Exercise one.

1. Let the market demand curve be P=1000 - 10Q. Assume the market is controlled by a monopolist. Let fixed cost be $10,000 and Marginal Costs (MC)=20Q.

a) What is the profit maximizing output?

b) What is the monopolist's total revenue at the profit maximizing output?

c) How much profit is the monopolist earning?

d) Assume the government breaks up the monopolist in order to create perfectly competitive market of identical firms. Assume the MC curve is now the industry supply curve. By how much has consumer surplus increased from breaking up the monopolist?

e) What is the deadweight loss associated with the monopolist relative to the perfectly competitive market?

2. Suppose a firm's fixed costs are $50 and its marginal cost of producing q units is MC = 10 + 2q. The industry demand curve is given by P = 40 - QD (where quantity is given in thousands of units). If the firm operates in a perfectly competitive industry and the price of the good is $30, how many firms produce this good in the short run?

3.

Price: Quantity:

8 300

7 400

6 500

5 600

4 700

3 800

2 900

1 1000

The monopolist has fixed costs of $1,000 and has a constant marginal cost of $2 per unit. If the monopolist were able to perfectly price discriminate, how many units would it sell?

Show the workings for each question

Two.

Adidas AG (Adidas) is engaged in the design, development, manufacture and marketing of a broad range of athletic and sports lifestyle products such as footwear, apparel, hardware (bags and balls) and sports equipment (golf and hockey). The company primarily offers its products through three brands: Adidas, TaylorMade and Reebok. Adidas operates in Europe, the Americas and Asia. It is headquartered in Herzogenaurach, Germany.

At the end of the 2015 fiscal year, the retail segment of Adidas operated 2,722 stores. During this year the company opened 284 new stores, closed 321 and remodeled 154. In order to further grow its retail footprint, the company planned to open around 100 new stores in the 2016 fiscal year (FY2016). To facilitate proper assortment and presentation at the point of sale, the company either manages the retail stores itself (own-retail and e-commerce formats) or collaborates with its wholesale partners such as mono-branded franchise stores, shop-in-shops, joint ventures and co-branded stores.1 Adidas's strong brand portfolio and enhanced retail presence enable easier customer recall, which helps it drive top-line growth and to attain competitive advantage over its peers.2

The company reported revenues of (Euro) EUR19.291 billion for FY2016, an increase of 14% over FY2015. In FY2016, the company's operating margin was 7.7%, compared to an operating margin of 3.7% in FY2015.3

In August 2017, Adidas reported another quarter of significant sales growth in North America and China, as it took market share from rivals Nike and Under Armor. Adidas stated that sales grew 28% in China and 26% in North America, although they fell 11% in the tough Russian market. Overall, sales rose 19%, with the core Adidas brand growing 21% while sales at the Reebok fitness brand were up 5%. Adidas said sales were driven by double-digit increases in the running category, where it has been unable to keep up with demand. It doubled its share in the US sports footwear market to 12.7% in April 2017, while Nike slipped two percentage points to 52.7, with Adidas taking three of the top spots in the ten best-selling shoes.4

Adidas sells its products in virtually every country around the world. The company has strong market positions in all the markets it operates in. However, according to Marketline (2017), it has recently been targeting certain markets that offer more medium- to long-term growth opportunities. To this end, the company has been expanding its operations in emerging markets, with more focus on Greater China and Latin America in particular. It also aims to build its market share in the US as well as Western European markets.

The emerging economies are growing at a faster pace compared to mature markets such as the US, Japan and certain European countries. Adidas has generated a significant amount of revenue from these high-growth emerging markets in recent times. For instance, the company generated 14.6% of its total revenues from Greater China in FY2015, 10.5% from Latin America and 14.8% from Middle East, Africa and other Asian countries (MEEA).

Adidas has sponsorship agreements with major associations for sports events across the world. For instance, the company has sponsorship agreements for the FIFA World Cup, the UEFA EURO, the UEFA Champions League, the National Hockey League (NHL) and the Boston Marathon. Additionally, Adidas has sponsorship deals with a huge list of sports teams in football, rugby and American universities. The list also includes individuals such as well-known soccer players, top marathon runners, American football players and tennis players.

The company also has various strategic partnerships and collaborations with well-known designers and design studios, as well as with creative personalities across the entertainment industry. Furthermore, Reebok partners with well-known fitness movements and organizations, as well as skilled people in the fitness industry, in order to promote its key concepts.

Innovation

According to Marketline (2017), the growing preference of customers to shop online has boosted the online retail trade in the US, Europe and Asia. The company offers Reebok, Adidas and TaylorMade products through an e-commerce platform. In 2012, Adidas launched a fully integrated brand and store site, providing a single destination for each of its brand's consumers. In addition, the company launched new country-specific e-shops globally for both Adidas and Reebok. Currently, Adidas operates approximately 50 own e-commerce sites.

The company is also engaged in developing services that meet specific functional requirements of its clients. For instance, through the 'Inventory Check' feature, Adidas allows its online shoppers to view in-store product availability. Its 'Click & Collect' service allows consumers to reserve products for pick-up from a local store. The 'Ship from Store' feature enables the company to transform its retail stores into mini distribution centers, thereby serving customers at a faster rate. Furthermore, the 'Endless Aisle' option offers access to a full range of products to the in-store visitors through the company's e-commerce platform. During FY2015, sales from Adidas and Reebok e-commerce platforms grew by 42% compared to FY2014.

Focus on research and development (R&D) has facilitated continuous development of new products. Adidas devotes significant resources and attention to the development of new product concepts, processes, production methods and digital applications for its brands. The company spent EUR139 million in FY2015 and EUR126 million in FY2014 on R&D. The company's approach towards R&D is based on an open source perspective; clearly visible in its numerous collaborations with athletes and consumers, universities and leading industry players, as well as national and international governments.

Adidas's R&D activities are decentralized, with each of the individual brands running its own R&D activities. For instance, R&D for the Adidas brand is closely integrated with the sourcing, design and product marketing functions. Before beginning the product development process, the company's innovation team defines a development priority. This is based on information gathered from consumer research and feedback, competition analysis and own product testing. Based on the data collected from these sources, the innovation teams analyze new materials and production processes, and conduct scientific research to improve the scope of idea generation. This approach helps the company to better understand the needs of its customers and thereby develop products that suit their requirements.

In addition to its internal R&D efforts, Adidas enters into long-term and exclusive partnerships with established third parties. This strategy allows greater flexibility and faster access to know-how compared to the substantial time and resources required if developed within the company.

Recently, Adidas has also been concentrating on enhancing its manufacturing capabilities through the development of innovative technologies. To this end, the company started commercial operations at its first 'speed factory' in Germany in May 2016. 'Speed factory' is an innovative manufacturing concept that combines the design and development of sporting goods through an automated, decentralized and flexible approach. Using this technology, high-performance sporting goods can be created faster than before. It will also have a significant impact on the environment by reducing the use of adhesives.6

Supply chain structure

Adidas has outsourced most of its production. Overall, the company works with more than 1,000 independent suppliers from around the world that manufacture its products in 63 countries. The supply chain is global and multi-layered, with many different types of business partners, some of whom are directly contracted suppliers, while others are not.

In 2016, the top five countries per region by number of supplier sites were:

the Americas (26%): United States, Brazil, Argentina, Canada and Mexico;

Asia (64%): China, Vietnam, Korea, Indonesia and Japan;

Europe, Middle East, Africa (EMEA) (10%): Germany, Turkey, Italy, Spain and South Africa.

Vietnam represents the company's largest sourcing country with 41% of total volume followed by Indonesia (24%) and China (23%).8 Adidas is one of the very few companies in the industry that has fully disclosed its global supplier list.

Sourcing relationships

The Adidas corporate website (2017) identifies three different types of sourcing arrangements:

Direct sourcing model

Adidas holds direct contractual relationships with its core suppliers who are centrally supervised by Global Operations. Global Operations is a corporate function which manages product development, commercialization, distribution and supervision of the manufacture of apparel, footwear and accessories for the Adidas, Reebok and Adidas Golf segments. These suppliers produce the predominant share of the total sourcing volume of the company.

Indirect sourcing model

The other part of Adidas's product volume, a minor portion, is sourced by agents or is made under license. Agents place orders with their preferred suppliers. Licensees may either place orders directly with their suppliers or use agents as intermediaries. Adidas's indirect supply chain complements its 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 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 Adidas's Social and Environmental Affairs (SEA) team.

The SEA team is a diverse group of around 70 people: engineers, lawyers, HR managers, environmental auditors and former members of non-governmental organizations (NGOs). The SEA team is responsible for ensuring compliance with the workplace standards within Adidas's supply chain and facilitating, promoting and managing the development and implementation of environmental initiatives across the company's own facilities. Over the years, the SEA team has established systems and processes to ensure that sourcing fully considers compliance with the workplace standards.

Suppliers

Adidas's 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 Adidas's suppliers to perform manufacturing operations that 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 its main suppliers.

Licensees: independent companies which manage the design, production and distribution of specific products, under licence to the Adidas Group. In 2016, Adidas worked with 61 licensees whose suppliers sourced products from 377 factories in 48 countries.

Agents: independent companies that act as intermediaries to source product manufacturing, manage the manufacturing processes, and sell finished products to the company.

This leads to a complex supply chain structure as shown in Figure 1.

Complexity of the supply chain

Fig. 1 Adidas's complex supply chain structure

Working with suppliers

While Adidas provides its supplier network with detailed specifications for production and delivery, these suppliers possess excellent expertise in cost-efficient, high-volume production of footwear, apparel and accessories. Adidas adopts a partnering approach to working with its key suppliers resulting in greater cooperation, transparency and support. The company helps its suppliers perform better by producing guidance and training materials, arranging technical advice and making sure best practice is shared among suppliers.

The Adidas corporate website (2017) carries an explanation of how the company checks to ensure that suppliers comply with its workplace standards. It commissions independent auditors to visit the suppliers and verify compliance, as well as evaluating Adidas's activities to implement their supply chain code of conduct. To facilitate workplace improvements in factories, Adidas supports its suppliers with training and capacity-building initiatives, either conducted by its own staff or by other stakeholders and third-party service providers.

All potential new suppliers are assessed by close cooperation between the SEA team, Global Operations and other sourcing entities. The goal is to ensure that new suppliers meet Adidas's standards. The sourcing teams can only place orders with a new supplier if the SEA team has given approval. If factories do not meet Adidas's standards, they are rejected, but if the issues are ones that can be fixed, the suppliers are given a rigorous timeline to correct the issues. Adidas checks progress and, if they have improved, the suppliers are approved for production. By setting a high entry bar for potential and new suppliers, Adidas avoids business relationships with suppliers that have potentially serious workplace issues.

Once a supplier is approved, Adidas regularly checks how it is performing. At the end of each year, the supplier attains a score for workplace compliance which is combined with ones for quality, delivery, etc. This helps determine how many orders the supplier should receive in the future. Adidas wants its suppliers to know that if they do well and are meeting standards, they continue to receive orders.

If Adidas finds that suppliers are not treating their workers fairly or if they do not have a safe and healthy workplace, or are not meeting environmental requirements, it takes action. Adidas issues warning letters asking that the problems be fixed. If the problems are not fixed after the first letter, it sends a second letter to stop orders. If it is necessary to send a third letter, Adidas asks its sourcing team to stop working with the supplier. If there are very serious issues, such as life-threatening safety issues, Adidas may immediately end the business relationship and write to the local government, asking for its help in fixing the issues that have been identified.

Giving workers the opportunity to air grievances in confidence is a key element in helping Adidas to ensure fair, safe and healthy workplace conditions. An approved supplier has to place open letters on noticeboards that tell workers who they can contact to address issues of concern. The letters inform workers that Adidas will help them find solutions to factory issues if they cannot find solutions through the supplier's usual mechanisms. Workers are also provided with local telephone numbers to call and addresses to write to. In some cases, the telephone hotlines are run by non-profit organizations and, in other cases, Adidas's own field staff take the calls and respond to the workers' concerns.

A lot of time is spent following up on calls or requests from workers about difficult-to-fix issues, such as the wrong salary payment, working too many hours, or being unfairly dismissed. In 2012, Adidas piloted a new management/worker communication project with one of its suppliers in Indonesia: workers can now send SMS text messages to hotlines to raise the alarm if they think their rights are being compromised. Workers' mobile numbers are being anonymously gathered so that the supplier's management can send out group texts reminding workers of safety issues or letting them know about changes in policy.

Managing supplier performance

Internal as well as external audits are conducted at suppliers' factories to ensure they are complying with Adidas's standards. The Adidas corporate website (2017) details the methodologies and tools that are used to measure performance, which have been adjusted to the different sourcing relationships.

The strategy applied to direct suppliers is based on a long-term vision of self-governance where they take ownership of their compliance program. To help these suppliers, Adidas conducts factory inspections, assessing risks and identifying root causes of non-compliance. This approach evaluates management commitment to compliance and the effectiveness of the factories' compliance systems, which in turn leads to a more precise evaluation of training needs. Factories are required to develop strategic compliance plans (SCPs) in which they outline their strategies to meet the standards. The plans include targets, programmatic actions, planned investments and timelines. Supplier performance is measured annually through key performance indicators (KPIs) which are linked to the sourcing organization's management and tracking systems.

When sourcing products through intermediaries such as agents and licensees, these companies are obliged to develop three-year plans outlining their strategies, programs and actions to ensure compliance in the indirect supply chains. They also have to commission audits by Adidas-approved external monitors. These external monitors verify the outcomes of the compliance plans and activities. Intermediaries' annual compliance performance is then measured using a comprehensive scorecard.

In the area of environmental compliance, Adidas uses its Environmental Assessment Tool and supplementary remediation guidelines to check and rate its suppliers. Audit results are reflected in a specific environmental key performance indicator (EKPI). Those suppliers who have appointed a dedicated sustainability manager, and who have made a conscious effort to address issues holistically (that is, considering social, health and safety and environment), score higher in their EKPI results. Adidas encourages all members of its supply chain to do the same, using the EKPI tool to benchmark supplier performance, while working with them on areas of improvement.

Risk mapping

Adidas uses supply chain risk mapping to ensure that all its suppliers produce in a socially and environmentally responsible way while using resources wisely. It combines regular processes to systematically monitor and support improvements with ad hoc tools, enabling Adidas to react quickly to critical situations as they arise and limit any negative effects on workers or the environment. Critical sources of information for risk-mapping exercises include the review of databases provided by governments, as well as regular engagement with civil society (e.g. organizations, unions and employer federations) and with workers directly.

Countries from which Adidas sources products and suppliers with whom the company works are regularly mapped and monitored for human, labor rights and environmental risks. Country and factory profiles determine the issues to be prioritized as well as the frequency of monitoring and remediation activities.

According to the Adidas corporate website (2017), Adidas has a number of tailored risk-mapping approaches and tools that are applied:

Country-level risk assessment: country profiles are developed based on in-depth due-diligence processes. Countries are categorised 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 SCP 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 and 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 of high-risk issues. Based on the information received, Adidas 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 hotlines and third party grievance mechanisms. Adidas takes information from workers and other parties regarding factory conditions very seriously and takes care to provide safe and easy channels for them to get in touch with the company. Information received this way may result in additional site visits, audits or other engagement with a business entity or factory at any time.

Rating suppliers

Adidas audits suppliers against its standards and rates them according to their performance. With the KPI rating tool, suppliers are evaluated against 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. Based on these results, suppliers are assessed with a C-rating score between 1 and 5 (with 5 being the best rating) and are then clustered into three categories:

The Risk Management cluster includes the lowest-performing suppliers. Adidas helps them to improve their performance and, if they respond, they are moved up to the partnership cluster. If not, Adidas winds down and eventually terminates the commercial relationship with them.

The Partnership cluster includes those suppliers who can benefit from significant training support, so Adidas focuses on capacity-building programs in collaboration with other companies and multi-stakeholder initiatives.

The Self Governance cluster is for those suppliers that are capably managing a program of good industrial relations, health and safety, and employer-employee communications. These suppliers must have an internal compliance policy and practice, and transparently report these activities.

Supplier development

As part of its efforts to achieve more effective and sustainable practice within the supply chain, Adidas has initiated a system of multi-level and cross-functional training sessions with its global supplier network. In 2016, Adidas trained more than 3,300 staff and personnel through 171 training sessions. There are three main approaches to training content:

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

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

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

There is an ongoing program of training suppliers to help them improve their social, health, safety and environmental performance.

Supply chain evolution

Adidas's operations before 2002 were traditional batch and queue, with products being stored in warehouses until the order was processed. As part of its overhaul of its supply chain, Adidas sought to significantly reduce footwear lead times by introducing lean manufacturing principles across its supplier network.

The time-to-market initiative involved a coordinated, global effort on behalf of Adidas and its consultants, which included training suppliers, technology improvements in supply chain planning, and a focus on internal design processes.19 Efficient implementation of lean manufacturing principles also removed non-value-adding procedures and improved labelling and special handling to reduce lead time.20 The reduction in lead time also led to a 33% increase in correct product choice, increased accuracy in ordering and, in some cases, resulted in larger orders as customers were less risk averse and displayed increased commitment.

Traditionally, Adidas had operated in a decentralized manner, with separate operating units independently choosing software that suited their internal preferences and geography. Since 2002, Adidas began implementing common processes. Tibco software was implemented to streamline and automate its business operations, improving flexibility, scalability and visibility across the enterprise, helping to reduce product delivery times.22

Similarly, Adidas's inadequate paper-based warehouse and distribution systems were replaced with unique WMS and RF software to halve distribution costs, reduce labor costs and improve accuracy and efficiency through automated cross-checking of all orders. John Hamilton, the development manager for supply chain applications, noted that: 'We use third-party manufacturing so we are involved with a lot of different partners, from people who manufacture our product, to people who manufacture our raw materials, to the distributors that sell our product throughout the world... We had a bit of a lag in our ability to see downstream demand... It's hard to see the end customer's demand because we are working through a lot of different subsidiaries.' i2 Solutions replaced the home-grown planning system to ensure that Adidas continued to meet the needs of customers, suppliers and consumers, enabling the company to reduce order confirmation times and to get products to market faster through its ability to improve asset utilization and factory fill rates, and to plan at multiple lead times.

Adidas moved further towards a centralization strategy as it implemented SAP AFS logistics software to facilitate process and system standardization worldwide, providing a solution that supported a consolidated global focus. Adidas chose the software because AFS is specific to the apparel and footwear industry.

with its emphasis on seasonal fluctuation, proliferation of design variations and product characteristics, multiple distribution channels and customer-service requirements, and outsourced manufacturing. Adidas consolidated the distribution system into a single streamlined network, with automated inventory and fulfilment systems that rapidly scaled its services and added enhancements as required.

Adidas also consolidated its supply base; in 2001 it reduced the manufacturing base by over 25% with a medium-term goal of reducing the supply base by 40%.27 Adidas also launched its 'World Class Supply Chain' initiative, moving away from a forecast-based supply chain to a demand-driven one. The company re-engineered its supply chain to customize its business to five differentiated and dynamic business models which target consumer needs. The initiative covered the whole concept-to-shelf process and incorporated marketing, sales and operations functions:

Brand model: delivers Adidas's brand statement products, supported by comprehensive customer service, marketing, retail and supply chain capabilities.

Evergreen model: short lead-time and never-out-of-stock capabilities for Adidas's most commercial and long life cycle product lines.

Quick Response model: seizes additional market opportunities with a 3-6-month concept-to-shelf process.

Global/Regional model: creates regional adaptations of global concepts to reflect consumer needs in regional markets.

In 2009, Adidas launched the 'Fast and Lean Creation' program for the Adidas and Reebok brands. It was aimed at making the product creation process faster, smarter and more efficient through process streamlining and simplification, improving communication between the development teams and suppliers, and the reduction of administrative work along the creation process. An additional objective was the harmonization of processes and systems across the two brands. The program aimed at accelerating the creation calendars in less than 12 months for a larger share of products. 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.

Transforming the upstream supply chain

As the vast majority of factories that make Adidas products are owned by other companies, it was imperative that these suppliers bought into the efficiency initiatives. It was a daunting task, not only because of the number of factories involved, but also because of the size of some operations. A paper posted on www.wordpress.com (2010) explains how it was achieved.

One of the largest factories was a vast complex in Guangdong, China, employing nearly 90,000 people. A second complex nearby employed another 20,000. Operations were traditional batch and queue. For example, a five-story building at the site was segregated by process. The cutting of raw materials occurred in batches on the first floor. The cut pieces were bundled and sent to storage in the warehouse, then brought back several days later for preparation on another floor. More warehouse storage would follow, until the prepared materials were brought back for sewing on yet another floor.

Training was a critical part of the transformation. Several dozen managers at a time went through a four-week training program. That was followed by consultants working with the graduates to transform the shop floor and creating manufacturing cells. Visual controls were also established in many operations. Results varied among factories, but the benefits were clear. Work-in-progress was reduced by amounts ranging from 54% to 98%, while lead times decreased by 25% to 97%. Improvements in productivity also covered a broad range, but averaged about 50%.

Initially, all the efforts focused on footwear factories. The initiative was then expanded to include apparel factories, which tend to be smaller but are greater in number. Lean efforts were launched not only in China, but also in factories in Taiwan, Tunisia, Vietnam, Indonesia, Philippines, Bulgaria and Turkey.

'The training is fundamental,' said David Freni, head of strategic planning at Adidas. 'You can relate the success in the factory directly to how well you've trained not only senior management people, but down in the factory too. They have to understand how they contribute to the overall picture, and what the overall picture is. If you spend the time up-front doing that, then they become part of the solution.' The other key factor, he stated, is establishing a baseline, 'understanding where you're at before you start changing things, so you understand how you've changed things, and by how much. Those two things are pretty much the core of getting it right. If you do those two things well, eventually the shop floor is pushing this and setting new limits. Then you really have a lean environment.'

Stanley Mao was coordinator of lean manufacturing for Apache Footwear in Guangdong, a manufacturer for Adidas. He said that 'it was very difficult to get our employees involved in lean implementation, due to the fact that they didn't know what lean was... therefore, we established a training program to train our supervisors first to let them know the principles and then change their thoughts and minds in different stages. Furthermore, these supervisors (key trainers) were responsible for training their employees step-by step to ensure everyone really understands and accepts lean principles'. Mao also said that benefits at his factory included 'freeing up floor space, reduced staffing needs and shortened production cycles'.

Adidas was also praised for developing a productive working relationship with the consultants. 'They did it right,' said Fred Flynn, one of the consultants. 'The steps they took were the proper steps.' These included educating the consultants about the footwear and apparel business so that they could customize training materials for the factories.

In hindsight, Freni believes it would have been helpful early on to have translated more materials into local languages. He also believes in avoiding information overload: 'You should give sufficient information, but not more than is needed at various levels. Try to simplify it so people get very good at the portion they have to understand, but do not get burdened with, let's say, theoretical aspects.' The initiative was a continuing effort, with Adidas progressing to work with its tier-two suppliers.

Beyond achieving the goal of a reduced time-to-market, Freni identified another gain: 'The principal benefit both for us and the factories is we have gotten to understand one another much better. We have clear measurable and can communicate in a common language, a lean language. And because we as a brand are initiating this training, reaching out to our supply chain partners, we are building a bond that historically has not been a traditional one. A lot of that is built on mutual understanding and clear measurements.'

The downstream supply chain

Adidas's main distribution centers (DCs) are located in the UK, Spain, Netherlands, Greece, South Africa, China and the USA. These DCs are managed by third-party logistics providers. A new one, situated in Germany, is a multi-brand distribution center that includes two large distribution buildings that house more than 15 million units of Adidas and Reebok brand apparel, footwear, equipment and accessories.

The Services Centre of the DC is able to process more than 2 million orders and answer more than 300,000 customer service calls annually. All these facilities are designed to support both the future growth of Adidas brands and future demands from the retail channels.

Although Adidas makes most of its money by selling at wholesale rates to large retailers, the company has also sought to increase profit margins by increasing its own retail sales as a percentage of total sales. The wholesale channel represents 85% of net revenues with retail at 15%. In 2009 Adidas implemented the Never-Out-of-Stock (NOOS) project for both distribution channels.

The NOOS program comprises a core range of basic articles, mostly on an 18- to 24-month life cycle, that sell across all channels and markets. Overall, the NOOS replenishment model secures high levels of product availability throughout the season, allowing for quick adaptation to demand patterns. Retailers have to provide dedicated retail space, co-invest in fixtures and fittings, and commit to a 'first fill' representing about 25% of total expected seasonal demand to participate in this program. In return, customers can profit from significantly reduced inventory risk on these products.

Adidas 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, Adidas strives to connect and control the various elements of its supply chain, to enable quick reaction to changing consumer trends. To this end, the company focuses on building maximum flexibility through information sharing, harmonization and standardization of processes and practices, and through the adoption of simplified IT systems and applications.

Supply chain differentiation

While early supply chain initiatives concentrated on leveraging the efficiency of common suppliers, infrastructure and processes, later ones sought to provide tailored solutions for all its business models, be it the wholesale or retail channels, or the performance-oriented or style-oriented businesses. Adidas's annual report in 2011 contained the following statement about the supply chain vision of the company: 'Become closest to every consumer by building and managing a supply chain that quickly responds to changing market needs and supports multiple distinct business models.'

A study by Hofmann and Knbel (2016) analyzed the different supply chains of Adidas and identified different magnitudes of customization in relation to important supply chain settings. The crucial distinction is between e-commerce, which offers a high level of customization, and standard channels via wholesale and retailing.

To customize a product, customers need to exhibit a certain will to engage in the co-creation process, either because of higher product functionality (professional or semi-professional sports athletes) or because of the will to demonstrate an individual lifestyle. The resulting segment is called 'engaged customers', who try to profit either from rational or emotional benefits through co-creation.

The other customer segment, preferring to buy standard products within retail stores, is called 'standard customers'. The crucial difference between the two customer segments is the magnitude of product variety.

Adidas's response to the first customer segment ('engaged customers') is its 'mi Adidas' initiative. There are two different ways in which customers can engage with Adidas in the co-creation process: either through consulting the online configuration tool on the 'mi Adidas' webpage or through physically visiting one of the Adidas retail stores. Shoes can then be customized and personalized through choosing size, color, personal icons and functional specifications (especially for sportswear). After ordering the shoe, a completely automatic order-processing system chooses the optimal manufacturing location and initiates assembly of the customized shoe.

Assembly of shoes is time consuming and, together with global logistics operations, results in relatively long lead times. Consequently, Adidas focuses on optimizing the delivery service in order to compensate for the product assembly constraints. In the US, Adidas cooperates with FedEx, and in Europe and Asia with DHL, to provide high-speed courier services. Customers are supplied directly but can choose different channel options. Since only courier services are used, the delivery flexibility is assured.

'Engaged customers' also benefit from several additional service opportunities, especially when ordering 'mi Adidas' shoes from the flagship stores, where foot-scanning technology and expert fitting support are provided. Furthermore, Adidas offers services such as 'mi coach', an electronic tool to generate an individual training and fitness program. The whole supply chain for 'engaged customers' focuses on flexibility and service as well as a high level of customization.

For 'standard customers' Adidas executes a completely different supply chain. The crucial difference can be found in the fact that 'standard customers' are served through a forecast-driven mass production supply chain focused on efficiency, cost and quality of the products. Neither courier services nor special delivery flexibility are necessary, and standard products for selling through wholesale and retail channels are stored within several distribution centers.

In implementing the supply chain differentiation approach, Adidas had to handle a range of challenges in the upstream supply chain and at the level of retailers. Adidas had large mass production facilities in place and the internal and external supply chain affiliations had to be enabled to handle the new customization idea on a large scale (mass customization). The company decided to follow a controlled step-by-step expansion. With growing demand, Adidas allocated more and more resources in the supply chain to deal with the technology-driven differentiation approach. Soccer footwear was the first category to be enhanced, followed by the running, basketball and tennis footwear, and then other sports goods and footwear. Potential problems at the retailer level were mitigated as far as possible by first introducing the approach at Adidas-owned outlets.

Recent developments

In order to support the 'mi Adidas' online platform, Adidas has built its first 'speedfactory' in Germany to add high-speed manufacturing to its bespoke product offering. The company plans to open additional 'speedfactories' in western countries such as one in Atlanta, USA, in 2017. While the company will continue to order over 300 million standard pairs of shoes a year from its Asian contractors in its base supply chain, it wants the 'speedfactories' to be able to produce an estimated one million customer-designed pairs of shoes a year to meet high-priced bespoke demand in western countries.

Adidas plans to dramatically reduce the time between custom orders and delivery with these 'speedfactories' to four to five business days. A customer would design and order a dream pair of shoes on Monday and receive the pair on Friday. The company would be monitoring its customers' creations on the web, whether wish-listed or actually ordered: if particular designs or features recur at high enough rates, the company can incorporate these features into standard shoes in the base supply chain. Personalized orders thus offer insight into customers' desires.

An article posted on www.fortune.com (2017) discusses how 3D printing methods are also enabling Adidas to react faster to changing fashions and create more customized products. In April 2017, Adidas launched a new sports shoe with a 3D-printed sole that it plans to mass produce next year. Rivals Nike, Under Armor and New Balance have also been experimenting with 3D printing, but have so far only used the technique to make prototypes, soles tailored for sponsored athletes and a handful of high-priced novelty shoes. That is because traditional 3D printers are slower and more expensive, and often create n inferior product than the injection moulds for plastic that are currently used to produce hundreds of millions of shoes each year, mostly in Asia.

However, Adidas says its new partnership with Silicon Valley Start-up Carbon allows it to overcome many of those difficulties to produce a sole that can rival one made by an injection mould, and at a speed and price that allows mass production. 'This is a milestone not only for us as a company but also for the industry,' said Gerd Manz, Adidas's head of technology innovation, announcing the launch of its new Futurecraft 4D shoe. 'We've cracked some of the boundaries.'

Carbon, financed by venture firms such as Sequoia Capital as well as funds set up by General Electric and Alphabet's Google, has pioneered a technique that prints with a light-sensitive polymer resin that is then baked for strength. Standard 3D printers build up products with layers of plastic powder. Adidas hopes to sell 5,000 pairs of its Futurecraft 4D this year, and 100,000 next years as Carbon cuts the time it takes to print a sole from the current hour and a half to as low as 20 minutes per sole. The shoes will sell at an unspecified premium price but Adidas plans to lower the cost as the technology develops.

In 2017, Adidas sold a few hundred pairs of running shoes with soles made by regular 3D printing for $333, but they were relatively rigid and heavy and took ten hours to print. Carbon's technology will allow Adidas to make small batches of shoes far more quickly. Small production runs were not economical before, as the metal moulds for most soles need to be used 10,000 times to pay for themselves, and they take four to six weeks to cast and grind. 'What you can do is introduce more types of products without a cost penalty,' said Terry Wohlers, head of Wohlers Associates, a US consultancy specializing in 3D printing. 'With this technology, you can produce one or a few inexpensively.

QUESTIONS

Q1 (a) Outline the main characteristics of collaborative supply chain relationships.

(b) Analyze THREE examples where Adidas has improved its supply chain performance through employing a collaborative or partnering approach.

Q2 Explain the characteristics of 'lean thinking' and provide examples from the case of where Adidas has implemented a lean approach within supply chain management.

Q3 Discuss how Adidas achieves, or could achieve, competitive advantage through:

(i) Innovation in the supply chain. (5 marks)

(ii) Range of products. (5 marks)

(iii) Brand image. (5 marks)

(iv) Customer care. (5 marks)

(v) Variable pricing.

4(a ) Based on information in the case study, suggest TWO ways in which Adidas has used, or could use, developments in technology to improve its supply chain performance.

Q4 Analyzes the approaches that Adidas takes to supplier development, highlighting the benefits and risks to the company.