Lessons in product transition and supply constraints, via adidas

One of the scary supply chain campfire stories I like to tell is of the CEO who stands in front of Wall Street to explain a revenue miss due to lack of visibility into the inner workings of its supply chain. A real-life version of which was recently lived by adidas. During its annual earnings call, adidas CEO Kasper Rorsted explained to investors that the company's slow sales growth in North America was attributed to supply issues as the company expands from high-end products into a mid-price range. According to Rorsted the volume increased faster than anticipated, and they didn’t respond quickly enough to the demand signal. Rorsted went on to add that it was a better problem to have than too much inventory. More on this topic in a separate post. It is important to note that the adidas case isn’t an isolated incident. Managing new product introductions and associated supply chain transitions is difficult in any industry. The fashion apparel and footwear industry faces its own challenges due to fickle consumer tastes and the added challenge of predicting the right combination of style, color and size in the right markets. This is one of those learning moments when each of us can introspect and ask “how would my company and I prepare for such a situation?” What are the processes and systems in place that would aid empowered people to prevent such surprises, to know sooner when something isn’t progressing to plan, and act faster to recover? What questions would you ask? Here’s a starting list. Let me know what you’d add to it.

1. What demand forecasts and assumptions would you capture as you plan such a transition from high-margin to mid-range?
2. Would your strategic planning process take into account all pertinent signals and data feeds?
3. In your pre-season planning, would you be able to play out multiple scenarios to evaluate various demand and supply situations?
4. As you get closer to season, would your demand planners have the right tools and analytics to know that demand was trending up or spiking?
5. How quickly would your supply planners see the impact of that rising demand?
6. Would your planners have sufficient control levers to increase overall supply or reallocate available supply?
7. Once they picked up on the rising demand, how quickly would they be able to assess its impact and assemble the right stakeholders, including your suppliers, to take timely action?
8. When would you know, with confidence, that you have no way of meeting all demand, and would miss revenue expectations and possibly cede market share?
9. What would that conversation be when your operations head takes responsibility for the situation and has to break that news to your CFO/CEO?
10. What’re the circumstances under which it’s ok to lose sales than have built inventory (and used promotion levers to shape demand)?

To be sure, adidas must’ve done a lot of things right, asked and answered many questions. Deciding to lower their growth projection publicly would’ve been the last recourse. Clearly, something didn’t go right, and therein lie lessons for them and all of us!