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.<\/p>\n
What Is at Stake:<\/strong><\/p>\n This opportunity is enormous for Adidas; in 2016, Adidas\u2019 inventory was ~\u20ac3.7B, or 19.5% of sales. This is the highest level in more than 10 years, demonstrating the enduring challenge of accurately estimating customer demand. [1]\u00a0 This inventory costs Adidas dearly; if one assumes a cost of capital of ~8%, inventory cost Adidas ~\u20ac300M in 2016, which is equivalent to about 30% of their net income.<\/p>\n 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.<\/p>\n Near Term Initiatives and Suggestions:<\/strong><\/p>\n To respond to this opportunity in the near-term, Adidas expects to produce 50% of its shoes (up from ~25% today) using a \u2018speed factory,\u2019 or a smaller, more localized manufacturing facility that can respond to local demand and is capable of customization. [2]<\/p>\n 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. [3] 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\u2019 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.<\/p>\n 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. [4]<\/p>\n Medium Term Initiatives and Suggestions:<\/strong><\/p>\n In the medium-term, management plans to improve their product offering by manufacturing custom mid-soles in retail locations after assessing a runner\u2019s 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. [5][6] Furthermore, this advancement would not lower Adidas\u2019 inventory levels materially since the cost of the midsole in a shoe is only a small portion of total inventory cost.<\/p>\n 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\u2019 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.<\/p>\n 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.<\/p>\n Outstanding Questions:<\/strong><\/p>\n I would be interested in others\u2019 perspectives on the following:<\/p>\n 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?<\/p>\n 2) If you were Adidas, would you also be concerned about the effects of shifting from a mass-production model to a highly customized \u2018speed factory\u2019 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?<\/p>\n <\/p>\n [1] Adidas AG Historical Income Statement, Capital IQ, Inc., a division of Standard & Poor\u2019s.<\/p>\n [2] Adidas AG, Q1 2017 Analyst Investor Day Presentation, p. 83 \u2013 84, https:\/\/www.capitaliq.com\/CIQDotNet\/Service\/Documents\/DownloadVersion.axd?versionId=1853136807&filename=Adidas+AG+-+Analyst%2fInvestor+Day.pdf&activityTypeId=9516<\/a>, accessed November 2017.<\/p>\n [3] Panagiotis N.Koustoumpardis, \u201cIntelligent Hierarchical Robot Control for Sewing Fabrics,\u201d Robotics and Computer-Integrated Manufacturing<\/em> 30, p. 34 – 36 , 2014, Google Scholar, accessed November 2017.<\/p>\n [4] Schrauf, S. and P. Berttram, Industry 4.0: How Digitization Makes the Supply Chain More Efficient, Agile, and Customer Focused, PWC Strategy&\u00a0 (2016)<\/p>\n [5] Compeitor.com, \u201cAdidas Debuting Exclusive $333 3D Printed Running Shoes,\u201d Compeitor.com, December 12, 2016, http:\/\/running.competitor.com\/2016\/12\/news\/adidas-debuting-exclusive-333-3d-printed-running-shoes_160111<\/a>, accessed November 2017<\/p>\n