07/14/2017 Discussion Document Adidas AG

Apparel Perspectives
Manufacturing as a
competitive advantage
My outside-in perspective of Adidas AG

• Adidas AG has demonstrated strong performance in FY16, delivering operating

margin of 7.7% and group sales of € 19.29B (+18% vs. YAG)
• This was delivered by streamlining the portfolio, building capabilities in brand
leadership, while capturing operating efficiencies1
• Building on this track record, the bar is being raised for Manufacturing with a goal to
drive innovation on non-specialty apparel and footwear lines
• Achieving this level of performance will require focus on a set of critical opportunities:
– Develop an “One-Adidas” approach to make the right set of Process Technology Choices to fuel
growth
– Optimize the manufacturing and supply chain footprint to control costs, improve market
responsiveness while navigating current industry headwinds
– Seamlessly manage interdependencies while ensuring strategic, operating and cultural cohesion
change occurs
• This document provides a summary of my perspective on innovation in apparel
manufacturing
• I look forward to being a part of the Adidas AG Manufacturing team to help shape the
long term innovation agenda
1 Return on Marketing Efficiency, Global Business Structures, Supply Chain Management efficiencies
Main focus of this perspective

Prepared for Adidas AG 1

 Apparel Industry Trends

The industry is challenged by increased volatility, new and

smarter shoppers and disruptions to retail, buying cycles and
owners
Volatility
 Sourcing regions and fashion
destinations impacted by
terrorism and Geo-political
change
 Rising global debt vs. GDP
reducing disposable incomes
 Slowing Chinese GDP growth2
New Shoppers
 Growth in “modest” and “body-
positivity” wear consumers
 Continued growth in Athleisure
segment
 Emergence of city specific trends
which drive complexity
 Growth in sustainable shoppers
in EC markets
Retail System
Slowdown
 FY16 inventory to sales ratios in
the US hit an all time high
 Slowing sales growth across all
categories
 E-Commerce sales growth from
3% (FY10) to 12% (Proj.’20)
 Footfall continues to slide even
with deeper discounting

Consolidation &
Smarter Shoppers Buying Disruption
Ownership Shakeups
 30% growth in M&A activity  Informed and demanding  Increase to six buying cycles1
vs. FY15 consumers expecting  See-Now-Buy-Now trend strains
 Custom and E-Retailer personalization and value value chain
acquisitions by retailers  Continued challenges by  Luxury segment making full line
 Uptick in interest by Hedge improved local players immediately available during
Funds to push for short term  Discount-culture takes further fashion show
financial windfalls hold in US, Europe and China  Buying & merchandising teams
 Trendsetting continues to shift to shaping future needs in parallel
mobile and social with designers
Source: Independent research, BoF, CFDA, McKinsey, BCG and ATK Prepared for Adidas AG
1 Women’s wear
2 2010 – 10% , 2016 6.7%
2
 Advantaged Supply Chain

These challenges require Manufacturing to make critical

choices across two supply chain areas1 to support the
strong growth trajectory of Adidas AG
Advantaged Supply Chain
B

Focus
Areas

Notes:
1 Assumed Adidas Manufacturing has lead responsibility in Process Technology Choices, Manufacturing Footprint and co-leadership of network optimization.
For most matrixed organizations several areas are transformed at once to support the “Right to Win” (i.e. Design-Driven Efficiency and Asset Configuration)
Source: Booz & Co Advantage Supply Chain Framework

Prepared for Adidas AG 3

 Phase I Approach

Three key areas will be the focus for the initial phase:

A B
Process Technology Choices
• Assess the current manufacturing
innovation pipeline
• Develop roadmap for an enterprise
innovation business case model
• Ensure innovation approach is Agile and
Lean
• Prioritize innovation pipeline
• Formalize opportunity screening with
governance and key milestone gates
C
Manufacturing Footprint
• Size the prize and set the vision – build a
clear and compelling case for change
• Determine full potential “clean-sheet”
manufacturing network – Outsourced,
Owned and Venture
• Develop roadmap for footprint business
cases, operating model definition and
implementation
Tailored Product Flows
• Tailor supply chain models to strike the
right balance of cost and responsiveness
(e.g. Fast, Repeats, Seasonal)
• Make the right trade-offs between
distribution warehousing and logistics
costs

Sustainable Change Approach

Organizational Case for Change Behavioral Focus Talent Requirements Driving change
Perspective internally
Address formal and Use rational and Focus first on changing Integrate people Create ongoing
informal organization emotional forces to drive behaviors, not mindsets requirements and close mechanisms to manage
• Process, structure, understanding and • Act your new way of capability gaps change
incentives, decision commitment thinking • Raise performance bar • Key influencers, peer
rights • How company and • Leadership to lead by • Build competency networks and story
• Culture, informal customers will benefit behavior change requirements telling
networks • How it can instill pride • Invest in skill building • Knowledge transfer,
and energy change leadership
• Compensation,
performance mgmt.

Prepared for Adidas AG 4

 Example Case: Global & North American CPG

Process Technology Choices

Technology evaluation approach Value creation

• Create an enterprise view of all innovation
Market projects
Development Diversification • Focused on
New

“must-win”
markets • Facilitate decision making with a flexible
Markets

qualitative and financial evaluation model (e.g.

Market Product
DCF, ROI)
Penetration Development
• Steering clear of
Current

industry revenue
multiple trap • Ensure alignment to an approved product
Current New strategy and financial attractiveness
Products

• Redeploy freed up resources to accelerate

Strategic Bet Accelerate
• Flexibility to innovation with near term positive impact to
High

include growth growth or cost

Attractiveness

premiums
Exit Selectively Deploy ~ 10-20% projects lacked business cases
• Innovation steerco wasting $XXMM1
Low

continually assess
pipeline
Low High
Ease of Implementation

1 Values masked for confidentiality. Global CPG company with a decentralized innovation center model

Prepared for Adidas AG 5

 Example Case: North American CPG

Manufacturing Footprint

Varying service levels by demand Value creation

Client Density Map (Annual Shipped / Sq Mile)
• Create an wholistic view of all current and
projected cost drivers

Units Shipped / Sq. Mile • Rebalance demand across network with no

impact to service levels
1 N/A (XXX)

2 <0.3 (XXX)

3 0.3-1.99 (XXX)

4 2-3.99 (XXX)

4-9.99 (XXX)

• Sequence transition in waves to maximize

5

6 10-24.99 (XX)

savings capture while mitigating risk

7 25-99.9 (XX)

8 100-499.9 (XX)

9 >500 (XX)

Balancing technology benefits and • Prioritize savings levers by site to highlight

quick wins
distance to serve
Manufacturing Scale Curve
Average Product Mix
Manufacturing Cost Drivers
Product Mix w/ New Technology
• Develop enterprise business case model to
simplify new technology assessments
Tech
MFG $/Unit

Choice

Out-
New Tech Plants below bound
XM units have Com- Utiliti- ~ $XXXMM of savings over a 3 year
significant cost penalty plexity es
horizon
Wage
Scale
Avg. Annual Capacity
Utilization
Prepared for Adidas AG 6
 Example Case: European Fashion Retailer & Global CPG

Tailored Product Flows

Vary days to store by product type Value Creation

Seasonal Fashion • Win See-Now-Buy-Now in store consumers
Style Assor
DC /
Fashion direction creation tment
CMT Tran STORE
setting Fabric MFG sit • Meet actual demand by striking the right
15-17 weeks
balance between costs and velocity

Fast Fashion DC / • Prevent out-of-stocks in faster moving product

CMT Tran
sit
STORE
lines
Repeats
4-5 weeks
• Limit discounting by creating artificial shortage
Tailor Replenishment Mode to Maximize in fashion-lines that drive footfall
Savings $XXX
• Rebalance distribution network to drive sales
AVERAGE WEKLY SALES

XX0

XXX
Direct From Direct From
~ XX% GM increase with a 20% higher
XXX
Plant To
Store
Plant To cost model relative to industry peers
Customer DC

XXX

XXX Traditional Delivery

0
0 50 100 150 200 250+
KM FROM FULL MIX PLANT TO MARKET
Prepared for Adidas AG 7
Assumptions made when building this perspective

• Current emerging trends (e.g. 3D printing, RPA) and full plant designs (Speedfactory
and Supply Chain of Future) were not evaluated as part of this perspective
• Individual technology trends can be transformative but need to be evaluated as part of
a broader Supply Chain and CRM transformation
• Broader technology architecture changes such as integration of CRM to Supply Chain
Systems were not evaluated as part of this perspective
• To truly win over See-Now-Buy-Now consumers will require an Apparel Manufacturer
to invest in a set of capabilities (e.g. Tailored Supply Chain, Omni-Channel Marketing
and Sales Approaches and Digital + Social Shopping Experiences)
• Adidas current footprint for non-specialty apparel is geographically dispersed and
primarily outsourced
• Organization would be open to moving a portion of manufacturing in-house
• There is a decentralized portfolio of manufacturing innovation programs

Prepared for Adidas AG

Prepared for Adidas AG 9