Adidas: Revolutionizing the Supply Chain with SPEEDFACTORY

Adidas is turning to digitalization of footwear manufacturing to improve speed to market, enhance customization, and increase flexibility with greater automation through its SPEEDFACTORY project.

Speed is Key

Adidas operates in a dynamic and fast-moving fashion industry, where speed is key. The athletic footwear industry has expanded in the broader fashion market with more focus on design and diverse offerings. Increasing technology and digitalization are transforming the traditional fashion supply chain, putting pressure on retailers to increase their speed to market. At the same time, the end consumers are driving the supply chain. To gain competitive advantage, Adidas needs to constantly provide new and relevant products by anticipating customer demands and responding accordingly.

Along with the digitalization challenge, Adidas’s global manufacturing chain has become a hindrance as it typically takes Adidas 12 to 18 months to design, produce, and deliver a finished good. [1] In order to cover the development and manufacturing costs, Adidas needs to produce batches of 50,000 to 100,000 of shoes for one production run. [2] The inability to satisfy the increasingly demanding consumers can lead to inventory risk, over-production, high level of clearance, brand damage – and ultimately lead to liquidity and financial problems.

Becoming the True Fast Sports Company

To react quickly to consumer demands, Adidas is highly committed to building innovative manufacturing technologies and to making improvements in digitalization process at every stage of the supply chain. In fact, one of Adidas’s three strategic pillars is speed. Its mission is to become the first “true fast sports company” by 2020. [1]

SPEEDFACTORY project

In 2016, Adidas launched SPEEDFACTORY pilot project in Germany, a smart manufacturing process via robotic automation that integrates the design and production process tailored to specific markets. [1] This was developed to bring production closer to the market and accelerate building relationship with the customers by responding faster to volatile trends. Traditionally, Adidas would manufacture across specialized factories in different cities and countries, but this re-designed process allows Adidas to concentrate most of the supply chain in one location. [3]

Adidas utilizes data analytics and 3D technology to create shoes that are customized to the fit and functional needs of consumers. The 3D technology enables more frequent and rapid virtual product iterations without need for physical samples. Adidas also leverages the motion-capture equipment and applies it to human body to monitor the walking and running movements. [4] Most importantly, Adidas engages consumers earlier in the process. Prototypes can be tested quickly with consumers allowing Adidas to incorporate feedback into the next design iteration without the risk of excess stock or price mark-downs.

Key differentiation points

  • Shorter lead time: reduces time from design to finished good from 12 to 18 months to as little as 45 days [1]
  • Smaller batch size: enables Adidas to reduce batch size to as little as 500 pairs (vs. 50,000 to 100,000 pairs in traditional mass production) [2]
  • Lower production costs: requires fewer materials and components and lower transportation and logistics costs from on-shore production [5]
  • Mass customization: customers can input their specific data to come up with a shoe that is tailored to their wants and needs

While this digitalization process is still in its early stages, Adidas will ultimately have to implement this technology and automation to the whole organization. The challenge is to continue building momentum and scale to transform Adidas’s entire supply chain. Following a successful launch in Germany, Adidas recently opened a second SPEEDFACTORY in Atlanta, U.S., with the goal of producing 500,000 pairs of shoes in 2018. [6] Adidas’s goal is to increase the sales driven by these speed programs to be at least 50% of sales by 2020. [3] Because this is such a radical change in the organization, Adidas should continue to implement a segmented roll-out in key markets where it involves customers willing to pay higher price for the value-added products and services.

In addition, Adidas is not the only one investing heavily into digital supply chains. Nike has partnered with Flex, a high-technology manufacturer to create automation and customization systems for its supply chain. Under Armour opened its “Lighthouse” lab, which uses 3D design and body scanning to create custom products for both footwear and apparel. [7] To stay ahead of the competition, Adidas needs to go beyond technological advances in design and manufacturing and expand its capabilities across the whole supply chain including smart warehousing and logistics. They must also find the right partners with the critical skill sets to help drive the evolution of a disruptive change in this industry.

Lastly, Adidas still relies heavily on production in Asia. Adidas stated that this SPEEDFACTORY will act as a separate business model to complement the Asia operations rather than replace them. [8] Adidas has established strategic partnerships with third party suppliers in Asia for years – the question is how they plan to transform the entire organization while minimizing the disruptions. Will SPEEDFACTORY eventually replace the conventional production in Asia?

 

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[1] Adidas AG, 2016 Annual Report, [URL], accessed November 2017

[2] Stephanie Pandolph, “Adidas uses Speedfactory to localize shoe designs,” Business Insider, 9 October 2017, [URL], accessed November 2017

[3] James Shotter, “Robot revolution helps Adidas bring shoemaking back to Germany,” Financial Times, 8 June 2016, [URL], accessed November 2017

[4] Ben Roazen, “An Explanation of adidas’ SPEEDFACTORY Facility,” Hypebeast, 5 October 2017, [URL], accessed November 2017

[5] Christopher Svezia, “Initiating at Neutral; social, fashionable, and fairly valued,” Wedbush Securities, 23 October 2016, via Thomson Reuters, accessed November 2017

[6] Andreas Inderst, “Adidas AG,” Macquarie Research, 18 February 2017, via Thomson Reuters, accessed November 2017

[7] Richard Weiss, ‘Adidas Brings the Fast Shoe Revolution One Step Closer’, Bloomberg, 5 October 2017, [URL], accessed November 2017

[8] “Adidas’s high-tech factory brings production back to Germany,” The Economist, 14 January 2017, [URL], accessed November 2017

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5 thoughts on “Adidas: Revolutionizing the Supply Chain with SPEEDFACTORY

  1. Thanks for pulling this together – was an interesting read.

    Regarding your question around SPEEDFACTORY and its future prospects, I think this technology will likely supplant the traditional factory model over the long-term; however, I would be curious to see what the actual costs and forecasted vs. current returns are for developing these factories. Thus far, it would appear Adidas is not disclosing those exact figures, but the financials do indicate a fairly large increase in both capex and research and development spend (capex growth of 26.9% and 29% for FY16 and YTD17, respectively). [1] [2] [3] Assuming Adidas is able to generate an appropriate return on capital for the large fixed costs associated with these automated factories, we’ll likely see more and more capital go into the ground.

    [1] Marc Bain, “Adidas can now make specialized shoes for runners in different cities, thanks to robots,” https://qz.com/1081511/adidas-can-now-make-specialized-shoes-for-runners-in-different-cities-thanks-to-robots/, accessed November 2017.
    [2] Adidas AG, Adidas Annual Report 2016, https://www.adidas-group.com/media/filer_public/a3/fb/a3fb7068-c556-4a24-8eea-cc00951a1061/2016_eng_gb.pdf, accessed November 2017.
    [3] Adidas AG, Adidas Nine Months Report 2017, accessed November 2017.

  2. Thank you for posting Heejin — this is a great article. I have two broad questions/reactions:

    First, I am not convinced that SPEEDFACTORY will lower production costs. Although these factories use fewer materials & lighter transportation/logistics costs, I doubt all of the production can be automated: labor costs are quite high in places like Germany and Atlanta (in addition to the capex that the previous commentor mentioned). My recommendation here is for Adidas to use SPEEDFACTORY for high margin “fashion” items (as opposed to “basics”), for which consumer preferences are hardest to anticipate in long time horizons. However, keeping production of “basics” (e.g. white socks, black logo t-shirts) in Asia is likely the long term equilibrium.

    Second, in addition to the supply chain considerations, I would recommend that Adidas leverage this initiative heavily in their marketing. Engaging with customers in the product development process not only allows brands to quickly deliver the best product, it also provides them with a myriad of ways to make the customer feel valued. For example, if a customer designs a custom sneaker, use it as an example on the website and show them how many other customers have purchased their new design.

  3. Heejin raises a great question in the end by asking, “Will SPEEDFACTORY eventually replace the conventional production in Asia?” I strongly believe that automation will replace conventional methods, perhaps not immediately but definitely in the decades to come. Companies will increasingly prefer to decentralize manufacturing in multiple locations as cost and time to manufacture reduce as a result of automation. I am very fascinated by AI and often enjoy reading about the field to learn more about what robots would mean to our jobs in future and to mass production centers such as China. I learned that in the next few decades, about 56% of all salaried workers in Cambodia, Indonesia, the Philippines, Thailand, and Vietnam could be displaced by automation and advanced technologies, such as 3D printing. Robots, for instance, are increasingly handling the labor previously done by low-skilled workers in industries such as automotive and electronics manufacturing. For governments and employers willing to educate and train workers for new, high-tech jobs, the shift could benefit all as it raises productivity and wages. But employers and countries that continue to rely on low-cost manual labor as their chief competitive advantage risk being left behind in the global economy [1].

    Endnotes:
    1. Bain, M. (2017). Robots are set to take the jobs of millions of Asian workers in the coming years. [online] Quartz. Available at: https://qz.com/727102/robots-are-set-to-take-the-jobs-of-millions-of-asian-workers-in-the-coming-years/

  4. The Speedfactory vs. conventional Asian plants question you raise reminds me of one of the case we saw in class, in which a Chinese glass manufacturer had to decide where to locate its production to serve the US market.
    I do not believe that from a cost standpoint the SpeedFactory is able to compete with operations in Asia today, as my guess is that this high end facility (i) probably requires highly skilled workforce to be run for now (including engineers) and (ii) may deal with significant amount of re-work and idle time due to necessary adjustments in processes implemented. Nevertheless, and while Adidas will move along its learning curve with automated operations, we can expect Speedfactory to be able to run at lower cost in the near future thanks to productivity gains and increase in autonomy, even more so as wages are rising in Asian countries.

  5. Thank you Heejin – this is a great read. It is clear that consumers will continue to demand more customization going forward, and as you mention, competitors are all creating similar programs to answer this customer need [1]. Accordingly, the customer promise for sporting apparel manufacturers is changing – consumers will increasingly demand ‘unique’ sporting apparel. Adidas has no choice other than to respond by creating its SPEEDFACTORY program. The key to outcompeting other apparel retailers will be in how Adidas manages to translate its investment in this program into a value-added service for its end consumer. My concern is that Nike has historically been better at managing its marketing campaigns around new products [2]; Adidas will need to improve its ability in this area so as to ensure it does not end up losing market share to Nike and other competitors.

    [1] Athletic Footwear Market in the US 2016-2020: https://www.technavio.com/report/usa-general-retail-goods-and-services-athletic-footwear-market-us-2016-2020?utm_source=T2&utm_medium=BW&utm_campaign=Media
    [2] Nike Football: World Cup 2010 South Africa: http://www.hbs.edu/faculty/Pages/item.aspx?num=40531

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