Adidas: Becoming A Tough Competitor in the Supply Chain Modernization Marathon
How Adidas can capture the opportunity gap created by Digitalization and Supply Chain 4.0.
Adidas should pay attention to digitization of the supply chain because it will fundamentally reshape their business in the medium term by enabling them to more rapidly adapt to shifting customer demands, slash inventory levels and boost profitability. These improvements will be made available by a combination of advanced robotics, 3D printing, social media analytics and big data. If Adidas does not capture this opportunity, it risks share loss to other, more sophisticated athletic brands.
What Is at Stake:
This opportunity is enormous for Adidas; in 2016, Adidas’ inventory was ~€3.7B, or 19.5% of sales. This is the highest level in more than 10 years, demonstrating the enduring challenge of accurately estimating customer demand.  This inventory costs Adidas dearly; if one assumes a cost of capital of ~8%, inventory cost Adidas ~€300M in 2016, which is equivalent to about 30% of their net income.
In addition to reducing inventory expense, modernizing their supply chain would enable Adidas to deliver more valuable products to consumers, thereby growing the average selling price. Ideally, this would also improve customer loyalty and reduce returns, thereby making sales more stable and profitable. These improvements would be rewarded by shareholders in the form of meaningful equity value appreciation.
Near Term Initiatives and Suggestions:
To respond to this opportunity in the near-term, Adidas expects to produce 50% of its shoes (up from ~25% today) using a ‘speed factory,’ or a smaller, more localized manufacturing facility that can respond to local demand and is capable of customization. 
Though a great first step, Adidas should also localize apparel manufacturing since the time it takes clothing to be shipped from Asia locks up precious capital. Robotic sewing technology is becoming sophisticated enough to take on a broader range of applications, and therefore may have the potential to bring apparel manufacturing back to developed countries.  Localizing production will also allow Adidas to respond to changes in fashion more quickly, allowing them to better compete with H&M and Zara with Adidas’ lifestyle apparel business. Furthermore, localizing production also has the benefit of reducing supply chain complexity as it simplifies logistics planning and reduces the risk of worker mistreatment and poor working conditions in emerging markets.
In addition to the above, Adidas should improve its big data analytics capabilities to better predict customer demand for its apparel and shoes. Adidas should refine sales estimates in real time by evaluating social media engagement, site visits and overlay that data with customer profiles (gathered in-store) to better predict what will be needed in the upcoming days and weeks. Furthermore, they should relay this information to their suppliers to ensure they are prepared for potential demand spikes. 
Medium Term Initiatives and Suggestions:
In the medium-term, management plans to improve their product offering by manufacturing custom mid-soles in retail locations after assessing a runner’s stride on a treadmill. Though this is a great idea, the time (90 minutes) and cost (these shoes retailed for $333) required to print custom midsoles in-store will likely limit user adoption in the near term.  Furthermore, this advancement would not lower Adidas’ inventory levels materially since the cost of the midsole in a shoe is only a small portion of total inventory cost.
To boost near-term adoption of custom midsoles, Adidas should maximize the number of consumers who receive a shoe fit assessment in-store, and provide them with an online account so that when customers look to buy their next pair of shoes, they can order custom fit shoes directly from Adidas’ website. This would benefit Adidas by improving customer stickiness, reducing returns and reducing in-store inventory (as more customers buy online vs. in stores). It would also encourage customers to buy shoes directly from Adidas (vs. through a wholesale partner), thereby boosting margins for Adidas.
In the medium term, Adidas should also partner with logistics firms to enable same-day or next-day delivery of customized products via drone. If customers can receive customized shoes same-day or next-day, they will be less likely to buy shoes through retail outlets, which also reduces the need for inventory.
I would be interested in others’ perspectives on the following:
1) What is the best way for Adidas (and other large consumer products brands) to incorporate drones into their last-mile delivery capabilities? Would they be better off: i) Selling their products through Amazon to use their drone delivery service ii) Partnering with specialty drone companies or iii) Hiring the talent necessary to develop a drone program and have drones deliver directly from speed factories and / or retail stores? Why?
2) If you were Adidas, would you also be concerned about the effects of shifting from a mass-production model to a highly customized ‘speed factory’ model? Do you think this shift would introduce new competitors to the shoe and apparel markets given the erosion of economies of scale? If so, how would Adidas fare? If not, what would protect Adidas from these new entrants?
 Adidas AG Historical Income Statement, Capital IQ, Inc., a division of Standard & Poor’s.
 Adidas AG, Q1 2017 Analyst Investor Day Presentation, p. 83 – 84, https://www.capitaliq.com/CIQDotNet/Service/Documents/DownloadVersion.axd?versionId=1853136807&filename=Adidas+AG+-+Analyst%2fInvestor+Day.pdf&activityTypeId=9516, accessed November 2017.
 Panagiotis N.Koustoumpardis, “Intelligent Hierarchical Robot Control for Sewing Fabrics,” Robotics and Computer-Integrated Manufacturing 30, p. 34 – 36 , 2014, Google Scholar, accessed November 2017.
 Schrauf, S. and P. Berttram, Industry 4.0: How Digitization Makes the Supply Chain More Efficient, Agile, and Customer Focused, PWC Strategy& (2016)
 Compeitor.com, “Adidas Debuting Exclusive $333 3D Printed Running Shoes,” Compeitor.com, December 12, 2016, http://running.competitor.com/2016/12/news/adidas-debuting-exclusive-333-3d-printed-running-shoes_160111, accessed November 2017
 Jason Dorrier, “Adidas to Mass-Produce 3D Printed Shoes in Vats of Warm Liquid Goo,” SingularityHub.com, April 7, 2017, https://singularityhub.com/2017/04/07/adidas-to-mass-produce-3d-printed-soles-in-vats-of-warm-liquid-goo/, accessed November 2017
Featured Image: Brian Betschart, “Adidas FutureCraft 4D Releasing in December,” sneakerfiles.com, June 10, 2017, https://www.sneakerfiles.com/adidas-futurecraft-4d-release-date/, accessed November 2017
Student comments on Adidas: Becoming A Tough Competitor in the Supply Chain Modernization Marathon
Great read Andrew! The rising levels of inventory in the fashion industry are an extremely pertinent problem. In response to your questions:
1. Usage of drones: I like the idea of using drones to improve delivery. From a high level, they would reduce the burden on stores to stock up inventory and serve primarily as “trial and browsing locations”. Amazon should be the last option for Adidas considering the large commissions involved, and given the scale of Adidas’s operations it doesn’t make sense for them to serve such a large offering to Amazon on a platter. On the other hand, the risks involved with doing drone deliveries are significant. It is an advanced technology that will require a lot of time and money to build, in addition to the high liabilities often speculated to emerge with the usage of drones. Hence, working with a specialised third party might be the best option. In fact, in due course, the likes of FedEx, DHL, UPS are also expected to offer drone delivery as the future of last mile delivery. Hence, the solution might not be too far out.
2. In principle, certainly there are risks that emerge with eroding economies of scale. However, they might not be as significant if Adidas can attribute potential savings from lowering inventory expenses to push down product prices. In order to mitigate residual risks, it would have to build it’s brand value significantly in order to ensure stickiness. In addition, it would have to deliver superior customer experience with its new delivery offering to be continue differentiating itself.
Great article outlining the impact of digitalization on Adidas!
I agree with your idea to move towards a rapid, customized, and localized manufacturing model. However, rather than predict customer demand could Adidas move entirely to just-in-time production? You mention 3D printing of custom insoles but what if Adidas could incorporate 3D foot scanning at home? Customers could use Xbox Kinect (or some other home tech) to scan their foot and then design their shoes in the comfort of their own home. Then the waiting time for printing would be less of an issue and a potential economy of scale could be created with centralized 3D printer hubs.
With regards to delivery, efficiency (and cost reduction) could be achieved by reducing shoe weight and package size. 3D printing may allow lighter construction (e.g., honeycomb sole) and a design that can be compressed (like a Casper mattress) for delivery.
The problem with this approach, regarding concerns of new competitors, is that what would prevent anyone from buying a 3D printer, scanning their current shoe, and then just printing more?
Appreciate you writing this article – I thought it was an interesting look at how some disruptive technologies are potentially set to impact Adidas and other shoe manufacturers. To address your questions – I think that the drone model is still a bit too far off to potentially utilize. Adidas’ core competency doesn’t lie in logistics or same-day delivery; if this an arena they want to enter, I think they would be better served contracting someone else to provide these services, ultimately.
For the sole printing and speed factory models, I think that Adidas could still maintain a strong advantage over new entrants by virtue of its R&D abilities. Even with the ubiquity of 3D printing, I think that the materials science expertise and knowledge of how to build a shoe still present a high bar to entry for new entrants. So, I think that for the moment Adidas can innovate without worrying about smaller entities disrupting them too greatly.