{"id":25661,"date":"2017-11-15T21:44:46","date_gmt":"2017-11-16T02:44:46","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/adidas-front-running-digitalization-in-sports-retailing\/"},"modified":"2017-11-15T21:44:46","modified_gmt":"2017-11-16T02:44:46","slug":"adidas-front-running-digitalization-in-sports-retailing","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/adidas-front-running-digitalization-in-sports-retailing\/","title":{"rendered":"Adidas: Front-running digitalization in sports retailing"},"content":{"rendered":"

\u201cIndustry 4.0\u201d \u2013 A global buzz<\/u><\/strong><\/p>\n

\u201cIndustry 4.0\u201d describes the fourth industrial revolution (Exhibit 1) in which machinery no longer simply processes a product, but in which the new capabilities of smart, connected machines are reshaping the operations of manufacturing plants, leading to fully automatized and optimized production processes (\u201cSmart factory\u201d) [1] [2]. The concept originated in Germany in 2010 as part of the government\u2019s High-Tech Strategy 2020 Action Plan, with similar applications having emerged globally (e.g. \u201cSmart manufacturing\u201d in the US).<\/p>\n

Exhibit 1. <\/strong>From Industry 1.0 to Industry 4.0 [3].<\/p>\n

\"\"<\/a><\/p>\n

 <\/p>\n

Implications of Industry 4.0 for Adidas \u2013 Transformational challenges ahead <\/u><\/strong><\/p>\n

As the application of Industry 4.0 and the underlying digitalization of supply chains is transforming competition and manufacturers [2] [4], traditional retailers such as Adidas face the challenge of adjusting their value chain and production processes to sustain competitive edge. Due to the scope of innovation, companies failing to adapt to this megatrend are expected to miss out on significant operational and cost efficiency gains in the short to medium term. McKinsey estimates that the potential impact of Industry 4.0 innovations on a company\u2019s supply chain could result in up to 30% lower operational costs, 75% fewer lost sales1<\/sup>, and a decrease in inventories of up to 75%, partially driven by a shift from push production (\u201cmake and build up inventory\u201d) to a pull production (\u201cmake to order\u201d) [5] [6].<\/p>\n

The effects of digitalization ultimately lead to a new economic rationale: Whereas historically, an automatized industry with low asset turnover and high margin (1) was able to offer the same ROCE as an industry with high asset turnover and low margin (2)2<\/sup>, Industry 4.0 represents a paradigm shift as the combination of increased profitability and asset efficiency structurally pushes ROCE to higher levels (3) (Exhibit 2).<\/p>\n

Exhibit 2. <\/strong>The effects of Industry 4.0 on return on capital employed (ROCE) [5].<\/p>\n

\"\"<\/a><\/p>\n

Former Adidas CEO Herbert Hainer (who was succeeded by Kasper Rorsted in October 2016) identified early on that \u201c(\u2026) [fully automated factories] will revolutionize the whole part of manufacturing in the sporting goods industry\u201d [7], recognizing that the successful adoption of this new form of production represents a critical success factor for Adidas in the future.<\/p>\n

 <\/p>\n

A new manufacturing era at Adidas \u2013 The Speedfactory<\/u><\/strong><\/p>\n

Adidas represents one of the early adopters of the \u201csmart factory\u201d concept in the retail environment, in an effort to maintain a competitive advantage through manufacturing bespoke sports shoes at closer proximity to its customers. On December 9, 2015, the company revealed its plan to launch an automated, decentralized and highly flexible manufacturing facility based on intelligent robotic technology and additive manufacturing (\u201cSpeedfactory\u201d) that allows to create high-performance sports shoes faster and more flexibly than ever before [8]. Compared to the formerly 18-month time lapse between the design of new models and their arrival in stores, the Speedfactory enables to process new collections in less than 45 days [5]. Instead of manufacturing components across different plants in Asia, with workers assembling components and sewing materials, the Speedfactory will instead create most parts itself from raw materials (e.g. plastics, fibres) and subsequently produce the goods [9]. In line with customers\u2019 increasing appetite for individualized products and aversion for long production times, the new system enables mass customization and the ability to flexibly react to demand variations, making traditional retooling of conventional machines obsolete [5].\u00a0Adidas first Speedfactory is based in Ansbach, Germany. In the medium term, Adidas plans to roll-out additional Speedfactories, e.g. near Atlanta, USA.<\/p>\n

 <\/p>\n

Huge opportunity, yet at an early stage<\/strong><\/u><\/p>\n

With a target production volume of c.500k trainers per year, the overall impact of the Speedfactory on Adidas\u2019 total manufacturing capacity of c.300m pairs of sports shoes remains limited [9]. In order to capture the benefits of Industry 4.0 in the near to medium term, Adidas needs to roll-out its Speedfactory across multiple locations and markets and replicate the concept for additional product categories (e.g. sports apparel).\u00a0Adidas should also focus on further increasing the speed-to-market through directly connecting customer orders with its smart manufacturing plants. In the future, a customer should be able to order a customized\/personalized product online, triggering the immediate \u201con-demand\u201d production of respective product in the Speedfactory, followed by same-day delivery to the customer\u2019s home.<\/p>\n

As Adidas transitions into a radically different manufacturing process, digitalization is set to disrupt Adidas\u2019 existing value chain in Emerging markets (e.g. China, Indonesia, Vietnam). In the long term, the shift from traditional manufacturing labor to automatized robotics is likely to make a large number of employees in these countries obsolete. How will Adidas manage this transition phase, also in the light of the company’s social responsibility for the people it currently employs? Given the increased vulnerability of connected machines to e.g. cyber attacks, how can Adidas successfully protect itself from such external threats?<\/p>\n

 <\/p>\n

Word count: 798 words<\/p>\n

 <\/p>\n

Footnotes:<\/u><\/p>\n

1<\/sup> Lost sales result from unrealistic lead times, poor inventory management that affects product availability and unreliable delivery of parts<\/p>\n

2<\/sup> Note: All points on the curve represent an equal ROCE of 15% (exemplary), indicating the mutual effect of profitability and capital efficiency on ROCE<\/p>\n

\u00a0<\/sup><\/p>\n

Sources:<\/u><\/p>\n

[1] Germany Trade & Invest (GTAI), \u201cIndustrie 4.0\u201d; https:\/\/www.gtai.de\/GTAI\/Navigation\/EN\/Invest\/Industries\/Industrie-4-0\/Industrie-4-0\/industrie-4-0-what-is-it.html<\/a><\/p>\n

[2] Porter, M. and Heppelmann, J., \u201cHow smart, connected products are transforming competition\u201d, 性视界 Business Review (Nov. 2014); https:\/\/hbr.org\/2014\/11\/how-smart-connected-products-are-transforming-competition<\/a><\/p>\n

[3] Kalyanaraman, S. (IBM), \u201cIndustry 4.0 meets Cognitive IoT\u201d (Oct. 2016); https:\/\/www.ibm.com\/blogs\/internet-of-things\/industry-4-0-meets-cognitive-iot\/<\/a><\/p>\n

[4] Porter, M. and Heppelmann, J., \u201cHow smart, connected products are transforming companies\u201d, 性视界 Business Review (Oct. 2015); https:\/\/hbr.org\/2015\/10\/how-smart-connected-products-are-transforming-companies<\/a><\/p>\n

[5] Blanchet, M. and Rinn, T. (Roland Berger), \u201cThe Industrie 4.0 transition quantified \u2013 How the fourth industrial\u00a0revolution is reshuffling the economic, social and industrial model\u201d (2016); https:\/\/www.rolandberger.com\/en\/<\/a>Publications\/pub_the_industrie_4_0_transition_quantified.html<\/a><\/p>\n

[7] Nikkei Asian Review, “Adidas aims to lead revolution in sporting goods manufacturing” (Jul. 2016);\u00a0https:\/\/asia.nikkei.com\/Business\/Companies\/Adidas-aims-to-lead-revolution-in-sporting-goods-manufacturing?page=1<\/a><\/p>\n

[8] Adidas press release;\u00a0https:\/\/www.adidas-group.com\/media\/filer_public\/fa\/a4\/faa42539-a5d3-45c0-8d5d-9ab96481e13c\/dec9_adidas_speedfactory-en.pdf<\/a>]<\/p>\n

[9] Economist, \u201cAdidas\u2019 high-tech factory brings production back to Germany\u201d (Jan. 2017); https:\/\/www.economist.com\/news\/business\/21714394-making-trainers-robots-and-3d-printers-adidass-high-tech-factory-brings-production-back<\/a><\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

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