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W(H)ITHER B2Bs?

Read this article to

  • Know how B2B are changing the e-commerce landscape
  • Understand the intricacies in B2B strategies
  • Be aware of what organizations should do to succeed in the marketplace

Do B2B have a future, or are they bubbles waiting to burst? While the media and researchers offer conflicting views on this, without a doubt the dotcom bust has bust taken the sheen off net-based business models. New players are now treating a cautious path. But B2Bs are definitely here to stay. What should the players do to remain in the game?

The press does play favorite…. sometimes! Dotcom obituaries have given way to essays on B2Bs. Hardly a day passes when our senses are not impinged with B2B strategies, success stories, disintermediation and the impending B2B doom (or boom). Consider what various research and consultant groups have to say.

  • Money spent on B2B transactions already surpasses consumer transactions 10-1 (Aberdeen Group)
  • B2B is estimated to become a $2. 7 trillion worldwide industry by 2004 (Forester Research)
  • Indian has the potential to earn revenues from e-business solutions worth $ 10 billion by 2008 (Nasscom-McKinsey study 1999).

At the same time, we hear rumors of Ariba closing down operations in India, stock prices of major B2B solutions providers plummeting and net-based companies incurring quarterly losses. More recently, the Gartner Group has predicted a bloodbath in the Asian B2B segment, when ninety per cent of the existing B2B (in Asia alone) will perish.

Businesses have been communicating with each other since the beginning. What has changed, however, is the technology that carries the communication, from pigeons to mail to fax to EDI…and now to communication via the internet. This has opened vistas of opportunity like never before.

Classifying B2B marketplaces on the basis of mutually exclusive categories can be erroneous because newer models of B2B are still evolving, and there is much overlapping in the types of transactions and services rendered in different marketplaces. Nevertheless, B2B companies can broadly be categorized on the basis of nature of ownership, types of transactions and services rendered. They can be private or public, horizontal or vertical, infomediaries, procurement exchanges, brokering sites and third-party marketplaces.

Indian scenario
In India, through the exposure to B2B marketplace is still limited, we do have all types of companies. “Apart from the PC penetration in India being lower than other parts of the world, the trends are the same in terms of services and functionality provided by B2B companies,” Says Devangshu Dutta, Director, LinkApparel, that not only links buyers and sellers of apparel industries but also provides them supply chain optimization and other value added services.

In India a large number of B2B portals provide simple catalogue services-providing information on the availability of items to buyers and suppliers, thus acting as infomediaries. They basically provide a matchmaking platform between buyers and sellers, with services like Request of Quotation (RFQ), free listing, queries, etc., with little or no auction services. Then there are companies that provide multiple bids auctions, reverse auctions and managed auction services like SteelRX.com and LinkApparel.

There is also an emerging trend of large players in a particular industry segment coming together to form a private exchange. This has happened more in the steel (metaljunction.com – a collaborative effort on the part of SAIL, Kalyani and TATA) and automotive sectors. We also have examples of large companies having created private B2B exchanges for transaction between their own suppliers and dealers, like LG Electronics and Samsung, for instance.

India also has the advantage of the presence of global B2B solutions giants like Sesame, Ariba, and Commerce One. “We are consciously bullish about the Indian market. India has big IT and healthcare companies, and its telecom sector is exploding. “The economy is doing well and all this presents very good business prospects for B2B solutions,” avers Seetoh Hon Chew, COO, Sesami Inc.

Emerging trends
The dotcom bust has brought to the fore the disadvantages of a purely net-based business model. “A ‘click-n-mortar’ approach is being adopted as market realities have made the players realize that it is important to service the customer from a physical location,” says Rishi Sahai, Investment Principal, Infinity Venture Fund, a VC firm that has invested in many B2B startups. “Complete online strategy is not possible in the near future even in technologically advanced countries like the U.S. For this every segment in the value chain should be able to communicate with each other,” contends Anurag Saraf, CEO, SteelRX, a B2B marketplace for the steel industry. “We have a very strong offline model, with representatives in six cities who are in constants touch with the customers, ” he says.

“It is becoming increasingly apparent that there is little value in just moving transactions online, ” feels Asutosh Padhi, Associate Principal, McKinsey, who tracks B2B trends worldwide. “Real economic benefits from B2Bs lie in services around transactions, that enable ‘real world’ reductions in coordination and processing costs, cycle times and inventory levels,” he asserts. He foresees broad-ranging alliances between technology players and providers of real-world services such as quality assurance, logistics and payments.

Double-edged sword
Unlike B2Cs, B2Bs are better-evolved; the technology is more sophisticated and entry barriers are great. Critical mass is achieved with greater difficulty and business models are more defensible. “The threat is of several players with inadequate experience tying to attack crowded vertical with similar value propositions. Eventually such players will head towards bankruptcy,” asserts Sahai.

“In India, like anywhere else in the world, when a hype is created everybody rushes to it as if it was gold, but only the serious players who understand the market dynamics will get through,” emphasizes Dutta. “There are a lot of me-too and look-alike companies proliferating. So one has to either be unique or very strong – in terms of money and the relationships with buyers and sellers – to survive,” he says.

For Rakesh Bhatnagar, CEO, Net4barter.com the biggest threat is attitude. “People spends so foolishly and assume so freely without practicality, that the whole business model goes away. We have to keep in mind that like in offline businesses even B2B need some gestation period.”

   
On the future opportunities for B2Bs, Sahai shoots a typical VC proposition. “The numbers are compelling. The market will be $2.7 trillion (according to Forrester Research) by 2004 ($1.4 trillion if you exclude extranets). If the B2B marketplaces make even one per cent of this as transaction fees, then revenues would amount to $27 billion. On an average if 50 vertical emerge out of the chaos, and if two competitors emerge per vertical, then revenues would still be $270 million each.”   Unlike B2Cs, B2Bs are better-evolved; the technology is more sophisticated and entry barriers are greater
   

 

In effect there is tremendous opportunity for companies, and huge growth potential. Padhi agrees with this observation and feels that the crux of the whole matter is who is going to capture the real value first. The greatest opportunity these exchanges offer is for the existing companies, as it will not only significantly improve their performance – since in India supply chains are highly inefficient and fragmented – but also help companies in significant ‘supply consolidation’. Large suppliers will gain from B2B initiatives.

“It is the SME segment that has gained the most from B2B initiatives. SMEs have not only expanded their business reach across India but are actually generating revenues from it,” says Brijesh Agrawal, CTO, Indiamart.com, an online marketplace that focuses on the SME segment.

Benefits: Are they for real?

   
Industry players believe that the introduction of e-commerce and online exchanges have definitely brought about benefits in more ways than one. Apart from the lower running costs, many feel that there is better coordination between upstream and downstream operations along the supply chain. There is also greater transparency when it comes to price, even for equipment and services. With increased ability to track inventory, companies can now reduce their minimum inventory levels, thus saving storage costs. Dutta feels that even achieving just the right inventory levels can bring additional profit margins rather than only cost savings. B2Bs have also expanded in an unprecedented manner, enabling the market reach of both buyers and sellers, even making price negotiations (auctions, discussions, RFQ/REP, etc.) from remote locations distinctly possible.
  B2B is a new concept. People have to be educated, money invested and infrastructure built. But, promises about B2Bs are definitely not overstated.
    Sanjeev Bhat, CEO, Radico Export and Import Ltd., which is listed with indiamart.com claims to have closed orders through Indiamart worth $100,000 since 1997. “The same orders that took us 30 days to close, we now close within 48 hours,” he informs. However, Vimal Bhatia, proprietor of Achal Bhatia & Sons, a company dealing in medical equipment has had a very bad B2B transaction experience, “I sent goods worth $5,000 to a U.S.-based firm and never got paid.”

The greatest disadvantage of the internet business model is that one can’t simply trust the other party. There are fly-by-night- operators lurching on the net to fleece gullible suppliers. “An intermediary could have simply averted the whole episode,” adds Bhatia. Padhi considers the potential benefits of B2Bs to be underestimated. “It is just a matter of time. People expect miracles out of IT systems, but there is a lead-time involved in terms of new technology adoption. To get the benefits, the entire eco-system the company works in, has to embrace the technology and that takes time,” adds Padhi.


Disintermediation: Myth or reality?

   
Industry players believe that the introduction of e-commerce and online exchanges have definitely brought about benefits in more ways than one. Apart from the lower running costs, many feel that there is better coordination between upstream and downstream operations along the supply chain. There is also greater transparency when it comes to price, even for equipment and services. With increased ability to track inventory, companies can now reduce their minimum inventory levels, thus saving storage costs. Dutta feels that even achieving just the right inventory levels can bring additional profit margins rather than only cost savings. B2Bs have also expanded in an unprecedented manner, enabling the market reach of both buyers and sellers, even making price negotiations (auctions, discussions, RFQ/REP, etc.) from remote locations distinctly possible.
  Winning B2Bs
  • Backed by existing players i.e. incumbents
  • Business model should be something more than pure procurement only model
  • Revenue model has to be focused towards value added service
  • Incumbents have to agree to a governance model that makes it a separate profit-making company.
   

 

“Disintermediation will surely happen as far as brokering of information is concerned. Traditional agents and dalals feeding on the opacity of the whole transaction will surely move out,” points out Kumud Goel, MD, KLG Systel, which has created a B2B marketplace for the construction industry. Padhi considers disintermediation unlikely, and points out that in many industries intermediaries play a very valid role their function much beyond mere match making, such as credit risk, providing finance, holding inventories, etc. It might happen in some small industries but that is not going to be a general trend. “What will happen is that the lower order intermediaries will evolve quite substantially and they will focus on the higher value-added activities”, says Padhi.

Integrating SCM and CRM
ERP transformed the entire transaction processes internal to the organization. But B2B is everything that happens outside the organization, whether on the supplier side or the customer side. Given this split, companies have the option of implementing their own independent SCM and CRM solutions. In Padhi’s view, more companies will go for independent CRM solutions, since there is a perceived risk that data needs to be proprietary and therefore needs to be kept within the company. On the supply side, companies will collaborate to create standard solutions, since each supplier supplies to many buyers. If buyers are offered different supply chain solutions in the same industry, it becomes difficult for the suppliers to participate in a meaningful way in the process.

“There is a strong need for developing a set of supply chain standards, with some basic definition of what purchase order, inventory information, etc. are,” states Padhi.

For Dutta the key to SCM in a B2B environment is “active collaboration” between organizations in all the processes, right from product development to order management. Saraf feels that SCM and CRM integration is a prerequisite for a wired world.

Logistics bete noire
Generally speaking, logistics involve an entire gamut of things – sourcing requirements, inventory management, demand estimation, order tracking, delivery logistics, etc. “Optimal logistics demand that the right quantity of the right product reach the right place at the right time,” says Bhatnagar.

   
COMPARATIVE B2B SCENARIO : INDIA AND U.S.
Parameters India U. S.
SCM Inefficient Efficient
Procurements (Focus) Direct Goods Indirect goods
E-biz Infrastructure (Legal, regulatory) Developing Well-established
Logistics Weak Strong
    Apart from the main logistics bottlenecks in India like truck strikes and transportation delays, there is no efficient system like a common information platform where one can access the stocks or status of delivery.

“Problems of logistics are real. Creating an infomediary is not going to help. It is not only the information which constraints the valuechain, but also the infrastructure supporting and enabling it,” says Dutta.

CIOs’ strategy
The emerging B2B scenario will pose many challenges to CIOs. What should be their strategies and priorities? Padhi feels that the generalization of the role of CIOs will be difficult, but feels CIOs will have three options: first, to setup their own IT systems and get their own packages; second, to join independent exchanges; and third, to get along with other industry players and form their own private exchange. “CIOs should carefully analyze the benefits of each of the options in terms of time and cost savings, standardization, before taking a decision,” contends Padhi.

For Dutta the strategy is “do not go by fads”. (Read Dr. Milind Oka’s series in CIO Enterprise) Companies need to identify the critical areas of the business, for only an honest assessment vis-a-vis competition will serve as a global benchmark.

Roadblocks
The roadblocks for any new concept are not confined only to infrastructural areas. They also have a lot of psychological implications. B2Bs are no exception.

Speed, connectivity, absence of proper payment gateways and bandwidth are its main adversaries. Bhatnagar feels that security is also a major issue. “There is a psychological discomfort when it comes to payment through the net,” he says. However, for him, infrastructure is a non-issue. “If you create a solution which is resource hungry and bandwidth hungry then you have a problem. So you need to create an environment that is compatible to Indian systems,” he asserts.

For Dutta the biggest issue is mindset; that is, creating the right mental framework for adoption of the system. Fear of what is going to happen in future in the light of economic slowdown and globalization, uncertainty in terms of policy adoption, and doubt in terms of success of the policy are the major factors that impede e-commerce transactions.

For Padhi, huge investments in supplier upgradation programmes and the absence of regulatory infrastructure are the major bottlenecks. Saraf does not consider security as a big issue since most of the transactions are done offline. “For basic security concerns there are standard solutions that are used worldwide,” he contends.

The future
Gartner Group’s forecast coupled with Cassandra’s prophecy about the impending B2B doom has put a question mark on the future course that B2Bs are more at a conceptual and trial stage not only in India but also in the U.S., which makes large-scale B2B transactions look like a distant dream.

“In India government sectors are yet to take the initiative for B2B commerce. And since the government is the biggest buyer in many sectors, the private players will not be able to sell anything to them online,” muses Goel.

   
“People are expecting too much too soon,” quips Saraf, adding that it was like sowing a seed and expecting fruits even before the sapling has sprouted. “It is a very new concept and people have to be educated, money invested in new technology, and infrastructure built. B2B’s promises are definitely not overstated,” he says.
  Like offline businesses even B2Bs need some gestation period
    Padhi sees the B2B future primarily in two forms: as consortium-driven exchanges and e-nablement of different functions within the companies.

Hype or no hype, B2Bs are here to stay, but the future will see many obituaries written about players jumping onto the B2B wagon without getting their basics right.

Supply Base Consolidation: A Step Too Far?

For many decades from the early 1900s onwards, retailers followed a ‘trader’ or ‘merchant’ model, largely buying from those suppliers who could provide the best prices. Of course other parameters were considered as well, such as desirability of the product, but price was the major driver. It was also rare for retailers to go out to look for suppliers – suppliers normally turned up at the merchant’s doors to sell their wares.

There was little, if any, strategy to selecting the ‘supply base’. Retailers were much too busy building their presence in the market, opening new stores, acquiring new markets, growing their product offer; in short, concentrating on the business of selling to consumers. International trade existed, as it has since the dawn of history, but was led by traders. Retailers, by and large, followed the domestic sourcing route.

The retailer goes abroad

The 1950s were driven by the need to rebuild war-shattered economies through trade and economic cooperation. Bi-lateral, and later multi-lateral, trade agreements were brought into force. An awareness of other countries around the world was also brought into sharp focus through two successive world wars, particularly the second. Retailers began to explore supply bases outside their home countries, and from the 1960s to the 1990s this international trade grew by leaps and bounds. Naturally, as the pioneers went overseas, so did their competitors – it is very hard to compete profitably, when your rivals are buying comparable merchandise at much cheaper prices.

As a result, by the early 90s the supply base of any large retailer in the major consuming markets would take in more than 30-35 countries from which products might be sourced. And as the number of supply countries grew, so too did the number of suppliers. It would not be unusual for 500-1000 suppliers to be dealing with a single retailer.

Consolidation, conservation and conservatism

Retailers such as Wal-Mart in the USA, M&S in the UK, Carrefour in France and many others have had preferred suppliers who grew along with them. These suppliers were typically based in the home country of the retailer, and set up production units or sourcing organisations overseas from where they could supply goods to their customer at a competitive price. In some cases, their sourcing strategies were driven by their own analyses; in others the retailer led the way (such as M&S or Wal-Mart identifying the next preferred supply country).

In the 1990s a scientific sourcing principle began to be applied. It was good to cut down supplier numbers, since this reduced the management effort on the part of the buyer to constantly look for new suppliers and maintain current relationships. Terms such as ‘key’, ‘preferred’ or ‘strategic’ supplier came into vogue.

As an example, witness the dramatic supply base reduction undertaken by most large retailers in the UK. Some organisations even looked to supermarkets to understand and apply their supply base management principles, where product categories were dominated by, or completely split up between, less than four suppliers. In a few cases, it reached such extremes that one supplier virtually controlled a retailer’s entire product lines.

Some organisations even quantified the cost of moving into new supply countries in an attempt to understand whether it was worthwhile and how best to shape their sourcing strategy.

At the end of the 90s and into 2000, however, there seem to be rumblings among retailers about the need for some more diversity in their supply bases. Statements such as “we are uncomfortable with our overexposure to country X”, or “I wish I could manage to meet some more suppliers to get a feel for what is happening out there in the marketplace – otherwise our range ends up looking like everyone else’s”, or even, “sometimes we feel we miss out on innovative factories because we are so deeply bound with our existing supply base”, reflect the general consensus.

So, the question is, has supply base consolidation been taken too far?

Time for a new deal

The first step should be to acknowledge that the business of retailing needs a healthy balance between predictability and innovation. Predictability, as much as is possible in sourcing, could be represented by relationships with known and trusted suppliers. It would take a very strong individual, and a very large safety net, to work every season with large numbers of unknown, new suppliers. It would also require a lot of management time and effort to keep educating new suppliers about the business and its needs.

However, equally, it must be acknowledged that the fashion business is not like automobile or aircraft businesses where practically the entire market and supply base is known.

Nor is it as expensive to develop new products or product components. In the automotive industry new models cost hundreds of millions of dollars to develop – and with such high stakes, buyers tend to select their suppliers carefully and, once the relationship is established, stick to the relationship for a fairly long period of time, with both parties investing resources in it for mutual long-term gain.

In the fashion industry, on the other hand, most product development investment does not exceed a few thousand dollars. This is well within the capability of not only the largest preferred suppliers of the large retailers, but most of the supply base around the world. Whether design-led or technology-led, new products and new looks are constantly being created. Similarly, innovative business practices that generate more responsive factories, improve quality or reduce costs, are not the sole domain of large, old and established companies.

The two critical areas that need to be addressed by any retailer are:

  1. A focus on cost/margin/profitability management: how can we make the management of sourcing more efficient in terms of effort and cost?
  2. An eye towards innovation and risk-management: how can we tap into new suppliers without expending too much effort in development only to find that the relationship does not work out?

There are many answers to these questions. One of them, which provides a structure or framework in which to work, is the link between product-type and sourcing strategy.

In this, as a first step, a buyer must make a mental division between ‘largely predictable’ products and ‘fashion’ products. Largely predictable products include not only basic or staple items, such as the three-pack of underwear or a $150 suit, but also seasonal items (such as swimwear) for which sales vary dramatically from summer to winter but follow a rhythmic pattern, with some variation, over the same season from year-to-year. For one company such predictable products might be 80 per cent of the business, while for another it might be no more than 20-40 per cent of the entire range.

For such products, supply base hopping is almost certainly the wrong strategy to follow. The sensible strategy would be to concentrate energy on developing relationships with certain key supply bases and suppliers who provide a long-term sustainability or constant improvement in terms of cost, quality and other performance parameters.

On the other hand, there are other products that follow the dictates of changing fashion moods more closely. For these products, putting a long-term commitment on any significant proportion of this segment to specific suppliers can be counter-productive. It can create a sense of security in the supplier, or even the buyer, possibly reduce the drive towards product and service innovation, and maybe even make the overall sourcing-supply relationship relatively inefficient over a period of time.

There is a sense of ‘supply dependence’ associated with supply consolidation, in comparison to the sense of ‘interdependence’ that comes from a flexible (even though not fully open) network of buyer and supplier relationships. A cosy ‘strategic’ relationship that assumes a two-way exclusivity also creates a relatively narrow channel of ideas and developments, and becomes largely process-driven at the cost of creativity. This is fine if you are selling the same product year-in, year-out; but certain suicide (or slow poison, at best) if you are in any part of the fashion market.

This is not to imply that strategic relationships can’t work in the ‘fashion’ arena. But make sure that in such a relationship the suppliers who are worried, nay paranoid, about their own survival. In the best organisations, uncertainty brings about creativity – pick a strategic supplier like that, and you’ve picked a winner!

Achieving the golden mean

Of course, a perfect balance between long-term strategic suppliers and new relationships is as elusive as the perfect business strategy. If one set of rules governed sourcing in the apparel and textile industries, the sector would have been consolidated around this many decades ago.

Previous experience is certainly a worthwhile guide to selecting suppliers and supply countries. But the competitiveness of supply bases is changing all the time, and suppliers are constantly developing new capabilities around the world. As someone once said, in business relying only on past experience is like driving a rally sports car blindfolded, while the navigator guides you looking through the rear windshield!

By using the tools to discover, build and maintain new relationships efficiently, most buyers should keep their doors open for new suppliers to walk in and display their capability. Closed doors mean closing the possibly to innovative products, significant margin improvement, and even new methods of doing business that might bring about tremendous improvements in ‘sourcing profitability’.

In a different context, a presentation at the National Retail Federation (NRF) seminar in the USA in 1999 by consultant Kurt Salmon Associates mentioned the potential need to move away from the ‘super-specialised’ and ‘super-analytical’ role of today’s retail buyer to bring in shades of the ‘merchant’ of the past.

The truth is that successful retailers have never really abandoned the merchant principle. This degree of freedom is essential to maintaining the healthy influx of new ideas that keep a retailer’s brand alive with the customer and keep it moving ahead in the market. During the selection process, smart buyers even look at the customer list of their suppliers with a conscious effort to imbibe product trends, technical knowledge and best practices from other companies in their own or other markets.

Managing diversification

The key factor that needs to be managed is the effort on the buyer’s part. If a buyer could manage more relationships with the same amount of time and effort, he would probably make more effective use of his own and his supplier’s capabilities to create a more dynamic product and service offer.

Two primary tools come to mind for creating and managing a more diversified supply base: collaboration and technology.

In ‘collaborating’ with the supplier, the idea is to see both buyer and supplier as part of the same demand-supply chain. In fact, take it right back to the supplier’s supplier. Understand that the processes run across organisations, rather than residing in any one – the buyer has as much responsibility and accountability in the sourcing process as the supplier. Information must be shared more transparently, and the overall sourcing process must be managed together, beginning from the product conceptualisation to final delivery. Brainstorming helps, ‘blame-storming’ doesn’t. This approach is as equally valid with a new supplier as with an old, trusted supplier. Good buyers already follow this approach, and it shows in their company’s market performance and financial results. And it does not even add lead-time; in fact, in many cases, it cuts down time.

Secondly, make use of emerging technologies. Don’t just depend on a company’s database or EDI systems. There are a number of tools available today which are relatively inexpensive and easy to use – from the basic supplier profiles available on the numerous marketplaces and exchanges around the world, to more advanced technologies that enable collaborative management of product development and sourcing process management.

There are even well developed systems that can act like virtual assistants, helping buyers and suppliers to keep track of order-specific tasks, and updating each other automatically of the status of these tasks. If you did not have to spend effort on fighting the fire caused by the task that you forgot yesterday, would you have a little more time available to speak to that new supplier whose profile you liked but just could not make the time to meet?

There is no quick fix, and each situation will be different. But I believe that for many buyers, the choices are becoming rather stark. Innovative or staid product? Market leadership, or complete loss of the pole position? Survival or decline? The choices that you make today have a habit of showing up in the profit and loss statements of tomorrow.

Supply base consolidation: a step too far?

The sourcing principles followed by many apparel organisations seem to be governed by apathy. Once supply relationships have been defined, it often becomes a struggle to change them. Yet keeping the supply base refreshed is probably one of the single most important functions that a buyer can perform explains Devangshu Dutta.

For many decades from the early 1900s onwards, retailers followed a ‘trader’ or ‘merchant’ model, largely buying from those suppliers who could provide the best prices. Of course other parameters were considered as well, such as desirability of the product, but price was the major driver. It was also rare for retailers to go out to look for suppliers – suppliers normally turned up at the merchant’s doors to sell their wares.

There was little, if any, strategy to selecting the ‘supply base’. Retailers were much too busy building their presence in the market, opening new stores, acquiring new markets, growing their product offer; in short, concentrating on the business of selling to consumers. International trade existed, as it has since the dawn of history, but was led by traders. Retailers, by and large, followed the domestic sourcing route.

The retailer goes abroad
The 1950s were driven by the need to rebuild war-shattered economies through trade and economic cooperation. Bi-lateral, and later multi-lateral, trade agreements were brought into force. An awareness of other countries around the world was also brought into sharp focus through two successive world wars, particularly the second. Retailers began to explore supply bases outside their home countries, and from the 1960s to the 1990s this international trade grew by leaps and bounds. Naturally, as the pioneers went overseas, so did their competitors – it is very hard to compete profitably, when your rivals are buying comparable merchandise at much cheaper prices.

As a result, by the early 90s the supply base of any large retailer in the major consuming markets would take in more than 30-35 countries from which products might be sourced. And as the number of supply countries grew, so too did the number of suppliers. It would not be unusual for 500-1000 suppliers to be dealing with a single retailer.

Consolidation, conservation and conservatism
Retailers such as Wal-Mart in the USA, M&S in the UK, Carrefour in France and many others have had preferred suppliers who grew along with them. These suppliers were typically based in the home country of the retailer, and set up production units or sourcing organisations overseas from where they could supply goods to their customer at a competitive price. In some cases, their sourcing strategies were driven by their own analyses; in others the retailer led the way (such as M&S or Wal-Mart identifying the next preferred supply country).

In the 1990s a scientific sourcing principle began to be applied. It was good to cut down supplier numbers, since this reduced the management effort on the part of the buyer to constantly look for new suppliers and maintain current relationships. Terms such as ‘key’, ‘preferred’ or ‘strategic’ supplier came into vogue.

As an example, witness the dramatic supply base reduction undertaken by most large retailers in the UK. Some organisations even looked to supermarkets to understand and apply their supply base management principles, where product categories were dominated by, or completely split up between, less than four suppliers. In a few cases, it reached such extremes that one supplier virtually controlled a retailer’s entire product lines.

Some organisations even quantified the cost of moving into new supply countries in an attempt to understand whether it was worthwhile and how best to shape their sourcing strategy.

At the end of the 90s and into 2000, however, there seem to be rumblings among retailers about the need for some more diversity in their supply bases. Statements such as “we are uncomfortable with our overexposure to country X”, or “I wish I could manage to meet some more suppliers to get a feel for what is happening out there in the marketplace – otherwise our range ends up looking like everyone else’s”, or even, “sometimes we feel we miss out on innovative factories because we are so deeply bound with our existing supply base”, reflect the general consensus.

So, the question is, has supply base consolidation been taken too far?

Time for a new deal
The first step should be to acknowledge that the business of retailing needs a healthy balance between predictability and innovation. Predictability, as much as is possible in sourcing, could be represented by relationships with known and trusted suppliers. It would take a very strong individual, and a very large safety net, to work every season with large numbers of unknown, new suppliers. It would also require a lot of management time and effort to keep educating new suppliers about the business and its needs.

However, equally, it must be acknowledged that the fashion business is not like automobile or aircraft businesses where practically the entire market and supply base is known.

Nor is it as expensive to develop new products or product components. In the automotive industry new models cost hundreds of millions of dollars to develop – and with such high stakes, buyers tend to select their suppliers carefully and, once the relationship is established, stick to the relationship for a fairly long period of time, with both parties investing resources in it for mutual long-term gain.

In the fashion industry, on the other hand, most product development investment does not exceed a few thousand dollars. This is well within the capability of not only the largest preferred suppliers of the large retailers, but most of the supply base around the world. Whether design-led or technology-led, new products and new looks are constantly being created. Similarly, innovative business practices that generate more responsive factories, improve quality or reduce costs, are not the sole domain of large, old and established companies.

The two critical areas that need to be addressed by any retailer are:

  1. A focus on cost/margin/profitability management: how can we make the management of sourcing more efficient in terms of effort and cost?
  2. An eye towards innovation and risk-management: how can we tap into new suppliers without expending too much effort in development only to find that the relationship does not work out?

There are many answers to these questions. One of them, which provides a structure or framework in which to work, is the link between product-type and sourcing strategy.

In this, as a first step, a buyer must make a mental division between ‘largely predictable’ products and ‘fashion’ products. Largely predictable products include not only basic or staple items, such as the three-pack of underwear or a $150 suit, but also seasonal items (such as swimwear) for which sales vary dramatically from summer to winter but follow a rhythmic pattern, with some variation, over the same season from year-to-year. For one company such predictable products might be 80 per cent of the business, while for another it might be no more than 20-40 per cent of the entire range.

For such products, supply base hopping is almost certainly the wrong strategy to follow. The sensible strategy would be to concentrate energy on developing relationships with certain key supply bases and suppliers who provide a long-term sustainability or constant improvement in terms of cost, quality and other performance parameters.

On the other hand, there are other products that follow the dictates of changing fashion moods more closely. For these products, putting a long-term commitment on any significant proportion of this segment to specific suppliers can be counter-productive. It can create a sense of security in the supplier, or even the buyer, possibly reduce the drive towards product and service innovation, and maybe even make the overall sourcing-supply relationship relatively inefficient over a period of time.

There is a sense of ‘supply dependence’ associated with supply consolidation, in comparison to the sense of ‘interdependence’ that comes from a flexible (even though not fully open) network of buyer and supplier relationships. A cosy ‘strategic’ relationship that assumes a two-way exclusivity also creates a relatively narrow channel of ideas and developments, and becomes largely process-driven at the cost of creativity. This is fine if you are selling the same product year-in, year-out; but certain suicide (or slow poison, at best) if you are in any part of the fashion market.

This is not to imply that strategic relationships can’t work in the ‘fashion’ arena. But make sure that in such a relationship the suppliers who are worried, nay paranoid, about their own survival. In the best organisations, uncertainty brings about creativity – pick a strategic supplier like that, and you’ve picked a winner!

Achieving the golden mean
Of course, a perfect balance between long-term strategic suppliers and new relationships is as elusive as the perfect business strategy. If one set of rules governed sourcing in the apparel and textile industries, the sector would have been consolidated around this many decades ago.

Previous experience is certainly a worthwhile guide to selecting suppliers and supply countries. But the competitiveness of supply bases is changing all the time, and suppliers are constantly developing new capabilities around the world. As someone once said, in business relying only on past experience is like driving a rally sports car blindfolded, while the navigator guides you looking through the rear windshield!

By using the tools to discover, build and maintain new relationships efficiently, most buyers should keep their doors open for new suppliers to walk in and display their capability. Closed doors mean closing the possibly to innovative products, significant margin improvement, and even new methods of doing business that might bring about tremendous improvements in ‘sourcing profitability’.

In a different context, a presentation at the National Retail Federation (NRF) seminar in the USA in 1999 by consultant Kurt Salmon Associates mentioned the potential need to move away from the ‘super-specialised’ and ‘super-analytical’ role of today’s retail buyer to bring in shades of the ‘merchant’ of the past.

The truth is that successful retailers have never really abandoned the merchant principle. This degree of freedom is essential to maintaining the healthy influx of new ideas that keep a retailer’s brand alive with the customer and keep it moving ahead in the market. During the selection process, smart buyers even look at the customer list of their suppliers with a conscious effort to imbibe product trends, technical knowledge and best practices from other companies in their own or other markets.

Managing diversification
The key factor that needs to be managed is the effort on the buyer’s part. If a buyer could manage more relationships with the same amount of time and effort, he would probably make more effective use of his own and his supplier’s capabilities to create a more dynamic product and service offer.

Two primary tools come to mind for creating and managing a more diversified supply base: collaboration and technology.

In ‘collaborating’ with the supplier, the idea is to see both buyer and supplier as part of the same demand-supply chain. In fact, take it right back to the supplier’s supplier. Understand that the processes run across organisations, rather than residing in any one – the buyer has as much responsibility and accountability in the sourcing process as the supplier. Information must be shared more transparently, and the overall sourcing process must be managed together, beginning from the product conceptualisation to final delivery. Brainstorming helps, ‘blame-storming’ doesn’t. This approach is as equally valid with a new supplier as with an old, trusted supplier. Good buyers already follow this approach, and it shows in their company’s market performance and financial results. And it does not even add lead-time; in fact, in many cases, it cuts down time.

Secondly, make use of emerging technologies. Don’t just depend on a company’s database or EDI systems. There are a number of tools available today which are relatively inexpensive and easy to use – from the basic supplier profiles available on the numerous marketplaces and exchanges around the world, to more advanced technologies that enable collaborative management of product development and sourcing process management.

There are even well developed systems that can act like virtual assistants, helping buyers and suppliers to keep track of order-specific tasks, and updating each other automatically of the status of these tasks. If you did not have to spend effort on fighting the fire caused by the task that you forgot yesterday, would you have a little more time available to speak to that new supplier whose profile you liked but just could not make the time to meet?

There is no quick fix, and each situation will be different. But I believe that for many buyers, the choices are becoming rather stark. Innovative or staid product? Market leadership, or complete loss of the pole position? Survival or decline? The choices that you make today have a habit of showing up in the profit and loss statements of tomorrow.

   

© Devangshu Dutta 1998

This version of the article was published in just-style.com on 29 May 2001