(Luận văn) determinants of adidass supply chain performance in asia pacific region 001

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY --- oOo --- NGUYEN NGOC QUOC DETERMINANTS OF ADIDAS’S SUPPLY CHAIN PERFORMANCE IN ASIA PACIFIC REGION MASTE

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY

- oOo -

NGUYEN NGOC QUOC

DETERMINANTS OF ADIDAS’S SUPPLY CHAIN PERFORMANCE IN ASIA PACIFIC REGION

MASTER OF BUSINESS ADMINISTRATION THESIS

Ho Chi Minh City – 2011

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MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY

- oOo -

NGUYEN NGOC QUOC

DETERMINANTS OF ADIDAS’S SUPPLY CHAIN PERFORMANCE IN ASIA PACIFIC REGION

MAJOR: BUSINESS ADMINISTRATION

MAJOR CODE: 60.34.05 MASTER THESIS INSTRUCTOR: DR VO THI QUY

Ho Chi Minh City – 2011

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ACKNOWLEDGEMENTS

I would like to express my deepest gratitude to my research Instructor, Dr Vo Thi Quy for her intensive support, valuable suggestions, guidance and encouragement during my study

I would like to express my sincere gratitude to all of my teachers at Faculty of Business Administration and Postgraduate Faculty, University of Economics Ho Chi Minh City for their teaching and guidance during my MBA course

Also, I fully appreciate those who were willing to participate in interview and survey session

My sincere thanks are extended to Ms Hoa Ly (Footwear Country Manager of adidas Viet Nam) and Mr Woj (Head of Operation of NEO label category) for their comments on my proposal as well as the approval to conduct the survey within adidas supply chain

Last but not least, the deepest and most sincere gratitude go to my beloved parents, my wife, my sons and my closest friends for their boundless support, abundant love and encouragement throughout my period of study I, therefore, dedicate this work

as a gift to all of them

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ABSTRACT

It goes without saying that supply chain management has played major role in every business locations under globalization and intensive world-wide competition More and more firms have been aware of importance of supply chain management (SCM) and attempt to enhance the effectiveness of SCM in order to secure their competitive advantages This paper aims at investigating the relations between supply chain practices (Strategic supplier partnership, Product creation, Purchasing/Supply planning, Sourcing Production (manufacturing), internal lean practices (Fast and Lean)) and adidas supply chain performance in a pull-based supply chain A framework expressing the hypothesized relations among the above-mentioned variables has been developed and validated by examining the validity and reliability of measurement scale, the findings add credence to the positive effects of Product creation, Purchasing/Supply planning, Internal lean practices (Fast and Lean) as antecedents to higher performance in the supply chain This work can support managers in taking supply chain design decisions and in defining countermeasures to mitigate their effects on supply chain performance

Keywords: Supply chain; Supply chain management; supply chain practices,

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TABLE OF CONTENTS

Chapter 1: Introduction to study - 10

1.1 Background or Rationale 10

1.2 Research problem 12

1.3 Research questions and research objectives 15

1.3.1 Research questions 15

1.3.2 Research objectives 16

1.4 Scope and Limitation of research 16

1.4.1 Research scope 16

1.4.2 Research limitation 17

1.5 Research method 18

1.6 Structure of research 18

Chapter 2: Introduction to adidas Limited Sourcing Company 20

2.1 Introduction about adidas group 20

2.2 Adidas‟s Strategy 22

2.3 Major locations and partnerships 26

2.4 Business performance in FY09 and its action plans in FY10 26

2.4.1 Business Performance 26

2.4.2 Its Action Plan in FY10 27

Chapter 3: Literature Review - 34

3.1 Literature review 34

3.1.1 Strategic supplier partnership 34

3.1.2 Product creation 36

3.1.3 Purchasing/Supply planning 40

3.1.4 Sourcing production (manufacturing) 43

3.1.5 Internal lean practices (Fast and Lean) 46

3.1.6 Postponement-Inbound Customs, Order Fulfillment/Warehouse and Outbound/Point of Sale 47

3.1.7 Supply Chain Performance 48

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3.2 Conceptual framework and Hypotheses 53

Chapter 4: Research method - 54

4.1 Research Design 54

4.2 Measurement scale development 56

4.3 Sampling technique and Data collection 59

4.3.1 Sampling technique 59

4.3.2 Data collection 60

4.4 Data analysis methods 61

4.4.1 Unidimensionality Analysis with Exploratory Factor Analysis 62 4.4.2 Reliability Analysis with Cronbach‟s Alpha 62

4.4.3 Assessment of Conceptual Model and Hypotheses 63

Chapter 5: Empirical results of the research - 64

5.1 Descriptive Analysis 64

5.2 Exploration Factor Analysis 66

5.3 Reliability analysis 69

5.4 Testing Hypothesis with Linear Regression 71

Chapter 6: Conclusions and Suggestions - 77

6.1 Theoretical contributions 77

6.2 Managerial contributions 77

6.3 Limitations and Suggestions for Future Researches 82

References - 84

Appendix 1 - 88

Appendix 2 - 92

Appendix 3 - 94

Appendix 4 - 95

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LIST OF FIGURES

Figure 1.1 Research Scope 17

Figure 1.2 Structure of the study 19

Figure 2.1 Global Operations in Go-to-Market Process 27

Figure 2.2 Suppliers by footwear production by region 32

Figure 3.1 adidas Product Creation Process 39

Figure 3.2 Conceptual framework 53

Figure 4.1 Research process 56

Figure 5.1 Structure of chapter 5 64

Figure 5.2.The revised model of determinants of Supply chain Performance 76

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LIST OF TABLE

Table 3.1 Studies related to sourcing strategy 43

Table 4.1 Constructs for SCM practices, Supply Chain Performance 57

Table 4.2 Respondent characteristics 60

Table 4.3 Statistical information about collected samples 61

Table 5.1 Descriptive statistics results 65

Table 5.2 Factor loading analysis results 68

Table 5.3 Results of Exploration Factor Analysis 70

Table 5.4 Means and standard deviations 71

Table 5.5 The correlations of factors of SC 72

Table 5.6 R Square and Adjusted R square 73

Table 5.7 Results of linear regression analysis 73

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ABBREVIATIONS

EMEA Europe, Middle East and Africa

GPS Global Procurement System

ILP Internal Lean Practice

ILS International Logistics Planning System

PC Product creation

PSP Purchasing/Supply Planning

R&D Research and Development

SAP Systems, Applications and Products in Data Processing

SC Supply Chain SCM Supply chain management SCP Supply chain performance

SP Sourcing Production

SSP Strategic Supplier Partnership

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CHAPTER 1 INTRODUCTION TO THE STUDY

1.1 Background or Rationale:

It goes without saying that supply chain management (SCM) has played major role in every business locations under globalization and intensive world-wide competition An increased focus on SCM as an operational phenomenon that can be leveraged to achieve superior organizational performance (e.g., Hult, Ketchen, &Slater, 2004) has been studied A supply chain (SC) is defined as the “network of facilities and activities that performs the functions of product development, procurement of material from suppliers, the movement of materials between facilities, the manufacturing of products, the distribution of finished goods to customers, and after-market support for sustainment” (Mabert & Venkataramanan, 1998, p.538).SCM is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers (Harland, 1996) SCM is also “a key strategic factor for increasing organizational effectiveness and for better realization of organizational goals such as enhanced competitiveness, better customer care and increased profitability” (Gunasekaran et al.2001, p.71).The major goals of SCM are to minimize non-value-added activities and associated investment cost and operating cost, increase customer responsiveness and flexibility in the supply chain, and enhance bottom-line performance and cost competitiveness (Stewart 1995) A recent study conducted by Petrovic-Lazarevic and Sohal (2002) reported that effective management

of the supply chain has been identified as being of significant importance to achieving and sustaining a competitive advantage for firms in the Australian textiles, clothing, and footwear industry

Supply chain performance (SCP) is affected by exogenous variables (e.g demand and lead time variability), SCM and planning decisions and supply chain design decisions (Forrester, 1961; Sterman, 2000; Lee et al., 1997a, b; Chen et al., 2000; Sezen,

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2008) More recent work has identified such emerging themes as value networks (e.g., Ehret, 2004), learning within these networks (e.g., Håkansson, Havila, & Pedersen, 1999), and conceptualizing industrial marketing networks as a series of resources, activities, and actors (Gadde, Huemer, & Håkansson, 2003)

Another reason is that while an increasing number of firms are interested in supply chains, some have considered the literature to date descriptive and anecdotal (e.g., Handfield & Nichols, 2003; Moore, 1999) In reality, there is a huge potential improvement to reduce the inefficiencies caused by poor performance of suppliers, unpredictable customer demands, and uncertain business environment An integrated SC has a clear advantage on the competitiveness of the individual companies As a result, the chain-chain competition has started to take over the enterprise-enterprise competition, although many enterprise-enterprise competitions do exist particularly in the less developed economies (Koh et al., 2006)

Many companies are trying to find tools for performance improvement in response to turbulent business markets and for efficiently controlling their business activities The objectives of performance measurement are to improve the efficiency and effectiveness of a SC (Beamon 1999; Gunasekaran et al 2001) In addition, Keeber (2000) also stated that the purpose of performance measurement is to reduce operating costs and customer service in logistics activities, improve firm‟s revenue growth, and enhance shareholder value Consequently, organizations began to realize that it is not enough to improve efficiencies within an organization, but their whole SC has to be made competitive It has been pointed out that understanding and practicing SCM has become an essential prerequisite to staying in the competitive global race and to growing profitably (Power et al., 2001; Moberg et al.,2002)

Sportswear is a globalised industry, with major production undertaken in Asian countries, and three international brands dominating worldwide sales – Nike and Rebook from the US, and Adidas from Europe (Just-style.com 2001) Moreover, sports superstars, TV sports programs and sports activities have great influence on this market

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The sportswear market possesses the same characteristics as the fashion market: strong seasonality, short product life, volatile demand, and high impulse purchasing (Christopher and Peck 1997; Fisher et al 1994; Fisher et al 2000) The seasons are affected not only by weather but also by the sporting calendar (Ashford 1997) The costs

of stockout and markdown for big companies like Sport Obermeyer would be more than 10% of sales (Fisher et al 1994) Thus, SCM in the sportswear market is critical to ensure that stock does not become out dated with the short product life cycle resulting in stockout and markdowns, thus reducing profits at the retail level

The SC in Asia possesses special socio-economic characteristics such as a preponderance of small independent retailers with big international suppliers dominating the market Moreover, there are many other reasons why Asia accounts for such a big part of the sourcing volume and SC Besides the lower labor costs in comparison to other areas, Asia offers many other advantages, e.g relatively lower political, economical and financial risks, better conditions in terms of infrastructure, qualified employees, etc and the domestic demand within Asia keeps growing, which makes this market more attractive, especially China, India, Japan

1.2 Research problem:

There are many previous empirical studies investigating factors affecting SCP

Some researches have focused on certain aspect of the internal SC, such as total quality management practices (Tan et al., 2002), internal integration (Pagell, 2004 and Braganza, 2002), agile/lean manufacturing (Womack and Jones, 1996, Naylor et al., 1999 and McIvor, 2001), and postponement (Beamon, 1998, Naylor et al., 1999, Van Hoek, 1998 and Van Hoek et al., 1999) On the other hand, some research have focused on supplier side, such as supplier selection, supplier involvement, and manufacturing performance

(Choi and Hartley 1996 and Vonderembse and Tracey, 1999), the influence of supplier alliances on the organization (Stuart, 1997), success factors in strategic supplier alliances (Monczka et al., 1998, Narasimhan and Jayaram, 1998 and Stuart, 1997), and supplier management orientation and supplier–buyer performance (Shin et al.2000)

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Studies such as those by Clark and Lee (2000) and Alvarado and Kotzab (2001), focus

on the downstream linkages between manufacturers and retailers A few recent studies have begun to consider both the upstream and downstream sides of the SC simultaneously Tan et al (1998) explores the relationships between supplier management practices, customer relations practices and organizational performance;

Frohlich and Westbrook (2001) investigate the effects of supplier– customer integration

on performance Tan et al (2002) studies SCM and supplier evaluation practices, Min and Mentzer, 2004 S Min and J.T Mentzer, Developing and measuring supply chain concepts, Journal of Business Logistics 25 (2004) (1), pp 63–99.Min and Mentzer (2004) develops an instrument to measure the supply chain orientation and SCM at conceptual levels Cigolini et al (2004) develops a set of supply chain techniques and tools for examining SCM strategies Li et al (2005) also conceptualizes, develops, and validates six dimensions of SCM practices (strategic supplier partnership, customer relationship, information sharing, information quality, internal lean practices, and postponement) which covers upstream, internal and downstream side of a SC Taken together, this research is representative of effort to address various aspects of SCM practices However, Li et al (2005) noted that the implementation of various SCM practices may be influenced by contextual factors, such as firm size, a firm's position in the SC, supply chain length, and channel structure For example, the larger organizations may have higher levels of SCM practices since they usually have more complex supply chain networks necessitating the need for more effective management of supply chain

Consequently, it is necessary to do more researches studying SCM practices for different industries or different supply chain models

Adidas is a German-based leading producer of sportswear and sports equipment, offering its products primarily through four brands: Adidas, Taylor Made-Adidas Golf, Maxfli and Reebok (Datamonitor, 2007) The Adidas group and its 150+ subsidiaries are directed from the headquarters in Herzogenaurach, Germany, and employ 26,376 people (Adidas, 2007).The Adidas product line includes more than 20,000 items, with thousands of product variations To keep up with market demand, the company changes

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its product range twice a year; more often if new technologies are available and in demand (Webex, 2004) Company‟s revenue for 2008 was listed at €10.799 billion and the 2007 figure was listed at €10.299 billion or about $15.6 billion

The company‟s SC is long and complex, relying on about 1,120 independent factories from around the world who manufactured its products in 68 countries Many of these are in one of the following six countries: China, India, Indonesia, Thailand, Turkey or Vietnam In Asia alone, its suppliers operate in 18 different countries It has a global supply chain network with the complete SC being outsourced

Using of various global manufacturing resources is an important part of adidas‟s SCM strategies One of the reasons is utilizing the industry strength of different countries In particular, adidas is looking for manufacturing resources which are taking advantages of low labor cost, low import taxes, high efficiency in manufacturing management and political stability Consequently, Vietnam, China, India and Indonesia are good alternatives that adidas is choosing for key manufacturing resources This way, adidas is also flexible to shift production from one country to another if they feel cost concern; political stability or trade restriction in certain country caused any problems for them In recent years, adidas has tended to shift production from Indonesia and China to Vietnam Because political stability in Indonesia is the concern that adidas does not want to take risk whereas labor cost in China is rapidly being increased recently

However, adidas is also facing some problems from outsourcing strategy in these countries

Strategic supplier partnership is a key concern that adidas is struggling Almost main material suppliers are from developed countries such as Japan, Korean, Taiwan and China As a result, long material lead-time is one of main problems negatively affecting adidas‟s SCP Based on trust and commitment, adidas is building strategic partnership with contract factories as well as main suppliers in order to enhance its overall SCP

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Manufacturing management is also a weakness of developing countries

Productivity of Vietnam and Indonesia workers is very low Productivity of workers in these developing countries is just approximately 1/3 compared with productivity of workers in developed countries like Japan, Korea, etc In other words, even adidas is utilizing low labor cost in developing countries, but low productivity is also a trouble that adidas and its partners are facing In order to enhance productivity and quality stability, Lean philosophy has being implemented in almost adidas‟s contract factories

However, the achievements in some recent years are not up to its expectation in terms of efficiency and benefits That‟s the reason why lean application and proliferation are always put on top targets of its fiscal year strategy

Product creation plays an important role in SC and many big sports brands now are moving their product creation centers into Asia as well It means that they want to locate product development and production as one place to reduce lead time for all related processes and cost from production creation stage to mass production That is big challenge to them since this is the first time that they have done this experiment

Basing on theoretical model of Li et al (2005) together with FY10 of adidas sourcing Limited operations strategies which have focused on 9 key drivers of SCP as from Strategic Demand/Design, Product Creation, Demand planning, Purchasing/Supply Planning, Sourcing Production, Inbound Customs, Order Fulfillment/Warehouse, and Outbound/Point of Sale which also covers internal based-successful SCM, as well as the current SC problems it is facing, this study will identify the factors which affects its SCP and develop a theoretical model/ measurement scale that would be appropriate to apply

in real situation of adidas‟s SCM practices

1.3 Research question and research objectives:

1.3.1 Research question

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Research questions involve the research translation of “problem” into the need for inquiry The research problems which are defined as above will lead to the following research question:

What are the relationships between SCM practices- Strategic supplier partnership, Product creation, Purchasing/Supply planning, Sourcing Production (manufacturing), Internal lean practices (Fast and Lean) – and adidas SCP?

1.3.2 Research objectives

A research objective is the researcher‟s version of a business problem Objectives explain the purpose of the research in measurable terms and define standards of what the research should accomplish (Zikmund 1997, p 89) In solving the research problem previously mentioned, the objectives of this paper are to:

o Identify key factors of SCM practices affecting adidas SCP in Asia

o Measure relationship between SCM practices and adidas SCP

From the above objectives, this research is expected to help supply chain managers of adidas to evaluate the SC with relevant data and to give recommendations to improve SCP of adidas SC in Asia

1.4 Scope and Limitation of research

1.4.1 Research scope

The research is studying the determinants of SCP of adidas in Asia However, due to some limitations, the research just focuses on Asia region with manufacturing and operating activities which are located in Asia countries The adidas‟s SCP from other regions will be conducted in other researches

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Besides, due to the limit of time, the research will focus on adidas Footwear contract factories „tier 1” and “tier 2” suppliers Raw material suppliers and distribution centers will be conducted in other researches

Figure 1.1 Research Scope

1.4.2 Research Limitation

Collecting survey data from single respondents per locations may result in inaccurate measurement even if the respondent is a top manager or executive of surveyed companies However, perception of the respondents through feeling may result

in inaccurate assessment about performance discrepancy between the company and its competitors

This research focused on SCM practices of manufacturing firms Therefore, the construct of internal lean practice may not be appropriate for distributors or retailers

Research scope

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The Postponement factor is not suitable for the characteristics of adidas‟s supply chain; therefore, it was not included in this research

This research deems delivery dependability as measurements for SCP

Other measurements such as inventory cost, cash-to-cash cycle time, etc are confidential information of the company Therefore, it is difficult to collect accurate data

of these measurements for this research

1.5 Research Method

This research study is designed to identify key factors of SCM practices affecting SCP of adidas SC in Asia then measure relationship between SCM practices and adidas SCP Thus, “exploratory” is viewed as an appropriate research type

In this research, survey are used as main methods and it are considered as a research technique in this study to identify key factors of SCM practices affecting SCP

of adidas SC in Asia then measure relationship between SCM practices and adidas SCP

Questionnaires are designed and directly asked/sent to interviewees to collect data related to SCM practices The argument for choosing survey is twofold Firstly, surveys provide quick, efficient and accurate means of assessing information about the population Secondly, surveys are more appropriate in cases where there is lack of secondary data

Finally, SPSS Version 16 software program are used to analyze data

1.6 Structure of research

This research includes six chapters:

The first chapter (Introduction) demonstrates the rationale and background of the research Furthermore, this chapter briefs some previous research that is relevant and helpful for the author to look for the research gap Deriving from research gap, the research questions and research objectives are also generated The study scope, research methodology, limitation and structure of research are also mentioned in this chapter

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Chapter 2 (Introduction to adidas Limited Sourcing group) briefs the general information about adidas, its strategy, its majors location, partnerships in the world as well as its business performance in FY09 and its action plan in FY10

Chapter 3 (Literature review) summarizes theories and previous study, which is helpful to build up the hypothesis and conceptual framework

Chapter 4 (Research methodology) explains research process and the method of data analyzing in each stage

Chapter 5 (Empirical results of the research) analyzes collected data from each survey stage in more detail

Chapter 6 (Conclusion and suggestions) details the conclusion and recommendation of the research

Figure 1.2 Structure of the study Chapter 1 Introduction to study Chapter 2 Introduction to adidas Limited Sourcing Company Chapter 3 Literature review

Chapter 4 Research Methodology Chapter 5 Empirical results of the research Chapter 6 Conclusions and Suggestions

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CHAPTER 2 INTRODUCTION TO ADIDAS

2.1 Introduction about adidas group

adidas – a name that stands for competence in all sectors of sport around the

globe The vision of company founder Adolf Dassler has long become reality and his corporate philosophy the guiding principle for successor generations

The idea was as simple as it was brilliant Adi Dassler‟s aim was to provide every athlete with the best possible equipment It all began in 1920, when Adi Dassler made his first shoes using the few materials available after the First World War

Today, the adidas product range extends from shoes, apparel and accessories for basketball, soccer, fitness and training to adventure, trail and golf

The adidas name dates back to 1948, deriving from the first two syllables of Adi Dassler‟s first and last name One year later, Adi Dassler registered the Three Stripes as

a trademark After a period spanning almost 70 years, the Dassler Family withdrew from the company in 1989, and the enterprise was transformed into a corporation (“Aktiengesellschaft”)

French-born Robert Louis-Dreyfus was Chairman of the Executive Board from April 1993 to March 2001 It was he who initiated adidas‟ flotation on the stock market

in November 1995 Since 2001, Herbert Hainer has been leading the Group

adidas Group – In 1997, adidas acquired the Salomon group, and the company‟s

name changed to adidas-Salomon AG The Salomon group also included the TaylorMade golf brand

In October 2005, the Salomon business segment, including the related subsidiaries and brands Salomon, Mavic, Bonfire, Arc‟Teryx and Cliché, was sold to the Finnish Amer Sports Corporation The company will change its legal name to “adidas AG” following shareholder approval at the Annual General Meeting in May 2006

On January 31, 2006, adidas-Salomon AG acquired Reebok International Ltd

The closing of the Reebok transaction marks a new chapter in the history of the adidas

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Group By combining two of the most respected and well-known brands in the worldwide sporting goods industry, the new Group will benefit from a more competitive worldwide platform, well-defined and complementary brand identities, a wider range of products, and a stronger presence across teams, athletes, events and leagues

The new adidas Group has more than 25,000 employees worldwide, with more than 2,000 working at the company‟s headquarters in Herzogenaurach A team of designers, product developers and experts for biomechanics and material technology carries out research in Portland and at adidas‟ second technology centre in Scheinfeld near Nuremberg

In Scheinfeld models, prototypes and made-to-measure performance products are also manufactured and tested It is here that adidas maintains the only sports shoe production facility still in existence in Germany

More than 80 subsidiaries guarantee marketplace presence for adidas products around the world Sales and distribution of adidas products is grouped in four regions worldwide: Europe/Emerging Markets, North America, Asia/Pacific and Latin America

Today, adidas is Europe‟s biggest supplier of athletic footwear and sports apparel

For over 80 years the adidas Group has been part of the world of sports on every level, delivering state-of-the-art sports footwear, apparel and accessories Today, the adidas Group is a global leader in the sporting goods industry and offers a broad portfolio of products Products from the adidas Group are available in virtually every country of the world Its strategy is simple: continuously strengthen our brands and products to improve its competitive position and financial and performance

Dress, casual and outdoor footwear, apparel and accessories

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CCM-Hockey

Hockey equipment and apparel

Activities of the company and its more than 170 subsidiaries are directed from the Group's headquarters in Herzogenaurach, Germany It is also home to the adidas brand Reebok Headquarters are located in Canton, Massachusetts Taylor Made-adidas Golf is based in California The company also operates creation centers and development departments at other locations around the world, corresponding to the related business activity adidas Sourcing Ltd., a fully-owned subsidiary headquartered in Hong Kong, is the worldwide sourcing agent for the adidas Group Effective December

31, 2009, the adidas Group employed 39,596 people

Its Mission

The adidas Group strives to be the global leader in the sporting goods industry with sports brands built on a passion for sports and a sporting lifestyle

It is consumer focused and therefore it continuously improves the quality, look, feel

and image of our products and our organizational structures to match and exceed consumer expectations and to provide them with the highest value

It is innovation and design leaders who seek to help athletes of all skill levels achieve

peak performance with every product it brings to market

It is a global organization that is socially and environmentally responsible, creative

and financially rewarding for our employees and shareholders

It is committed to continuously strengthening its brands and products to improve its

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To anticipate and respond to their needs, it continuously strives to create a culture of innovation, challenging to break with convention and embrace change By harnessing this culture, it pushes the boundaries of products, services and processes to strengthen its competitiveness and maximize the Group‟s operational and financial performance This,

in turn, will drive long-term value creation for its shareholders

Reorganization of Group provides solid platform for growth

In 2009, the adidas Group took the strategic decision to move from a vertically integrated brand structure into a functional multi-brand structure for the adidas and Reebok brands This led to the creation of a Global Sales function responsible for the commercial activities and a Global Brands function responsible for the marketing activities of both brands In addition, the Global Sales organisation was split into Wholesale and Retail, to cater more appropriately to the different needs of these two distinctive business models This new structure follows two important principles: to foster further alignment and strengthen brand management to drive long-term sustainable growth, while at the same time ensuring coordinated and best practice execution in the marketplace

To transition to the new structure, the Group initiated several measures in 2009 including:

o Establishment of joint operating models for the adidas and Reebok brands in most markets around the globe

o Elimination of regional headquarters, moving to more direct interaction between local markets and global functions

o Separation of the responsibility between Global Brands and Global Sales management on the Board level Herbert Hainer, adidas Group CEO, additionally assumed direct responsibility for Global Sales At the same time, Erich Stamminger, Member of the Executive Board of the adidas Group, took responsibility for Global Brands

The new structure will allow it to better leverage the strengths of its management team and deliver best-in-class service to its consumers and customers Due to the

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different business models of Taylor Made-adidas Golf, Rockport and Reebok-CCM Hockey, these operating segments are not part of the new matrix structure

Diverse brand portfolio

Consumers want choice Whether it is the athlete looking for the best possible equipment, or the casual consumer searching for the next fashion trend, adidas group is inspired to develop and create experiences that engage consumers in long-lasting relationships with its brands To maximize its consumer reach, it has embraced a multi-brand strategy This approach allows it to tackle opportunities from several perspectives,

as both a mass and a niche player, providing distinct and relevant products to a wide spectrum of consumers In this way, each brand is able to keep a unique identity and focus on its core competencies, while simultaneously providing adidas Group with a broad product offering, increasing its leverage in the marketplace

Investments focused on highest potential markets and channels

As a Group, it targets leading market positions in all markets where it compete

However, with almost 180 subsidiaries worldwide, adidas Group has prioritized its investments based on those markets which offer the best medium- to long-term growth and profitability opportunities In this respect, it continues to place a considerable emphasis on expanding its activities in the emerging markets; particularly China and Russia see Subsequent Events and Outlook

No matter in which market it operate, it recognizes that consumer buying behavior and the retail landscape are unique Therefore, to fully exploit market opportunities, it tailors its distribution strategy to present adidas brands to the consumer

in the most impactful way This is achieved by following a distinctive channel approach

It strives to provide its customers with superior service to secure prime shelf space for its brands, while continuing its commitment to building a strategic competency in own retail and e-commerce see Global Sales

Creating a flexible supply chain

Speed and agility are key elements to outpacing the competition Adidas Group is committed to meeting the full range of customer and consumer needs by ensuring

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product availability in the correct size and colour, providing game-changing technical innovations and also the latest high-end fashion product to the highest quality standards

It strives to shorten creation and production lead times by continuously improving its infrastructure, processes and systems By sharing information from point of sale to source and vice versa, it strives to connect and more closely integrate the various elements of its supply chain, to enable quick reaction to changing consumer trends To this end, it focuses on building maximum flexibility While leveraging the efficiency of common infrastructure and processes, the Group strives to provide tailored solutions for all its business models, be it the wholesale or retail channels, or the performance-oriented or style-oriented businesses

Leading through innovation

Everyone in the adidas Group is responsible for driving innovation Therefore, it fosters a culture of challenging convention and embracing change, and requires all areas

of the Group to generate at least one new meaningful innovative improvement per year

In particular, the Group believes that technological evolution and cutting-edge design in its products are essential to achieving sustainable leadership in its industry see Research and Development (R& D) Beyond this, enhancing services for its customers, and implementing more efficient and effective internal processes are other areas where its organization strives to innovate

Develop a team grounded in our heritage

The Group‟s culture is continuously shaped by influences from the past, present and future It perpetuates its founder‟s commitment to the athlete/consumer, pride in what it does, quality and love of sport The Group wins as a team through open communication, collaboration and our shared values found in sport

Further, the Group is particularly focused on ensuring best-practice social and environmental standards It encourages socially and environmentally responsible behavior, because it knows it will generate superior long-term value for the Group

Creating shareholder value

Sustainable revenue and operating profit growth are critical to its success

Creating value for its shareholders through significant cash flow generation drives its

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overall decision-making process For each of its segments, the Group pursues the avenues for growth which it expects to be most value-enhancing, with particular emphasis on improving profitability In addition, rigorously managing working capital and optimizing its capital structure remain key priorities for it As always, the Group is committed to increasing returns to shareholders with above-industry-average share price performance and dividends

2.3 Major locations and partnerships

The adidas Group sells products in virtually every country around the world As

at December 31, 2009, the Group had 177 subsidiaries worldwide with the headquarters located in Herzogenaurach,Germany The Group has also assembled an unparalleled portfolio of promotion partnerships around the world, including sports associations, events, teams and individual athletes The Group‟s most important locations and upcoming sporting events are highlighted on the world map

The details of major locations and partnerships are presented on appendix 2

Number of suppliers and its own factories

On Dec 31, 2009, adidas worked with more than 1,120 independent factories (excluding factories of its licenses) who manufacture adidas Group product in 68 countries, 69% of the factories are located in Asia, 15% in the Americas and 16% in Europe, Middle East and Africa (EMEA), 27% of all these factories are in China

The total numbers of supplier factories is higher than the number reported in 2008 for this are:

1 The supply chain disclosure by business entities increased

2 The number of business entities within the Group contracted and expanded, resulting in a moving supplier and factory count

There was a notable movement of factories as shown on appendix 3

2.4 Business Performance and its action plan in FY10:

2.4.1 Business Performance:

In 2009, the adidas Group results were negatively impacted by a significant slowdown in consumer spending and high levels of promotional activity due to the adverse macroeconomic climate Currency-neutral Group sales decreased 6% as a result

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of declines in the Wholesale and Other Businesses segments In Euro terms, adidas Group revenues decreased 4% to € 10.381 billion from € 10.799 billion in 2008 The Group‟s gross margin declined 3.3 percentage points to 45.4% (2008: 48.7%), mainly impacted by higher input costs, currency devaluation effects as well as higher clearance sales and promotional activity Consequently, the Group‟s gross profit declined 10% to

€ 4.712 billion in 2009 versus € 5.256 billion in 2008 The Group‟s operating margin decreased 5.0 percentage points to 4.9% from 9.9% in 2008 due to the lower gross margin as well as higher other operating expenses as a percentage of sales The Group‟s operating profit declined 53% to € 508 million in 2009 versus € 1.070 billion in 2008

The Group‟s net income attributable to shareholders decreased 62% to € 245 million from € 642 million in 2008 Diluted earnings per share decreased 60% to € 1.22 in 2009 versus € 3.07 in 2008

2.4.2 Its Action Plan in FY10

The adidas Group‟s Global Operations function coordinates the development, production planning, sourcing and distribution of the majority of our products The function continually strives to increase efficiency throughout the Group‟s SC as well as

to ensure the highest standards in product quality and delivery performance for our customers at competitive costs

Figure 2.1 Global Operations in Go-to-Market Process

Sources: http://www.adidas-group.com/en/ourgroup/OurGroup_AreaStart.aspx Enforced vision: closest to every consumer

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The vision of the Global Operations function is to be closest to every consumer

This means enhancing the adidas Group‟s top- and bottom-line growth by meeting consumer demand in both wholesale and retail channels with the right product – in terms

of quality, size, color, style and material – in the right place, at the right time In order to realize its vision, the Global Operations function continues to focus on five strategic initiatives:

o Replenishment: Providing high availability as well as fast and timely delivery of

product to wholesale and retail customers while minimizing inventory of finished goods

o End-to-End Profitability: Identifying key cost and profitability drivers and their

interrelationships to optimize decision-making in order to mitigate financial risks and ensure the long-term profitability of the Group and its supply base

o Adaptive Supply Network: Enhancing the flexibility and responsiveness of both

the Global Operations Sourcing and SCM organizations to satisfy quick-changing market needs

o End-to-End Planning: Optimizing the Group-wide demand and supply planning

system landscape to improve efficiency, transparency and cross functionality of processes across the Wholesale and Retail segments as well as Other Businesses

o Accelerated Creation to Shelf: Building capabilities, processes and technology

that drive faster, smarter and more efficient product creation to enhance the Group‟s top- and bottom-line growth

Processes and systems tailored for expansion of Retail segment

The Replenishment initiative is particularly essential to support the growth of its Retail segment and Group-controlled retail space In 2009, it established a dedicated retail transformation team within Global Operations that supports the retail sales team

by implementing the right processes and systems to cater for the unique demands of Retail see Global Sales Strategy Throughout the year, Global Operations also increased its efforts in strengthening and enhancing its portfolio of fulfillment models that allow sales subsidiaries to buy product closer to market and replenish stores more frequently and strategically Improved capacity and material planning processes allowed over 1,300 articles to be produced and delivered with short lead times of 22 to 30 days

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Further advancements in costing transparency and predictability

In light of the decline of global economic output, its End-to-End Profitability efforts gained further significance in 2009 It set up a dedicated Profitability Management department to monitor macroeconomic trends, forecast the impact on product and supplier costs, and devise our SC profitability strategy In addition, its development teams also contribute significantly to this initiative by engineering its product with a stronger focus on cost Throughout 2009, it also engaged its suppliers with the aim to increase transparency and predictability in costing For example, it closely tracked raw material costs and leveraged this information to consolidate volumes

This allowed adidas to negotiate more effectively and offset cost increases In addition, its Sourcing teams improved its product allocation process to better utilize suppliers‟

capabilities and take into account total supply chain costs (e.g time to market, trade restrictions) Moreover, by leveraging consolidated volumes, its Transport and Customs team successfully negotiated reduced transportation costs and optimized shipment routes with its service providers

Infrastructure optimization continued

As part of its Adaptive Supply Network initiative, it continued to optimise its SC infrastructure in 2009 Adidas further consolidated its network of distribution centers, upgraded its existing facilities and invested in new sites Apart from warehousing consolidation and warehouse processes optimisation in the UK, Spain, the Netherlands, Greece and South Africa, its most remarkable improvement was the finalisation of the adidas Group‟s second multi-brand distribution centre in Spartanburg/ South Carolina, USA These new facilities are designed to support both the future growth of our brands and future demands from its retail channels In addition, the planning phase for a new distribution centre in Russia was completed However, execution of the project has been deferred until market conditions require that the project be re-started to support its business models in the area

In 2009, it also continued building and enhancing its process and systems infrastructure, bringing increased flexibility and responsiveness to its supply chain

Adidas made significant enhancements to its SAP-based purchase order management

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system – Global Procurement System (GPS) – based on user feedback It also started preparation work for its rollout to the Reebok brand in 2010 GPS harmonises and simplifies the ordering process and enables it to better react to market changes

It is the largest SAP implementation undertaken by the adidas Group to date, and will ultimately replace ten legacy systems across the Group It has also started preparations for the expansion of its trading platform in Amsterdam to the USA and Japan The improved visibility, control and risk management capabilities this platform generates will benefit each of its supply chain functions across all brands

Standardization and automation of planning processes

As part of our End-to-End planning initiative adidas has been focusing on implementing an optimised demand planning process and system to more than 20 countries in Europe It standardised and partially automated certain planning functions

to increase forecast accuracy Following the first wave of implementations in 2008, it continued the roll-out to the remaining European countries throughout 2009 The final

go live will be completed by the end of the second quarter of 2010 when both brands adidas and Reebok will share a joint platform in Europe Hereafter, adidas expects to continue the roll-out to other key adidas Group markets such as Japan

The demand planning program is complemented by a supply planning program aimed at consolidating several legacy planning systems and processes within the Group into a single International Logistics Planning System (ILS) for all brands and product segments (Footwear, Apparel and Accessories) In 2009, ILS was successfully launched for brand adidas It will be rolled out for brand Reebok in 2010

Product creation process streamlined and simplified

The Accelerated Creation to Shelf initiative gained important momentum in 2009 with progress being made in three areas February saw the start of its “Fast and Lean Creation” program for the adidas and Reebok brands It is aimed at making adidas‟s product creation process faster, smarter and more efficient through process streamlining and simplification, improved communication between its development teams and suppliers, and the reduction of administrative work along the creation process An additional objective is the harmonisation of processes and systems across its brands

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This program will accelerate the expansion of creation calendars of 12 months or less to

a larger share of its products The program roll-out will continue until 2011 In 2009, adidas also increased the use of virtual technologies at its creation centers around the world to further reduce the cost of product prototypes and sales samples

Majority of production through independent suppliers

To minimise production costs, adidas outsource over 95% of production to independent third-party suppliers, primarily located in Asia While it provides them with detailed specifications for production and delivery, these suppliers possess excellent expertise in cost-efficient high-volume production of footwear, apparel and accessories

The adidas Group also operates a limited amount of own production and assembly sites in Germany (1), Sweden (1), Finland (1), the USA (4), Canada (5), China (1) and Japan (1) In order to ensure the high quality consumers expect from its products, adidas enforces strict control and inspection procedures at its suppliers and in its own factories In addition, adidas promote adherence to social and environmental standards throughout its supply chain

Continued consolidation of manufacturing partners

In 2009, Global Operations worked with 270 independent manufacturing partners, representing a 10% reduction compared to the prior year This is a result of further rationalisation of its supplier base as well as the overall decline of sourcing volumes Of its independent manufacturing partners, 74% were located in Asia, 16% were located in Europe and 10% in the Americas 32% of all suppliers were located in China

Its Global Operations function manages product development, commercialisation and distribution, and also supervises sourcing for its Wholesale and Retail segments as well as for adidas Golf Due to the specific sourcing requirements in their respective fields of business, Taylor Made, Rockport, Reebok-CCM Hockey and the Sports Licensed Division are not serviced through Global Operations, but instead utilise their own purchasing organization In order to quickly seize short-term opportunities in their local market or react to trade regulations, Group subsidiaries may also source from selected local suppliers outside the realm of Global Operations Local purchases, however, account only for a minor portion of the Group‟s total sourcing volume

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Figure 2.2 Suppliers by footwear production by region

Sources: http://www.adidas-group.com China share of footwear production decreases

97% of our total 2009 footwear volume for adidas, Reebok and adidas Golf was produced in Asia (2008: 97%) Production in Europe and the Americas combined accounted for 3% of the sourcing volume (2008: 3%) China represents adidas‟s largest sourcing country with approximately 41% of the total volume, followed by Vietnam with 31% and Indonesia with 17% As part of its strategy to increase the regional diversity of its supplier base to meet the ongoing needs of its business, the overall representation of China in its sourcing mix declined 2 percentage points At the same time, the share of footwear volume sourced from India increased almost 2 percentage points from a low comparison base In 2009, its footwear suppliers produced approximately 171 million pairs of shoes (2008: approx 221 million pairs) The year-over-year decrease was attributable to a lower sourcing volume at both the adidas and Reebok brands due to excess inventories in the first half of 2009 Its largest footwear factory produced approximately 11% of the footwear sourcing volume (2008: 11%)

Rockport purchased approximately 6 million pairs of footwear in 2009, which represents

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a decline of 27% versus the prior year Products were primarily sourced from factories

in China (64%), Vietnam (24%) and Indonesia (10%) The largest factory accounted for 28% of the total sourcing volume of the Rockport brand

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CHAPTER 3 LITERATURE REVIEW

This chapter discusses on theories regarding SCM practices and SCP

From referred theories and practical discussions, conceptual model, hypotheses

as well as measurement scales have been developed Noted that from this chapter, the terms factor and construct are used interchanged Besides, the terms indicator, variable and item are also used interchanged

3.1 Literature review

3.1.1 Strategic supplier partnership

Strategic supplier partnership is defined as the long-term relationship between the organizations and their suppliers The study of buyer-supplier relationships and purchasing process has been the central issue in relationship marketing and purchasing

as well as business-to-business marketing literature

Buyer-supplier relationships in the SC are one of the most important elements of supply chain integration Establishing and managing effective relationships at every link

in the SC is becoming the prerequisite of business success It is designed to leverage the strategic and operational capabilities of individual participating organizations to help them achieve significant ongoing benefits (Balsmeier and Voisin, 1996, Monczka et al.,

1998, Noble, 1997 and Stuart, 1997) A strategic partnership emphasizes direct, term association and encourages mutual planning and problem solving efforts (Gunasekaran et al…2001).Such strategic partnerships are entered into to promote shared benefits among the parties and ongoing participation in one or more key strategic areas such as technology, products, markets, etc.(Yoshino and Rangan, 1995) Strategic partnerships with suppliers enable organizations to work more effectively with a few important suppliers who are willing to share responsibility for the success of the

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products Suppliers participating early in the product-design process can offer more cost-effective design choices, help select the best components and technologies, and help in design assessment (Monczka et al…1993) Strategically-aligned organizations can work closely together and eliminate wasteful time and effort (Balsmeier and Voisin, 1996) An effective supplier partnership can be a critical component of a leading edge supply chain (Noble, 1997)

Several empirical studies conducted in China support that buyer-supplier relationships have a positive effect on a firm‟s financial performance (Liu and Wang 2000; Luo 1997; Yeung and Tung 1996), or that manufacturer-distributor relationships and guanxi have an important impact on the performance of export ventures in China (Ambler et al 1999)

Firms engaged in long-term relationship with their customers achieve higher profitability than firms using a transactional approach (Kalwani and Narayandas 1995)

Maloni and Benton (2000) found that strong buyer-supplier relationships have a significant positive effect on manufacturer performance, supplier performance, and performance of the entire supply chain

Applying this in a supply chain context, we consider strategic supplier partnership as the degree to which a manufacturer strategically collaborates with its supply chain partners and collaboratively manages intra- and inter-organization processes The goal is to achieve effective and efficient flows of products and services, information, money and decisions, to provide maximum value to the customer at low cost and high speed (Bowersox et al., 1999; Frohlich and Westbrook, 2001; Naylor et al., 1999)

This includes several important elements First, we highlight the importance of strategic collaboration, which is an ongoing partnership to achieve mutually beneficial strategic goals It engenders mutual trust, increases contract duration and encourages efficient conflict resolution and sharing of information, rewards and risks (Ellram, 1990;

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Heide and John, 1990; Poirier and Reiter, 1996) While operational coordination can only lead to operational benefits, strategic coordination provides both operational and strategic benefits (Sanders, 2008) This also emphasizes intra- and inter-organization processes, since strategic supplier partnership is comprehensive and encompasses a variety of activities, including many that are focused on materials, transportation and administrative tasks (Bowersox and Morash, 1989; Hillebrand and Biemans, 2003)

Finally, we emphasize the customer-facing nature of strategic supplier partnership, stating that its primary objective is to provide maximum value for the customer

Over the last twenty years, economists have dramatically improved our theoretical understanding of how product innovation influences major aspects of macroeconomic performance Not only has research explored the potential role that product creation and destruction has for explaining business cycle fluctuations (e.g., Shleifer (1986), Caballero and Hammour (1994) and Ghironi and Melitz (2005) among others) but economists have also examined the key role played by new and better products for long-run growth (e.g., Romer (1987), Grossman and Helpman (1991), Aghion and Howitt (1992) and Klette and Kortum (2004) among others)

With all the growth in research and new product development it is interesting to consider how supply chain processes can be utilized to increase operational effectiveness But how many of these systems are really considered? When any new facility or process is established, a company is given an opportunity to create a supply chain process that facilitates resource and cost saving systems This can importantly

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impact the actual supply chain structure as well as the internal process for the new product development

In our look at supply chain operations for new product development we will first consider the collaborative process of integrating the operating supply chain behind a new as it is being developed Commonly companies will request components parts from their suppliers, conceptualize and create the new product, and then possibly weeks or months before product launch provide demand schedules for necessary component parts

Is this enough though? How would a full supply chain understanding improve the performance and profitability for the product when it does reach the market?

The second area we will consider is the application of supply chain processes into the new product development phase How can the ideas behind supply chain theory help companies develop more efficient models of collaboration? Here we will consider four specific areas, 1 Early Involvement of Contribution, 2 Creating a Cleat Design, 3

Multiple stages of Quality Testing, 4 Understanding the Process of Each Contributor

A product is ready to begin development There is a clear market opening with high predicted consumer demand If we produce this product and move it to market the questions asked are: What are the costs of the new product? What does the demand look like? When will we launch? But where are the questions regarding the supply chain?

What are the lead time costs? Where will inventory be held and at what costs? What are the optimal inventory levels to carry at the warehouse, retail level, manufacturing facility, or in transportation?

The answer is to begin supply chain development during the new product creation phase As marketing creates forecasted demand figures, and product engineers play with the design and development, including integral stakeholders such as the purchasing group and more importantly suppliers can be a critical step to better understanding both the product and the SC as it unfolds In retail, potential customers should also be included to establish stocking and shipping methods

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At adidas, we follow this below models for production creation phase:

Further decomposition of the Product Creation Process

The Product Creation Process can be decomposed in 3 processes:

Marketing: Defining how to obtain a sellable profitable product, starting with listening to customers, followed by managing the customer expectations, introducing the product at the customer and obtaining customer feedback

Project Management: Realizing the product in the agreed triangle of

The functions mentioned in below figure:

o The operational or project leader is responsible for the operational management

o The architect is responsible for the design control

o The marketing or product manager is responsible for the commercial aspects

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Figure 3.1 adidas Product Creation Process

Sources: http://www.adidas-group.com

At adidas the most frequently conceptualized is that “New products offer the lifeblood of any dynamic business organization” With that reason the Product creation process is streamlined and simplified

The Accelerated Creation to Shelf initiative gained important momentum in 2009 with progress being made in three areas February 2009 saw the start of adidas‟s “Fast and Lean Creation” program for the adidas and Reebok brands It is aimed at making product creation process faster, smarter and more efficient through process streamlining and simplification, improved communication between development teams and suppliers, and the reduction of administrative work along the creation process An additional objective is the harmonisation of processes and systems across its brands This program will accelerate the expansion of creation calendars of 12 months or less to a larger share

of its products The program roll-out will continue until 2011 In 2009, adidas also increased the use of virtual technologies at its creation centers around the world to further reduce the cost of product prototypes and sales samples Initiatives to further

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streamline product creation process Adidas constantly strive to utilise its R&D processes to fulfill its mission to develop products that give its athletes and consumers a tangible advantage over the competition With respect to its R&D activities specifically, adidas aim at improving it ability to adapt to changing consumer preferences more quickly, flexibly and efficiently In order to do so, adidas foster close cooperation between its development teams and relevant stakeholders This means adidas has strengthened its connection with suppliers to facilitate direct interaction and involvement in quality control, product testing and commercialisation Also, in 2009 further progress was made to integrate marketing and design teams into the product creation process at an earlier stage This measure supports the minimization of costly product changes in the later stages of the development process

3.1.3 Purchasing/Supply planning

The importance of strategic purchasing is documented widely in SCM literature (Betchel & Jayaram, 1997; Cohn & Tayi, 1999; Chen & Paulraj, 2004a, 2004b; Paulraj, Chen & Flynn, in press; Wisner, 2003) Purchasing has been viewed as an essential component of a firm‟s strategic planning process (Cousins, 2005; Ferguson, Hartley, Turner& Pierce, 1996) Purchasing is often linked to an organization‟s achieving competitive advantage (Ferguson et al., 1996) Yet, others have linked strategic purchasing to customer satisfaction (Brookshaw & Terziovski, 1997) As recognized by Carr and Peterson (2002), strategic purchasing is an upstream component of SCM This dimension involves strategically selecting the suppliers The construct of strategic purchasing is operationalized in terms of dimensions such as whether purchasing is aligned with the firm‟s strategic orientation, whether purchasing is carried out while keeping the long-term issues of the firm in mind, and whether the suppliers have adequate knowledge of the firm‟s strategic goals (Chen & Paulraj, 2004a, 2004b)

Strategic purchasing also enhances knowledge development leading to organizational development and improvement in interaction between the member components of a SC (Paulraj, Chen & Flynn, in press)

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