There are a number of issues here. First is the Adidas side of the story. NBA happens every year and unlike the Soccer world cup, the uniforms do not change very often. Though every year some new stars are created, the older players definitely do their job. The point of the two sentences is that the demand for the jerseys is more or less stable and obsolescence low. Given these parameters, outsourcing to Thailand would definitely make a lot of sense. "Moving manufacturing closer to the source of raw materials", as Adidas says, surely makes sense.
Adidas plans to continue making jerseys for college and amateur teams in the United States. Given the unstable demand in this sector, again this makes sense. However an increasing price differential between the US and Thailand (plus the cost of transporting bulky raw material instead of finished goods), Adidas may be forced to revisit this decision also.
Another issue is the statement that Adidas had promised ACO a five year deal based on which ACO had invested USD 1 million in new machines. At this point it would be difficult to say if this was true. It could be a political hype being created to force Adidas to reverse its decision.
In case it is true, it is again not something that has never been done. Companies are known to treat their vendors with disdain. Buyers of large firms limit their reach to the sales personnel of the vendors. Contracts are short term and the changes in schedules are high. While this may reduce the 'price' the firm pays its vendors, the 'cost' incurred by the vendor increases. The vendor has to compensate the drop in his profits. This is where the the vendor may resort to means that are not exactly ethical. He / she would definitely cut service levels to the customers in some form.
In some cases it is very easy for the buyer to shift vendors, but relatively difficult for the vendors to find new buyers. If the vendors in such cases do not have long term contracts they try to recover all their costs of capital and process changes in the first period of the contract. this would mean substantially higher prices for the buyer.
The message here is very simple. Toyota has been doing this for ages. The point is in continuation to my last post. Resorting to pressure tactics and changing vendors may create a mirage of reducing prices. However the increase of cost is sure to reflect somewhere. Unreliability (meaning increased inventory and lost capacity) and the increased firefighting efforts that we see in our firms are a reflection of these very unhealthy practices that we are following.
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