As part of the structural changes being implemented following its tie-up with Reebok, Adidas is centralizing distribution and logistic functions which were previously in the hands of their respective headquarters, their subsidiaries and their service providers, triggering annual projected savings of €20 million a year. Three-fourths of these cost savings will result from the integration of the distribution operations for both brands in the American and British markets into a common new global logistic operation, a process that already began in early April. The rest of the world will gradually follow suit.
Total annual savings of €175 million are budgeted within five years’ time from the consolidation of the distribution networks of Adidas and Reebok and other action throughout the supply chain, including €100 million in operating costs and €75 million in the shaving of purchasing costs thanks to the group’s new extended buying muscle. On the operating side, the bulk of the cost reductions should come from the merger of information technology functions, integrated media spending and other corporate functions.
The enlarged group is set to develop more than 100,000 distinct products this year and to source 500 million units of footwear, amounting to purchases of €3.5 billion. The group believes that, by using its higher bargaining power and the technical strengths of both companies, it could reduce the cost of these goods by €75 million annually in 3 years.
Unlike what happened after the acquisition of Salomon in 1999, when Adidas suddenly had to deal with entirely unfamiliar production processes for skis and inline skates, the company believes that the takeover of Reebok will enable it to further refine its own sourcing and distribution methods. The fact that both companies have adopted SAP supply chain management software over the past year will facilitate matters.
Among Adidas’ strengths, the group points to very tight relationships with a small group of manufacturers. This has enabled them to work closely together, for example for the establishment of specialist production lines for each category of footwear. In turn, this enables Adidas to turn out large quantities of products in a very short time. For example, it has produced and sold 750,000 pairs of the F50 Tunit, its latest football boot, in a matter of months.
Owing to these tight relationships, Adidas has sharply reduced its lead times over the last 7 years by implementing a series of so-called lean measures. Previously, at least 10 days elapsed between the time the production got started and the packing of the finished shoe, but in some cases this process has been cut down to no more than 72 minutes.
Adidas has been generally quicker than Reebok in delivering samples and other products to the market, facilitating its agents’ sales pitches, but both brands have been involved in quick replenishment models that have been appreciated by retailers. The new joint supply chain management organization spearheaded by Glenn Bennett, a new member of the top management who previously handled a similar function in Reebok, plans to develop a “best of class” solution to optimize these and other processes.
From next year, Adidas expects to offer replenishment of certain basic ranges in just 72 hours. In general, retailers will be able to place reorders for more merchandise from the group in the future, or get it automatically replenished. Futures orders currently represent about 70 percent of the overall business, but the ratio should decline over a period of time in the future.
On the other hand, Adidas executives acknowledge that Reebok could be used as the benchmark in terms of costing. This is partly explained by the fact that Reebok’s business is predominantly in the USA, where margins are tighter.
Under Bennett’s leadership, the group will tackle a reduction in joint purchasing costs through a new World Class Buyer program, which was recently outlined to suppliers in Hong-Kong. It aims to obtain more judicious supply contracts by introducing direct competition for certain segments, while deepening its relationship with leading suppliers. At the same time, the company should increase transparency on costs to stimulate further cuts.
