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Adidas: Racing to Supply Chain 4.0

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Adidas is taking the lead in revolutionizing an industry supply chain that is known for relying on manual labor and having extremely long lead times.

The footwear industry supply chain has been described by analysts as “slow, low tech, and highly labor intensive” [1]. In recent years, this has become a major concern for Adidas, a large footwear and apparel company headquartered in Germany, which recognizes that companies that do not adapt to change risk their survival. Clarifying the underlying problem, Adidas’ head of technology innovation has asserted that “the way our business operates is probably the opposite of what consumers desire” [2].

Apparel industry analysts have also claimed that customers “want three things: they want custom product, they want it fast, and they want innovation” [3]. Across industries, customers are increasingly asking for more convenience and quicker delivery. According to an Adidas executive, “speed is all around us…it’s essential to our consumers who live in a world of immediacy” [4]. Customization has generally been difficult to do at a reasonable cost because of the high fixed costs involved in production runs. The first company to figure out how to make a shoe fit every person’s unique desires will have an important first mover advantage. Furthermore, if apparel companies are not constantly understanding and reacting to changing tastes, they risk losing customers. For the reasons above, Adidas felt it was critical to invest in digitalization technologies including automation, digital design, and 3D printing, which are all part of a new movement called Supply Chain 4.0 [5].

Historically, production processes have consisted of a design phase followed by a manufacturing phase. Adidas’ design process has become faster because it can be done digitally through virtual prototyping instead of creating molds and making physical samples [6]. Manufacturing time has decreased because of significant investments in automation and 3D printing. As a result, some think that “lead times could be cut from 18 months to just four” [7]. Just as important is the fact that “design and manufacturing are no longer separate processes; they now happen simultaneously” [8]. This automated linkage improves efficiency because the company can switch to producing another SKU without stopping production to set up machines or train workers [9]. This provides a competitive advantage because Adidas can react quickly to changes in consumer preferences.

The improvements in design and manufacturing have also made it cheaper to produce shoes. Morgan Stanley estimates that the new production model may be 10% cheaper than the traditional model [10]. Moreover, fixed costs have fallen significantly since less tooling and fewer samples are needed. When fixed costs decline, it becomes much more economical to make smaller runs of shoes. As global consulting firm Deloitte puts it, “when less capital is required, the minimum efficient scale comes down” [11]. Adidas is taking advantage of this by offering customization to its customers. In effect, customers will be able to order shoes that appeal to them more, whether that’s a better fit or a unique design.

In the medium term, Adidas plans to build additional production facilities closer to the customer [12]. This will enable them to understand local trends better and deliver to the customer faster. They also want to continue driving towards mass customization in the next ten years. In fact, Adidas’s CIO, Michael Voegele, has said that “the capabilities we’re building…are geared toward lot size one” [13].

While I think that Adidas is doing well, there are a few additional steps they should take. One is that their Supply Chain automation experts should travel to other facilities to train employees just like Toyota sent its employees to American facilities. At the same time, I would recommend that Adidas be cognizant of the local environments in which they open new factories. We have seen that if foreign companies come in and impose their management style on those who are not used to it, there can be backlash. I would also suggest that they pilot their new approaches before rolling them out fully to the public. For instance, it would be unfortunate if customization was rolled out and Adidas could not fulfill orders within a reasonable time frame. Finally, I would caution Adidas that factories are very expensive, so they should be sure they have the demand for products before they commit capital.

One concern I have is whether it is indeed possible to get to a run size of one and still be at a reasonable cost to the consumer. For that to happen, fixed costs would need to be quite small and I’m not sure how feasible that is. I am also concerned about Adidas’ ability to identify and adapt to consumer trends as quickly as is needed. Some trends seem to be over almost as soon as they start – even with the improvements they have made, could Adidas really capitalize on a trend before it dies?

(788 words)

1 Laura Berman, “Nike and Adidas Could Be on Verge of Unleashing Something Financially Game-Changing,” TheStreet, June 7, 2017, https://www.thestreet.com/story/14168547/1/nike-and-adidas-could-be-on-verge-of-unleashing-something-financially-game-changing.html, accessed November 2017.

2 “Adidas’s High-Tech Factory Brings Production Back to Germany,” The Economist, January 14, 2017, https://www.economist.com/news/business/21714394-making-trainers-robots-and-3d-printers-adidass-high-tech-factory-brings-production-back, accessed November 2017.

3 Marc Bain, “Adidas Can Now Make Specialized Shoes for Runners in Different Cities, Thanks to Robots,” Quartz Media, October 4, 2017, https://qz.com/1081511/adidas-can-now-make-specialized-shoes-for-runners-in-different-cities-thanks-to-robots/, accessed November 2017.

4  “Adidas Will Open Atlanta-Based Facility to Make Shoes in America,” Adidas press release (Portland, OR, August 10, 2016).

5 Stefan Schrauf, “Digitizing the Supply Chain,” October 10, 2017, webinar, Harvard Business Review, https://hbr.org/webinar/2017/10/digitizing-the-supply-chain, accessed November 2017.

6 Marc Bain, “A Revolution is Coming in the Way Your Sneakers are Designed and Manufactured,” Quartz Media, June 8, 2017, https://qz.com/1000737/a-revolution-is-coming-in-the-way-your-sneakers-are-designed-and-manufactured/, accessed November 2017.

7 ibid.

8 Marc Bain, “Adidas Can Now Make Specialized Shoes for Runners in Different Cities, Thanks to Robots,” Quartz Media, October 4, 2017, https://qz.com/1081511/adidas-can-now-make-specialized-shoes-for-runners-in-different-cities-thanks-to-robots/, accessed November 2017.

9 “Adidas’s High-Tech Factory Brings Production Back to Germany,” The Economist, January 14, 2017, https://www.economist.com/news/business/21714394-making-trainers-robots-and-3d-printers-adidass-high-tech-factory-brings-production-back, accessed November 2017.

10 Marc Bain, “A Revolution is Coming in the Way Your Sneakers are Designed and Manufactured,” Quartz Media, June 8, 2017, https://qz.com/1000737/a-revolution-is-coming-in-the-way-your-sneakers-are-designed-and-manufactured/, accessed November 2017.

11 Adam Mussomeli, Doug Gish, and Stephen Laaper, “The Rise of the Digital Supply Network,” Deloitte Insights, December 1, 2016, https://dupress.deloitte.com/dup-us-en/focus/industry-4-0/digital-transformation-in-supply-chain.html, accessed November 2017.

12  “Adidas Will Open Atlanta-Based Facility to Make Shoes in America,” Adidas press release (Portland, OR, August 10, 2016).

13 Marc Bain, “Adidas Can Now Make Specialized Shoes for Runners in Different Cities, Thanks to Robots,” Quartz Media, October 4, 2017, https://qz.com/1081511/adidas-can-now-make-specialized-shoes-for-runners-in-different-cities-thanks-to-robots/, accessed November 2017.

3 thoughts on “Adidas: Racing to Supply Chain 4.0

  1. great article!

    while I agree that Adidas needs to train employees to use the new automated supply chain, I wonder how much of its staff will be let go due to their digitization efforts.
    it would’ve been interesting to know what is the percent reduction in time to market compared to the 12- 18 month average indicate in the website below. however, to answer your question I think the fact that the product is customized for the consumer makes it worthwhile and used for longer periods. unlike fast fashion where products are replaced every few weeks.
    https://qz.com/1081511/adidas-can-now-make-specialized-shoes-for-runners-in-different-cities-thanks-to-robots/

  2. Very interesting article!

    To your first point: I do think that it is possible to get to a run size of one at a reasonable cost, because I believe that the required technologies – such as 3D printing – are very close to reaching the level required to do so – both in terms of quality and cost. As a matter of fact, a few months ago, Adidas went from seeing 3D printing as a mere prototyping method, to using it as an actual mass production process. This winter, the company will start selling the Futurecraft 4D, the first shoe with a 3D printed sole [1]. It would not surprise me that within a couple of years, Adidas or one of its competitors is able to use this technology to produce an entire shoe, at a competitive cost. Once this happens, reaching a run size of one does not seem such a long shot anymore.

    It is important to point out, however, that having a fully functional and economically viable technology in place is not enough. Reaching a run size of one implies many drastic changes in the company’s entire supply change and operating model. The company must, therefore, “…find people with the right skills, and manage the shift to a culture that’s willing to carry out the effort. In other words, they must transform their entire organization.” [2]

    To your second point, I would just like to provide some food for thought: Would it make sense for Adidas to adopt or, at least, explore the approach towards Big Data that Gap is starting to implement? This year, Gap’s CEO – Art Peck – decided to eliminate his creative directors and put in place big data and advanced analytics tools to identify consumer trends and design new products accordingly [3].

    [1] Yurieff, K. (2017). Adidas unveils new 3D printed shoe. CNN Tech. [online] Available at: http://money.cnn.com/2017/04/07/technology/adidas-3d-printed-shoe/index.html [Accessed 29 Nov. 2017].

    [2] Schrau, S. and Berttram, P. (2017). Industry 4.0: How Digitization Makes the Supply Chain More Efficient, Agile, and Customer Focused. PwC.

    [3] Israeli, Ayelet, and Avery. Predicting Consumer Tastes with Big Data at Gap. Harvard Business School Case 517-115, May 2017. (Revised July 2017).

  3. It is interesting to read that Adidas is beginning to shift its business model to address customer preferences for custom products with fast turnaround times.

    One question I had as I read this article was whether the new technologies that Adidas is developing to grow and optimize its production processes could also serve as an entry point for new competition? It is certainly impressive that the new business model may be ~10% cheaper than the traditional model; however, if Adidas demonstrates that it is possible to manufacture small batches of custom product in a cost-effective way, what is to stop innovative new footwear companies from entering the market?

    It seems as though this risk is particularly relevant if we believe that consumers care now more than ever about custom product (versus, say, brand name). If that is the case, what is to stop them from turning to a new, potentially lower-cost but equally bespoke offering?

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