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SUSTAINABILIT Y

SUPPLY CHAIN APPROACH

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, including the use of an innovative 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, the
monitoring program of adidas was accredited by the FLA for the first time; 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. 

Working closely with key strategic partners, the vast majority of our products are produced in
around 100 manufacturing facilities worldwide. We value long-term relationships: By the end
of 2018, 84% of our strategic suppliers have worked with adidas for more than ten years and
42% 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 around 700 independent
factories from around the world that manufacture our products in more than 50 countries
(Status: 2018). 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. In
2018, the top five countries per region by number of supplier sites were:

Asia: China, Vietnam, Korea, Indonesia and India

America: United States, Brazil, Argentina, Canada, and El Salvador

EMEA: Germany, Turkey, Italy, United Kingdom, and Spain

GLOBAL FACTORY LISTS
adidas is one of the very few companies in the industry that has fully disclosed its global
supplier list.

LINK

sourcing relationships

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: adidas holds direct contractual relationships with its core
suppliers who are centrally supervised by Global Operations. Global Operations manages
the development, prodcution, 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 is made under licence. 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, to satisfy a niche market requirement, or in some cases to react to certain trade
regulations, adidas subsidiaries may also source from local suppliers in a specific country
that are not overseen by Global Operations; these suppliers do require authorization from
the Social and Environmental Affairs team for production.

TYPES OF SUPPLIERS

Our suppliers fall into five broad categories:

Main suppliers. They have a direct contractual relationship with adidas for the supply of
products, whether for export or domestic market consumption.

Subcontractors. These are factories that have been subcontracted by our suppliers to
perform manufacturing operations the main suppliers are not capable of doing in their
own facility.

Material and other service providers. These suppliers may not have a direct business
relationship with adidas, but supply goods and services to our main suppliers.

Licensees. 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 the
company.

COMPLEXITY OF THE SUPPLY CHAIN

RISK MAPPING

Mapping our supply chain risk is a very effective tool to ensure that all of our suppliers produce in a socially and environmentally responsible

way while using our resources wisely. It combines regular processes to systematically monitor and support improvements with ad-hoc tools

enabling us to react quickly to critical situations as they may arise and limit any negative effects this may have on workers or the
environment. Critical sources of information for risk-mapping exercises include the review of data bases as provided by governments as

well as regular engagement with civil society organizations, unions, employer federations and with workers directly.

Countries where we source product from and 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 as well as the frequency of
monitoring and remediation activities. 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 have to be audited at least once every two years.

Business Entity Level Risk Assessments: A Business Entity’s actual performance as

outlined in its Strategic Compliance Plan and Report Cards shows its individual
performance and compliance risk. This influences the frequency of performance reviews
and impacts the longer-term business development.

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 on the details on 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 within adidas. 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 SEA through Hotline Posters
and 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. Information we receive this way may result in
additional site visits, audits or other engagement with a Business Entity or factory at any
time.

ONBOARDING NEW SUPPLIERS

In close cooperation with our business function Global Operations and other Sourcing
entities, all potential new suppliers are assessed by the adidas Social and Environmental
Affairs (SEA) team, with the goal 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, but if the issues are ones that can be
fixed we give them a rigorous timeline to correct the issues, and go back and check again to
see if they have improved. If they have improved, they are approved as a supplier producing
for adidas. By setting a high entry 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.

Overall, at the end of 2018, the ‘first-time rejection rate’ of 30% of all new factories visited
was similar to the previous year (2017: 29%) and the ‘final rejection rate’ was at 3%
(2017: 2%).

TRAINING AND EMPOWERING SUPPLIERS

As part of our continuous efforts to achieve more effective and sustainable practice within the
supply chain, we have initiated a system of multi-level and cross-functional training sessions
with our global supplier network. In 2018, we trained more than 1,200 staff and personnel
through 143 training sessions. We have three main approaches to training content:

Fundamental includes introductory training for the Workplace Standards, Fair Factories
training Clearinghouse (FFC) data entries, new factory approval process and the SEA
operating guidelines.

Performance includes detailed training on specific issues on labor, health, safety and
training environmental practices, as well as initial assessment monitoring methods.

Sustainability includes training in the KPI and rating tools, sustainable compliance planning and
training supplier self-assessment methods.

There is an ongoing program of training our suppliers to help them improve their social,
health, safety and environmental performance. We focus our efforts on the following key
training initiatives:

Fair Factoires Clearinghouse: The Fair Factories Clearinghouse (FFC) is an external, non-

profit program which utilizes technology that allows members to share information, to
collaborate on productivity and to facilitate safe, humane working conditions. adidas'
Social and Environmental Affairs (SEA) team trains selected factories to use the FFC
system which builds more transparent reporting. adidas has participated in the FFC
platform since 2006 and has used the platform to share supplier audit and monitoring
information since 2008.
 Human Resources Management Systems: After years auditing in factories, adidas
recognized there was a lack of fundamental HR systems in the Asia Pacific region
factories. The introduction of more sophisticated production set-ups such as lean
manufacturing required more sophisticated HR practices. The Human Resources
Management Systems (HRMS) training program started in 2006 and focuses on training
supplier managerial staff in the Asia Pacific region, in particular China and Vietnam.
Training topics are designed for key HRMS elements covering hiring, compensation and
benefits, training and development, performance management and human resource
planning. The training has contributed to operational efficiencies, as well as growing
worker satisfaction and staff morale. In addition, we evaluated the modules on freedom of
association and industrial relations to more closely link with the FLA’s Sustainable
Compliance Initiative monitoring tool. The outputs support long-term social compliance in
the supply chain.

'Energy and Water Investment Plan' project: In 2018, we started the ‘Energy and Water
Investment Plan’ project with facilities located in five of our main sourcing locations
(Cambodia, China, Indonesia, Vietnam and Taiwan) that were off track to achieve their 2020
targets, or that were recently added to the scope of our monitoring. These facilities are
required to conduct on-site assessments and develop an investment plan enabling them to
deliver on their energy and water reduction targets, with the aim to identify
potential efficiency measures and achieve actual savings by implementing these saving
opportunities on-site before the end of 2019.

'Energy and Water Efficiency’ project: In 2018 we also saw the successful completion of
an 18-month ‘Energy and Water Efficiency’ project that we cofunded together with the
International Finance Corporation (IFC) and which benefited six supplier facilities in
Vietnam. The aim of this partnership was to provide access to advisory services as well as
low-cost financing for suppliers who wish to invest in improving their energy and water
footprint but need technical support or the upfront capital to do so. Since the start of the
project in 2017, suppliers have implemented more than 60 saving opportunities, with
notable annual savings in energy consumption, greenhouse gas emissions and water
consumption. As part of the project with the IFC, we conducted a renewable energy
assessment, identifying those
suppliers with the feasibility of using renewable energy.

WORKER EMPOWERMENT
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 on the notice boards that tells 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 find solutions through the factory’s usual mechanisms. Workers are also
provided with local numbers to call and addresses to write to. In some cases the telephone
hotlines that we use are run by non-profit organisations and in other cases our own field staff
take the calls and respond to the workers' concerns. A lot of our time is spent following up on
calls or requests from workers about hard-to-fix issues, such as the wrong salary payment,
working too many hours, or being unfairly let go.

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 innovative ‘SMS Worker Hotline’ in supplier factories in Indonesia back in 2012, we have
progressively improved our suppliers’ operational grievance mechanisms, using an
application-based ‘Workers Voice’ platform that was available and used in 97% of our
strategic factories across ten countries by the end of 2018. Strategic suppliers account for
around 75% of all production volume.

DEVELOPMENT OF WORKER GRIEVANCE      

APPLICATION

2020 TARGET 2018 2017 2016

Empower our supply chain workers by expanding and 97%  63% 58%
refining grievance systems and skill training
programs. This includes the full expansion of the    
Workers’ Greivance Application to 100% of our
strategic suppliers.

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. By the end of 2018, worker satisfaction surveys were conducted
in 123 supplier factories in twelve countries (2017: 47 factories across nine countries). Upon
completing the survey, factories are required to develop improvement plans for the ‘top
three’ issues and then track progress regularly. Based on the feedback captured by the
surveys we have seen, for example, constructional improvements in canteens and
worker dormitories as well as a positive drive to develop better training programs for
workers and supervisors.
Alongside factory-led training, adidas has also offered tailored training for supervisors since
2016. Up until the end of 2018, more than 700 supervisors in 55 factories across five
countries received such training. Supervisors have shown a strong commitment to the
training courses and post-event assessments. And we have received very positive
feedback from trainers and factory management regarding the supervisors’ improved work
performance. As part of our larger 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 400 on-job women as well as women workers made redundant
(Status: end of 2018)

MONITORING SUPPLIER PERFORMANCE (AUDITS)

Internal as well as external audits are conducted at our suppliers’ factories to ensure they
are complying with our standards for social and environmental compliance. 

STRATEGIC SUPPLIERS (C-KPI)

The strategy applied to suppliers we have a direct relationships with is based on a long-term
vision of self-governance where they take ownership of their compliance program. To help
these suppliers, we conduct factory audits, assessing risks and identifying root causes of
non-compliance. With the Compliance Key Performance Indicator (C-KPI) rating tool we
evaluate six fundamental elements of social compliance including management
commitment, the quality of management systems in place, worker-management
communication, training delivered, transparent reporting and measurement of compliance
activities. According to the results, suppliers are assessed with a C-rating score between 1
and 5 (with 5 being the best rating). 

Our target for 2020 is to have at least 80% of our strategic suppliers rated at 4C or better. By
the end of 2018, 62% of strategic Tier 1 suppliers reached 4C rating or better (2016: 51%),
which reflects functioning management systems and effective worker’ communication and
grievance channels. Strategic suppliers account for around 75% of all production volume. 

Click here to read our Audit Manual.

STRATEGIC SUPPLIERS (E-KPI)

In the area of environmental compliance, a tool called ‘E-KPI’ measures
suppliers’ environmental compliance overall and assess their performance and progress
toward the 2020 targets. Using a benchmarking approach, the E-KPI allows for a high level of 
transparency into suppliers’ actual consumption intensity, hence supporting us in defining
suppliers’ specified areas for improvement and training needs that match their
respective situation. We will continue to support suppliers to identify
resource efficiency measures and rollout in our supply chain.

We set ambitious reduction intensity targets for our strategic suppliers at Tier 1 and Tier 2
level, aiming to systematically improve their environmental performance. By 2020, we
expect them to reduce their overall energy consumption, water use and waste volume by 20%
compared to their performance in 2014. We also set a 35% target for reduction in water use
for our strategic apparel material suppliers 2 at Tier 2 level. 2018 results show the promising
efforts we are putting into driving resource efficiency. Suppliers are on track to meet their
2020 reduction targets across all categories (footwear, apparel, and accessories and gear),
with overachievers  compensating low performers in the aggregated reduction results.

LICENSEES (REPORT CARDS)

Some adidas business entities source products through intermediaries such as agents, and
we also develop new market opportunities with licensees who independently manage
production. We call this process 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. Our target for 2020 is to have at least 80%
of strategic licensees in a mode that allows them to monitor their own supply chain aligned
with SEA standards, and support their suppliers to continuously improve workplace condition
(“self-governance”). By the end of 2018, 80% successfully embedded governance systems,
supply chain management, purchasing practices and product safety
compliance requirements into their business practices. 20% 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.

Enforcement: Dealing with non-compliances

Breaches of the Workplace Standards are categorized into zero tolerance points and
threshold issues. Zero tolerance includes prison labor, serious, life-threatening health and
safety conditions and repeated or systematic abuse. A finding of zero tolerance non-
compliance means an immediate and urgent engagement with a 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 and any
combination of the two. 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, and

The commissioning of special projects to remedy particular compliance problems.

Any cases of non-compliance identified during audits are given a certain time frame for
remediation.  For a full list of non-compliances identified in 2018 please see our Annual
Report. When we find ongoing and serious non-compliance and a lack of commitment on the
part of the management to address the issues, we will, when appropriate, issue a formal
warning letter. In very serious cases or in cases of zero tolerance non-compliance, a ‘stop
work’ letter will be issued, advising the offending supplier that SEA has recommended the
business relationship be terminated. In 2018, we had a total of 39 active warning letters
(2017: 42) across 16 countries, and we terminated agreements with one supplier for
compliance reasons (2017: 4), as the supplier refused to grant the SEA team access to audit
the factory.

OUR APPROACH TO SUPPLY CHAIN MANAGEMENT

HISTORY IN SOCIAL COMPLIANCE

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