Adidas sustainability (Draft term paper)

Executive Summary

The practices of sustainability employed by Adidas has been looked upon as very effective and efficient. This paper studies and looks into the practices of procurement for Adidas and determines whether or not it can be improved and how could it be improved. There is also suggestions on what to do to improve its practices The paper then answers the question of child labour, which is something that has been a bane in many organizations across the world trying to do business and procure from countries with cheap labour.

Several suggestions are given like intervention, coalition with many organizations and so forth.

Question 1

Please analyse based on internet and academic research the sustainable procurement practices from Adidas and summarize their practices.

Since the Brundtland Commission, sustainability has been gaining in popularity among companies. The Adidas group is a leading company in sustainable practices. It started releasing its first annual report on sustainability in the year 2000 and have been publishing it since and made available online, accessible for the public. During the same year, the company made inroads by being recognized in the list of the Dow Jones Sustainability Index. Since 2005 the organization been annually rated in the top 100 Most Sustainable Companies in the world and was ranked third in January last year.

So it can be deduced based on these achievements that the company hasin place good policies to be practiced, and have taken active steps to ensure that they are always in line with being a sustainable organization. To be such an organization, it is not enough just to have sustainable practices internally, but mindful of procuring from suppliers. Most of the products from Adidas are not built in their own factories, but are manufactured in developing countries around the world, including Indonesia, India and Thailand among others. This is translated as roughly 80% of Adidas’ products are manufactured by their direct suppliers.

Throughout the years, the company has reduced the amount of harmful materials in its products, and reduced wastes in its manufacturing process (Ghosh & Shah, 2012). Adidas has taken many steps to reduce waste in their products, and this is manifested with the production of items with recyclable products and recently, with the unveiling of running shoes made from ocean waste. This requires procuring recyclable items, collecting recyclable items from their own production runs, and deciding on better designs to be built in the factories.

In the procurement practice, Van Weele gives the purchasing process model that companies could follow. 

With regards to Adidas, the company would start by defining the specifications of requiring a company to bring the documents of their management practices and how they obtain suppliers for reviewing, before being selected. This will be explained in the following discussion.

In 2013, Adidas introduced a new framework of four pillars to sustainability, namely, people, product, planet and partnership, which essentially addresses the triple bottom line of economic, finance and social development.

The first approach, which is to people, touches on the social aspect of sustainability and touches upon many of the main issues regarding workers’ rights that surfaced. A main example is the case of the 2012 closure of a supplier factory in Indonesia, PT Kizone, due to bankruptcy, and which resulted in mass unemployment for the workers.

Planet would involve practices that strive to be environmentally friendly, not only for Adidas but also for its suppliers, and this is done through encouragements for suppliers to have better policies. Finally under partnership, Adidas makes partners with many parties to assist them achieve their goal. The company partners including non-profit organizations like Fair Labour Association (FLA). FLA is an organization dedicated to protect workers’ rights around the world, and Adidas has been in partnership for the past 15 years, giving priorities to workers’ welfare.

The below diagram shows the sustainability throughout the supply chain that companies can use as a benchmarking tool.

In Adidas’ sourcing strategy, there are three steps taken to identify the suitable supplier, namely risk mitigation, performance improvement and collaboration. In risk mitigation, Adidas does screenings of all Tier 1 suppliers and all major Tier 2 suppliers using Environmental KPI benchmarking tool (Adidas sustainability report, 2011). In procuring from suppliers, Adidas tries to have long-term partnership sourcing and stresses on good relationship. An example that can be seen is in Indonesia where the company has had 25 years of sourcing history in that nation. The benefits of close relationship is more trust is developed and it is easier to work closely in environmental and social issues.

For social compliance, Adidas would use a KPI measuring management commitment to workers right and level of worker-manager communication and relations. Good companies are rated as 3C while 2C and 1C is a lower level. Many new companies chosen as a supplier would start in the 1C or 2C ranking after auditing and would gradually improve as time passes. As a stated policy, Adidas would eliminate a company that did not improve in one year.

It is of interest however, to see if Adidas could source from companies who are 3C or 2C rated right from the start, to improve further its sustainability. If it is indeed possible to include good companies from the initial stage, while a considerable concern for the financial aspect of the company is taken, then this would be the way forward.

To monitor the processes, audits are held on a regular basis. Adidas gives a choice to suppliers to be eligible for self-governance, which means that they could opt to undergo a series of training where they would be able to do internal audits and Adidas would not be required to come and inspect their factories. (Adidas report 2012, pg 7).

Thus the policy is to monitor and train their direct suppliers until they become wholly compliant with Adidas practice, but what about indirect suppliers? Adidas also have in place policies to check the compliance and performance of indirect suppliers, called the Strategic Compliance Plan (SCP). This would help suppliers make better plan before sourcing for suppliers, since they have to submit the SCP to Adidas for review. The SCP would detail suppliers management system that is in place within their organization on how to manage compliance within their organization and suppliers (Adidas report 2012, pg 15)

As is seen from the table, improvements on all fronts of the KPI units is attained, which means that Adidas is implementing its policy of auditing and ensuring compliance from suppliers. It is this kind of development that helps the company win the award earlier in 2015.

During the sourcing process, a process of due diligence would be carried out. Adidas would have to conduct visits and evaluate the candidates’ sustainability compliance. Companies who fail to meet the threshold are rejected either after a first visit, or on the second visit after being given an opportunity to make improvements to their practices. When a supplier has been chosen, as mentioned, a failure to meet the requirements will result in termination of agreement, after a grace period given.

With regards to audit visits, there have been reports which shows that there are improvements that need to be made. Some supply factory workers have said that due to Adidas’ announcement of visiting, practices are changed and workers are pressured by managers to not be transparent if asked by Adidas’ representative. To avoid this, surprise inspections could be increased in number.

The issue of low wage has been on the agenda since 2002. In 2012 the company employed the Fair Wage tool to assess if companies are paying, not only the minimum wage, but fair wage based on the working hours. The table below shows the framework.

Although Adidas does not disclose the names and locations of the factories in their report, unlike Nike, they still present their results in a comprehensively, in terms of the number of audits carried out in different regions, number of terminations and number of warning letters issued.

A strategy that Adidas employs is collaborating with other competitors who share the same suppliers. This will exert influence to address challenges in the supply chain, especially the companies who are further down the supply chain. In combating the practice of child labour, Adidas also worked together with non-governmental organizations and an international alliance of brands and investors to pressure the government of Uzbekistan to stop the complicit act of fostering practices of child labour in the country.

Question 2

Critically reflect on the effectiveness of the sustainable procurement program of Adidas and make further suggestions how multi nationals can effectively eliminate child labour.

One of the major issues of sustainability that was raised against Adidas was the case of PT Kizone of Indonesia. As mentioned, the factory was forced to close Adidas was blamed for having such a company in the supply chain, and thus was initially criticized for the incident. However the organization proved to be willing to assist in workers welfare by providing financial aid to the displaced workers. Critics often point out to the low wages paid to supplier factory workers in many third world countries especially Indonesia.

We have seen how Adidas runs their procurement practice to ensure sustainability in the previous question. Overall, their practices have been seen as rather transparent and effective to gaining sustainability. The issue of child labour for Adidas has not really been a major one, and the last reported case was in 2000, involving the case of factories in Indonesia (The Guardian, 2000). 

However, that was the first year when Adidas started to publish their reports on sustainability and it is a first challenge for them to address.

Since the beginning of the 20^th century, the issue of child labour have been the attention of widespread social and regulatory bodies (Kolk and Tulder, 2002). Child labour is defined by the international labour organization as work that deprives children under the age of 14 off their childhood, which includes work that prevents children from attending school, and the work is also physically and mentally harmful for them (ILO).

The issue of child labour is a rather complex one, as it would normally involve companies further down the supply chain. While companies can manage to check that their Tier 1 and Tier 2 suppliers are free from any such misconduct, it is difficult to have control the further down you go. Eliminating child labour would involve the collaboration of many relevant bodies like the companies and their suppliers, governmental bodies and non-governmental organizations (NGOs). Child labour is usually the product of a combination of poverty, lack of education, lack of jobs and lack of awareness about the harms of such practice. While it is easy to terminate a supplier that is involved with such practice, there will always be a risk of another supplier doing the same.

Solving child labour requires the working together of many parties and is not the work of a few. For the first step, companies could establish a proper code of conduct for itself and for suppliers that states that child labour is not tolerable and state what is the age minimum or state that it is line with the definition set out by the ILO, as well as what would happen in the case of violations. Codes of conduct are written statements of principles or policy intended to be commitments of certain enterprise conduct (ILO, International labour review, 1999).

Companies should vet suppliers as much as possible.

Monitoring systems can be done in a few ways. It could either be internal, external or a combination of the two. Internal would mean that companies would monitor their suppliers by sending auditors, while external would refer to the hiring of third party bodies to be involved with the monitoring process. Some suppliers who sub-contract work to a third party, and this should be notified to the purchasing companies so that everyone involved is aware of what is happening and that the third party company could also be monitored. Thus purchasing companies should be aware and make a listing of not only all their suppliers but also subcontractors.

Purchasing practices to reduce the work loads of workers should be done after consideration of the amount of work that the selling companies are able to carry out. Companies which feel that they are struggling to meet demands would sub contract to other parties, and in a country where child labour is rampant, this could serve as a problem.

Countries should ratify laws that prohibits companies from being involved. Certain countries can be either unwilling or unable to tackle the problem of child labour. Countries such as Uzbekistan is notorious for harbouring child labour. The issue is a deep one ingrained in the unwillingness or complicity of the government, thus Adidas with the coalition of other companies seek to avoid the market altogether.

Avoiding companies that engage in such practice is only the first step, while ending the practice altogether would take much time and effort. It would involve organizations to intervene in the local social-cultural environment and contributing to change.  The “vicious cycle” that is often mentioned that produces the tradition of child labour must be addressed. The cycle involves poor parents who could not afford a living asks children to work which results in the children growing up without proper education and ending up the same as their parents and fostering the same practice of making their children to be labourers.

Some companies like Nestle has stepped up efforts by involving in the societal fabric of the company and providing infrastructures such as schools to assist the people to break from the cycle of poverty. Unless the issue of education is addressed, then the problem will always be there and could not be solved. The ILO provides stipends to assists poor parents that sends their children to school. The incentives are conditional, which is the children have to have good attendance at the school and this is tightly monitored (Frank Hagemann interview). 

Conclusions

Conclusions will be added soon, as well as a more updated discussion, including an addition on references.