed and systematic approach to managing the relationships with our suppliers.
Besides our own employees, workers in our suppliers’ factories play a central role in our sustainability program. It was our concern for their working conditions and well-being that led us to establish our Workplace Standards, the supply chain code of conduct, which also covers workers’ health and safety and provisions to ensure environmentally sound factory operations. To enforce compliance with our Standards we have a multi-level monitoring and enforcement process in place, which includes the use of a rating system for the assessment of our suppliers. The rating results are shared with our Sourcing teams and incorporated into the overall supplier rating that influences our decision whether and to which extent we continue the business relationship with a specific supplier. This transparency and integration with sourcing decisions is fundamental to the success of our efforts to drive improvements in workplace conditions.
In addition to our own monitoring activities, we value independent and unannounced assessments by independent third parties to demonstrate the credibility of – and provide verified information about – our program to stakeholders. As a member of the Fair Labor Association (FLA), adidas is subject to external assessment by independent monitors, participation in the FLA third-party complaint system and public reporting. In 2005, our own monitoring program was accredited by the FLA for the first time and re-accreditation took place in 2008 and in 2017. This decision was based on independent factory monitoring and verification reports of supplier facilities and a thorough audit of monitoring protocols, training programs and auditing systems.
The company’s global supply chain extends through various tiers from strategic manufacturing partners, to componentry and materials suppliers, to raw material sources, such as cotton, leather and natural rubber. Working closely with key strategic partners, the vast majority of our products are produced in the facilities of 114 manufacturing partners worldwide. We value long-term relationships: 65% of our independent manufacturing partners have worked with us for at least ten years and 35% have a tenure of more than 20 years. The length of our supplier relationship is determined by specific performance criteria which is regularly measured and reviewed.
adidas has outsourced most of its production. Overall, we work with more than 500 independent factories from around the world that manufacture our products in 46 countries (2021). Our supply chain is global and multi-layered, with many different types of business partners, some of whom are directly contracted factories, while others are not.
Our influence in terms of social and environmental compliance is linked to the strength of our partnerships, and is often proportional to the scale and stability of the orders placed with our suppliers.
- Direct sourcing model: We hold direct contractual relationships with our core suppliers who are centrally supervised by our Global Operations function. Global Operations manages the development, production, planning, sourcing and distribution of the vast majority of our products. These suppliers produce the predominant share of the total sourcing volume of the company.
- Indirect sourcing model: The remaining minor part of our product volume is sourced by agents or made under license. Agents place orders with their preferred suppliers. Licensees may either place orders directly with their suppliers or use agents as intermediaries. Our indirect supply chain complements our direct sourcing by meeting specific requirements that cannot be serviced through Global Operations.
- Local market production: In order to quickly seize short-term opportunities in their local markets – and to satisfy a niche market requirement or specific trade regulations – adidas subsidiaries may also source from local suppliers in a specific country that are not overseen by Global Operations. These suppliers require authorization from the Social and Environmental Affairs team for production.
Our suppliers fall into five broad categories:
- Manufacturing partners have a direct contractual relationship with adidas for the supply of products, whether for export or domestic market consumption.
- Subcontractors are factories that have been subcontracted by our suppliers to perform manufacturing operations our main suppliers are not capable of in their own facilities.
- Material and other service providers may not have a direct business relationship with adidas, but supply goods and services to our main suppliers.
- Licensees are independent companies which manage the design, production and distribution of specific products, under licence to adidas.
- Agents. Independent companies that act as intermediaries to source product manufacturing, manage the manufacturing processes, and sell finished products to adidas.
- Strategic suppliers are manufacturing partners and materials suppliers. Those are suppliers who have been selected for specific social and environmental initiatives that go beyond general compliance monitoring. They are viewed as long-term strategic partners who provide world class facilities, have meaningful business share with adidas as Tier 1 manufacturers or, if Tier 2 suppliers, are a key source of materials for our Tier 1 manufacturers, strong management in development and manufacturing, economies of scale, and advanced supply chain capabilities.
Mapping our supply chain risk is an effective way of ensuring that our suppliers produce in a socially and environmentally responsible way. We combine processes to systematically monitor and support improvements, with tools that enable us to react quickly to critical situations as they may arise. This helps us limit any negative effects on workers or the environment. Critical sources of information for risk-mapping exercises include the review of databases as provided by governments, as well as regular engagement with civil society organizations, unions, employer federations and with workers directly.
The countries where we source our products, and the suppliers who we work with are regularly mapped and monitored for human, labor rights and environmental risks. Country and factory profiles determine the subject of issues to be prioritized and the frequency of monitoring and remediation activities. The tailored risk-mapping approaches and tools that are applied are as follows:
- Country level risk assessment: Country profiles are developed based on in-depth due diligence processes. Countries are categorized as high or low risk. Suppliers located in high-risk countries are audited on a regular basis.
- Factory level risk assessments: Regular audits, KPI assessments, factory risk-rating analysis. This information determines the frequency of re-audits and engagement with the factory.
- Crisis protocol: Used by business entities and factories to report the details of high-risk issues. Based on the information we receive, we may decide to conduct site visits, audits or other engagement with a business entity or factory on a case-by-case basis.
- Monthly reporting to executive management: Depending on the issue, this may also lead to additional action on a case-by-case basis.
- Grievance mechanism: Workers and other parties can reach the Social and Environmental Affairs (SEA) team through a variety of channels, including mobile apps, dedicated SMS channels, hotlines and other third-party grievance mechanisms. We take information from workers and other parties regarding factory conditions very seriously and take care to provide safe and easy channels for them to get in touch with us. The information we receive may result in additional site visits, audits or other engagement with a business entity or factory at any time.
In close cooperation with our Global Operations function, all potential new suppliers are assessed by the adidas Social and Environmental Affairs (SEA) team, to ensure that new suppliers meet our standards. Our Sourcing teams can only place orders with a new supplier if the SEA team has given approval. If factories do not meet our standards, we reject them. That said, if the issues can be fixed, we give them a rigorous timeline to correct them. If the factory has improved, they are approved as a supplier who can produce for adidas.
By setting a high bar for potential and new suppliers, we avoid getting into business relationships with suppliers that have serious workplace issues and insufficient means of improving unacceptable conditions. At the end of 2021, the first-time rejection rate of all new factories stood at 34%.
As part of our continuous efforts to achieve more effective and sustainable practices within the supply chain, we have initiated a system of multi-level and cross-functional training sessions with our global supplier network. In 2021, we trained more than 5,300 staff and personnel through around 150 training sessions. We have three main approaches to training content:
- Fundamental training: includes introductory training for the adidas Workplace Standards, Fair Factories Clearinghouse (FFC) data entries, new factory approval process and the SEA operating guidelines.
- Performance training: includes detailed training on specific issues related to labor, health, safety and environmental practices, as well as initial assessment monitoring methods.
- Advanced training: includes training in the KPI and rating tools, sustainable compliance planning and supplier self-assessment methods.
Giving workers the opportunity to air grievances in confidence is a key element in helping us to ensure fair, safe and healthy workplace conditions. An approved factory has to place open letters that tell workers whom they can contact to address issues of concern. The letters inform workers that we will help them find solutions to factory issues if they cannot do so through the factory’s usual mechanisms. Workers are also provided with local hotlines through which they can share their concerns. These are run by non-profit organizations or our own field staff.
In parallel to existing grievance systems, additional digital tools are available. Following the successful pilot of our ‘SMS Worker Hotline’ in supplier factories in Indonesia in 2012, we have progressively improved and expanded the use of this operational grievance mechanism, and in 2021 more than 600,000 workers employed in 123 manufacturing facilities across eighteen countries had access to this system. This reflects a 99% coverage of key manufacturing partners.
Complementing the various grievance channels, we provide ongoing capacity building to enhance the facility teams’ capability to improve the effectiveness of the grievance mechanism. Satisfaction rates relating to the resolution of complaints has risen steadily from 39% in 2019 to 58% in 2020 to 71% in 2021.
In addition, we launched the ‘Worker Pulse’ in 2020, which is a digitalized survey to capture workers’ perception and awareness of their labor rights in areas such as communication, harassment and abuse and grievance systems.
Internal and external audits are conducted at our suppliers’ factories to ensure they comply with our standards for social and environmental compliance.
- Measuring supplier social compliance (S-KPI): The strategy applied to suppliers we have a direct relationship with is based on a long-term vision of self-governance where they take ownership of their compliance program. To help them, we conduct factory audits to assess risks and help identify the root causes of non-compliance. Our Social Key Performance Indicator (S-KPI) rating tool measures the following: reduced accident rates, higher retention levels, or improved worker satisfaction and the effectiveness of our worker empowerment initiatives. According to the results, suppliers are assessed with a S-rating score between 1 and 5 (with 5 being the best rating). Our target for 2025 is to have 70% of our strategic suppliers rated at 4S or better and 100% to achieve 3S or better. For more information about our company’s approach to monitoring our supply chain, please click here to access SEA’s Audit Manual that overviews our team’s monitoring approach.
- Measuring licensee performance (report cards): Some adidas business entities source products through intermediaries such as licensees, who independently manage production. We call this process the indirect sourcing of products. adidas licensees are obliged to adopt our in-house monitoring approach to ensure compliance in the indirect supply chains as well as commission audits by adidas approved external monitors who verify the outcomes of the compliance plans and activities. A licensee’s annual compliance performance is then measured by using a comprehensive report card. Of our key licensees, 100% achieved a licensee compliance rating of 4 (on a rating scale of 1-5, with 5 being the best), and 22% a rating of 5. This rating mechanism mirrors that of our S-KPI, which applies 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.
Breaches of the Workplace Standards are categorized into zero tolerance and threshold issues. Zero tolerance issues include prison labor, life-threatening health and safety conditions and repeated or systematic abuse. If a finding of non-compliance is identified, it will result in immediate engagement with the supplier and, if verified, we will terminate the relationship with that supplier.
Threshold compliance issues include serious employment issues, serious health, safety or environmental issues (or any combination of the aforementioned points). The Enforcement Guidelines for threshold issues can disqualify a new supplier, or lead to enforcement actions with existing suppliers. When suppliers fail to meet our Workplace Standards, we apply the sanctions and remedies from our Enforcement Guidelines, which include:
- Termination of the manufacturing relationship
- Stop-work notices
- Third-party investigations
- Warning letters
- Reviewing orders
- The commissioning of special projects to remedy compliance problems
We have an thorough approach to managing the relationships with our suppliers and we continue to develop new approaches for engaging with suppliers who are part of indirect sourcing models. For years, adidas has been running leadership programs that address this topic; important steps have been:
- In 1997, building on existing initiatives, adidas developed its initial supplier code of conduct (Standards of Engagement) and established a Compliance team. The Standards of Engagement (now called Workplace Standards) reflect international human rights and labor rights conventions. They are contractual obligations under the manufacturing agreements adidas signs with its suppliers.
- In 1999, adidas joined the Fair Labor Association (FLA) as founding member.
- In 2000, we started to report our sustainability performance, the first company in the sportswear industry to do so.
- In 2001, we played an instrumental role in the development of the International Labor Organization’s Better Factories Cambodia initiative, addressing working conditions and labor rights in the apparel sector. Since the program began, all adidas garment factories in Cambodia have been monitored on a regular basis.
- In 2004, we spearheaded the introduction of human resource management systems in major footwear factories.
- In 2005, the FLA accredited adidas’ SEA program.
- In 2006, a revised code of conduct, the ‘Workplace Standards’, was introduced replacing the adidas Standards of Engagement.
- In 2006, adidas joined the Fair Factories Clearinghouse, an industry-leading compliance data-sharing platform. All social compliance information is recorded in this central database.
- In 2007, we disclosed our global supplier factory list. The list is updated twice a year and includes T2- and licensee suppliers.
- In 2008, we developed Strategic Compliance Plans (SCP) for the licensees and business entities that source through agents. A report card (RC) section was added to the SCP in late 2010.
- In 2010, as the official sponsor, licensee and outfitter of the 2010 FIFA World Cup South Africa™, we disclosed the list of factories involved in the production of World Cup products. The first and only FIFA sponsor to do so.
- In 2010, adidas acted as the lead party in a supplier-brand caucus formed to engage with Indonesia’s trade union movement. Its aim was to develop a basic framework for the exercise of trade union rights in the workplace. An agreement was finally reached and signed in Jakarta in June 2011.
- In 2010, adidas started its collaboration with the International Labor Organization Better Work, an innovative partnership program between the ILO and the International Finance Corporation (IFC). The program’s objective is to improve both compliance with labor standards and competitiveness in global supply chains.
- As official partner of the London 2012 Olympic Games, in 2011, adidas disclosed its supply chain for Olympic products, becoming the first Olympic partner to disclose its factory list for an Olympic Games.
- During 2011 and 2012, 25 adidas suppliers in eight countries (Philippines, Indonesia, Mexico, Brazil, Vietnam, China, El Salvador and Thailand) completed Fair Wage self-assessment questionnaires and four factories underwent full Fair Wage assessments. Also in 2012, adidas introduced the SMS Grievance Channel at one of the company’s main footwear suppliers in Indonesia to improve the communication between factory workers and management, offering workers the possibility to anonymously ask questions and raise concerns.
- In 2014, the company joined the Bangladesh Accord on Fire and Building Safety (‘The Accord’) and as a result, we have seen a strong commitment by our suppliers to fulfill the safety requirements of the Accord. In 2017, adidas was ranked 9 out of 206 companies in terms of the remedial effort of our suppliers.
- In 2015, adidas continued to apply and strengthen its own global Human Rights Due Diligence (HRDD) approach by further improving and deepening our transparency and our dialog with key stakeholders as well as addressing severe human rights risks in our wider supply chain. We were the first brand in our industry to develop an operational grievance mechanism to address human rights impacts. In June 2015, we were also the first company to publish a record of the third-party complaints received related to labor or human rights violations. The record, which is updated annually on our website, details the nature of the complaint and its current status.
- In 2016, the Fair Labor Association (FLA) publicly applauded adidas’ comprehensive work in Turkey to help Syrian refugees find work and to improve working conditions for local and displaced workers. In the same year, the Modern Slavery Outreach Program was launched, focused on assessing and addressing risks in our extended supply chain, i.e., those tiers that fall outside our mainstream social compliance and labor rights monitoring program. Also, adidas ranked first on KnowTheChain’s benchmark, which assessed 20 leading footwear and apparel brands for their efforts on tackling modern slavery in their supply chains.
- In 2017, we were the overall winner, heralded as ‘Outstanding Achiever’ at Thomson Reuters Foundation’s Stop Slavery Awards. The award is given to businesses who are leading the way in the global fight against forced labor in their supply chains.