Question

Adidas Runs Into Supply-Chain Problems in Crucial North American Market

Shares fall amid concern the sporting-goods maker could lose ground to rival Nike

Adidas Chief Executive Kasper Rorsted, speaking Wednesday, said the company didn’t have the manufacturing capacity to keep up with growing demand for its midprice apparel.By Sara Germano

Updated March 13, 2019 9:15 a.m. ET

HERZOGENAURACH, Germany— Adidas AG ADDYY 1.48% said a supply-chain bottleneck in North America would prevent it from meeting demand for its products in coming months, sending shares down amid concerns the world’s second-largest sporting-goods makercould lose its footing in one of its most important markets.

Chief Executive Kasper Rorsted said the company didn’t have the manufacturing capacity to keep up with growing demand for its midprice apparel, a problem he estimated would cost the company between €200 million and €400 million ($225 million and $450 million).

Shares of Adidas fell 3% in early trading Wednesday.

Adidas has redirected investments and management resources to North America over the past four years to better compete with industry leader Nike Inc., and the market has become one of its most important. Revenue in North America adjusted for currency movements rose 15% to €4.7 billion in 2018, about a fifth of overall sales, tied with Asia-Pacific as Adidas’s fastest-growing sales region.

Mr. Rorsted said the supply-chain challenges had arisen from strategic decisions Adidas had made earlier as it began sharpening its focus on the U.S., where it traditionally has the lowest market share relative to its competitors.

“Since our strategic position was smaller, we decided to build the brand at the top, then move into the midtier,” he said.

As the company moved to expand its wholesale relationships in the modestly priced apparel sector, he said, manufacturing demand couldn’t keep pace.

The supply-chain problems present a further challenge for Adidas, which was already contending with flat sales in its home market of Western Europe, increased competition from rival brands, and shifting consumer tastes. Like all sportswear brands, Adidas offers a range of products—some for sport, some for fashion—and demand can change depending on trends or cyclical events like an Olympics or World Cup.

Adidas said it had stalled in Western Europe partly because of strong demand for fashion products and weak demand for sport gear, a direction that it has been working to correct for much of 2018. Globally, the company said it is shaking up its assortment of some of its core sneaker products to more proactively manage demand.

Mr. Rorsted said the company has taken about €500 million worth of its flagship midtier Superstar and Stan Smith sneakers off the market, in response to slowing demand after shoes—best sellers in recent years—began to fallout of favor.

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Meanwhile, Mr. Rorsted said the company is “changing the business model” for its partnership with rapper Kanye West, whose Yeezy sneakers have been a focal point of Adidas’s growth strategy for the high-end sneaker market. The company will continue to launch high-end Yeezy shoes in some deliberately small quantities, but will offer other Yeezy models to the mass market.

“In a normal year, we’ll have between 20 and 30 launches of Yeezy products, where it used to be around two or three,” Mr. Rorsted said.

The company said it expected sales to grow between 5% and 8% on a currency-neutral basis in 2019, including the 1-2% negative effect from the supply chain issues.

Analysts at Baader Helvea said they expected the slower forecast would cause a negative share-price reaction, even as the company’s full-year outlook was in line with consensus.

“But the problems should be solved in the course of the year and sales-growth momentum should increase,” said Baader Helvea analyst Volker Bosse.

The German company said net profit for the quarter ended Dec. 31 was €108 million, compared with a loss of €41 million a year earlier. Sales for the quarter increased 3.5% to €5.23 billion.

— Patrick Costello and Max Bernhard contributed to this article.

Write to Sara Germano at [email protected]

QUESTIONS:

	1. (Introductory) What is preventing Adidas from meeting demand?
	2. (Introductory) What failures occurred at Adidas that caused the shortages? Be sure to include both internal and external factors.
	3. (Introductory) What could Adidas have done proactively to prevent these shortages?
	4. (Advanced) What markets does your company serve that can be trendy or cyclical? How does your company plan for demand in these markets? What can your company learn from Adidas's mistake?
	5. (Advanced) How does your company forecast and plan for demand changes? What has worked well? What aspects need improvement?

Answer 1

Dear Ms Sara,

Greetings for the Day!!

Trust you are doing well,

I would like to discuss on Supply-chain problems at Adidas. The 1.48% supply-chain bottleneck in North America is preventing Adidas from meeting its demand. Aa a result, the share price will go down and be a loss to Adidas in the market. The company did not have the manufacturing capacity to meet up the growing demand for its mid-price apparel. This could cost the company between €200 million and €400 million ($225 million and $450 million) and reduce the share price also. The company moved to expand its wholesale relationships in the modestly priced apparel sector but the manufacturing demand couldn’t keep the pace, resulting to shortage. Their strategic decision was wrong according to my point of view, as they decided to build the brand at top and then move to the mid-tier. To proactively prevent these shortages, they could have grown slowly by targeting mid-tier first then building the brand at top. Even after expanding with modestly priced apparel or mid-price apparel, the manufacturing capacity was a big concern and rather than launching new products they should have focused on meeting demand of existing product to get more customer satisfaction and growing slowly over the time with best output in each segment. It had also stalled in Western Europe partly because of strong demand for fashion products and weak demand for sport gear. It was facing supply chain problems and challenges like- increased competition from rival brands, and shifting consumer tastes in Western Europe.

Serving the housing market or travel industry or clothing market is the strategy what our company follows as it is cyclical and trendy market at the same time. The demands over several markets may depend on economic growth and recession. The production should be in a way that people can live without certain things at time of recession. As Adidas focused on directly moving at top and failed miserably with supply chain demand shortages. Our company would go with the flow, by gradually growing over time. It would first try to meet demand for a product within a specified period of time and then think of expansion. Doing one or more thing without proper planning would result in huge loss.

My company always follows a simple principle or strategy- taking orders from client, getting appropriate production done within a specified period of time, making sure that the demand is satisfied, delivery the best quality product to the client at shorter time period. This strategy has worked well for us. It helped in proper supply chain management, by producing or manufacturing a little more than the actual demand. By training and educating the employees or labours of manufacturing unit to use modern technology and smart way to produce a product at shorter time frame would help to meet the demand always. Any increasing demand, is well maintained and managed by the Store Manager who keeps hold on the inventory available at the current period and how much more is required. Time management is very important for meeting the demand. The employees should be given proper working conditions and positive work environment to work at so that they are able to give best possible output. An improvement in maintaining and managing stocks, and moving ahead in competition by using smarter way or shorter way in supply chain management is always required.

Hope the things discussed is helpful for the near future and overall economic growth.

Thanking You,

Your Sincerely

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