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June 17, 2003
The Indian textile sector has its roots going back several thousand years. After the industrial revolution in Europe, this sector in India also saw growth of an industrial complex. However, over the last 50 years the textile industry in India has shown a chequered performance.
Today the industry contributes around 14 per cent to industrial production in the country, is estimated to directly employ approximately 35 million people (in addition to the indirect employment in allied sectors), accounts for about 27 per cent of the country’s exports, and is, in sum, an important economic engine for the nation.
In part, the very diversity, scale and spread of the industry which has been its strength, has also been its weakness. Most people’s experiences and actions have included only part of the industry, rather than its whole. Thus, even government regulations and financial policies have never been able to adequately fulfil the widely varied needs of the different segments of the industry.
However, during the last 10 years, the industry’s actions, government policies as well as market events have begun to converge, providing several growth opportunities for the sector domestically as well as in the global market. As the MFA quota-regime draws to a close, India presents many opportunities for buyers, suppliers and investors to partner with its textile industry, and to profit from the partnership.
Vertical chain and variety of products
To begin with, the Indian industry is one of the few in the
world that is truly vertically integrated from raw material
to finished products. It covers fibre-production, spinning,
knitting and weaving, as well as apparel manufacture.
Among fibres, although cotton has the largest share (around 58 per cent of mill consumption), Indian industry has over the years steadily diversified its raw material base to include manmade fibres such as polyester, viscose, acrylic and polypropylene (accounting for around 39 per cent of raw material consumed), as well as other natural fibres (including silk, wool, linen). In fact, Indian companies have built global scale even in non-traditional areas (such as Reliance Industries in polyester, and the Aditya Birla group, which is the world’s largest producer of viscose fibre).
While accurate statistics for a comparable period don’t seem to be available to compare between Indian and China, India certainly has among the two second largest spinning capacities in the world. Also, this is continuing to grow and modernise – the current strength is at around 38 million spindles and 400,000 rotors. Through a steady stream of upgrading, this has emerged as a globally competitive supply base for yarn of various counts and qualities.
Fabrics have been a traditional area of strength, not just through millennia-old traditions of weaving, but through a series of industrialisation moves beginning in the late 1800s. The Indian weaving and knitting base today includes products as diverse as fine dress fabrics, shirting, worsted suiting, denim, fleece, jersey, flat/woollen knits, technical fabrics etc. Much of this diversification of fabric product base has occurred in the last 10-20 years as domestic consumption patterns have changed as well.
In apparel, far beyond the embroidered, beaded or sequinned dresses in women’s wear and bleeding madras shirts in men’s wear that so typified India’s image in the past, the country produces active sportswear, weatherproof outerwear, foundation garments, suits, socks, infant wear and a whole host of other products for all ages. Production of made-ups includes a wide variety of bed, bath and table linen, kitchen accessories, etc.
Competitive capabilities
Certainly, an abundant low cost labour base has been one of
Indian industry’s advantages. Various studies by consulting
firms such as Kurt Salmon Associates, Werner, Gherzi Textile
Organisation as well as other bodies have highlighted India’s
cost advantage, as well as the long-term sustainability of this
advantage.
What is more important is that, among this abundant workforce, the fabric or garment-making skill is very high as entire communities have participated in the trade and sustained and refined workmanship. In fact, workers in the Indian industry are often referred to as “kaarigar” (artisan or craftsman), even though recent trends of increasingly automated equipment have emphasised deskilling of the worker into an “operator”.
It is this existing needlecraft base that has enabled the Indian industry to retain its position as one of the key suppliers of apparel and textiles, and also add new products to its portfolio by rapidly learning the techniques.
In addition to this, Indian industry has consistently remained flexible in terms of production quantity and lead time. While typical production runs are governed by fabric colour minimums, India presents the possibility of producing quantities as low as to a few hundred pieces. This capability is especially critical in an unpredictable market where retailers and brands are looking to source ever-smaller quantities of product, increasingly closer to the season.
During recent years there has also been qualitative improvement in management assets. This is especially critical: as retailers and brands consolidate their businesses, they expect their suppliers to become more sophisticated and take on more roles that were previously done by the customer. Therefore, suppliers need to become more sophisticated in their management practices, processes and technology, which can only be built if the senior and middle management are well-educated and technically qualified.
So, building on top of the textile engineering base which began in the 50s, the 90s saw growth in “fashion management” studies, including marketing and merchandising, garment manufacturing technology, design management, fashion communications management etc.
Simultaneous growth of the organised branded market within India, as well as the entry of larger companies sourcing from India, has given these fashion management graduates the playing field on which to further hone their skills, and provide a pool of management talent to Indian as well as global companies like Gap, Nike, Reebok, Tesco, Next, Asda, Wal-Mart, Limited etc.
The policy environment that was unfavourable to large-scale manufacturing in the past has also created an unintended strength – a base of design, product development and merchandising capability.
Due to restrictions placed upon the size and composition of manufacturing capacity that could be invested in, from the 60s until the early-90s a number of companies grew their business solely on the basis of “merchant exports,” ie, trading. This business model needed strong marketing and merchandising capabilities, as well as an eye for design and skills in product development. Over time this has built up into a sustainable strength and competitive advantage of the Indian industry. Buyers also recognise this skill as a key element of sourcing from the Indian industry, as visible from the frenetic rate of new sampling that goes on every season in factories around India.
Geographic spread and concentrations
The size and diversity of the Indian industry becomes immediately
clear from listing the various geographical locations where
the industry exists and their skills-sets.
Yarn, fabric and apparel manufacturing takes place practically across the country. There are over 1,500 organised spinning units of significant scale, and over 280 composite mills that are vertically integrated from spinning to finished fabric. In addition, there are over a thousand smaller spinning units, around 200 exclusive weaving units and an estimated 375,000 “powerloom mills” which operate in the small-scale sector.
However, there are certain concentrations of skills and product type that have developed over the last 30 or so years.
Western India, including the states Gujarat and Maharashtra, have a number of spinning units as well as composite mills. Also in the west, the Surat belt is known for polyester fabrics, gaining from the proximity of large polyester yarn suppliers. Surat’s industry has been a fast-growing supply base for the domestic market and, starting with the Middle East, it has steadily grown its exports also.
The south, including the Salem-Erode belt, is a hub for cotton fabric. While it dramatically grew in the 1980s and 1990s as a belt of small-sized “unorganised” mills, many companies here have recently become more sophisticated in their technology and product development.
In the apparel sector, Ludhiana, Tirupur, Delhi, Bangalore, Mumbai and Chennai are all remarkably unique and dynamic centres of production. For example, Tirupur in south India, formerly a small town, is today a stronghold of cotton knitwear with annual exports of a billion dollars. Ludhiana, in the prosperous northern state of Punjab, originally built its strengths in woollen knitwear through exports into the former Soviet Union. After a brief hiatus in the early 90s it regained its dynamism, and is now a supply hub for sweater knits to some of the largest fashion brands in the US and in Europe.
Delhi, the leading export centre for apparel in volume and value, leads also in design and merchandising skills, with smaller and flexible production quantities. Chennai (Madras), on the other hand, is more geared towards large and well-established factories producing large quantities of basic products, while Bangalore is growing in more engineered products including tailored clothing and foundation garments.
Obviously, this gross generalisation is only indicative of the relative strengths of the various locations, as individual companies with comparable or greater strengths do also exist outside these concentrations.
India as a regional sourcing hub
India is being seen by more and more customers as a hub, rather
than a stand-alone sourcing opportunity. Standing alone, India
exports about US$13 billion of textile and apparel products,
and this figure is slated to grow to over US$20 billion by 2005-06.
However, even more interesting is India’s position as a regional hub, including sourcing from Bangladesh, Sri Lanka and Nepal. In apparel alone, India, Bangladesh and Sri Lanka already export around US$12 billion to global markets, and are growing further.
Already companies such as H&M and Karstadt-Quelle manage their sourcing from these three countries together, with the regional headquarters based in New Delhi. Gap has taken it further, including its Middle East sourcing within this umbrella. Many others are following suit. The reasons for this are many and varied, including the fact that many companies in Sri Lanka, Bangladesh and the Middle East (and even as far as South East Asia – including Indonesia and Thailand) actually employ Indian professionals in various management positions. Other than that, business and cultural linkages have existed in the past and provide a platform for regional business cooperation.
Certainly, India’s size as a potential market is an important factor in its role as a hub, and many of these companies are looking to grow their sourcing base in and around India as a precursor to selling within the Indian market.
Challenges faced in India
Before listing the opportunities that India presents for various
types of companies, it is wise to acknowledge the deficiencies
and problems as well. These can be broadly classified into three
heads: gaps in the industry, regulatory disadvantages and disadvantages
India faces as a country.
A major gap in Indian industry is its fragmented structure with a dominance of small scale. Even though the government policies that created this distortion have gradually been removed, their impact will still be felt for some time.
One of the greatest implications is that since most of the companies are small, there are very few clear examples of leadership and reference points that can be aspirational or inspirational for the rest of the industry. The ones that are – Arvind Mills, Reliance or Raymond – far exceed the scale of most of the industry players, and do not provide a clear “roadmap to growth” for the rest of the industry. Having said that, apparel exporters such as Ambattur Clothing, Shahi Exports and Gokaldas have grown in an entrepreneurial manner, and can be role models.
Small scale also brings with it the problem of productivity. Various authors and researchers have placed the current productivity of Indian factories at half to one-third of levels that might otherwise be achievable. Smaller companies often do not have the resources to invest in appropriate technology or retraining, or in the re-engineering of processes. While skilled Indian labour is inexpensive in absolute terms, due to lower productivity levels, much of this advantage is lost by small firms.
Fragmentation of the supply base also creates barriers to achieving true integration between the various links in the supply chain. This creates issues of lack of control and lack of consistent or reliable performance. The huge geographical spread further complicates this issue.
Among regulatory disadvantages, one of the most insidious is the historical reservation of manufacturing for very small companies. While the original political intention might have been to spread self-reliant industry across a large population base, this reservation has created the fragmentation that shackled the competitiveness of Indian industry. Most of the sectors have now been de-reserved, and entrepreneurs and corporates are investing significant sums of money in setting up new, large factories, or expanding their existing manufacturing plants.Secondly, the government has, in the past, also kept foreign investment out of textile and apparel manufacturing. It has gradually removed these restrictions, and has also brought down import duties on capital equipment, creating grounds for foreign investors to set up manufacturing plants competitively in India. In recent years, when India has started becoming a global manufacturing base for products such as cars (Ford, Hyundai), power backup systems (APC), chemicals (Clariant) and fast-moving consumer goods (Unilever), it can certainly provide a competitive base for textiles and apparel companies to invest in.
Some other problems remain, such as excise and other tax imbalances. The political diversity of India’s 35 states and Union Territories, and a coalition of ruling parties has led to slow progress in rationalising these imbalances due to debate and discussion. However, a VAT framework is being put in place, though in fits and starts, which will clear these imbalances once it is implemented fully, and create a truly unified economic space.
Labour laws are still seen to be relatively unfriendly to business, with companies having less than ideal flexibility to follow a “hire and fire” policy. To avoid any potential trouble with labour unionisation, companies have often broken their business down into small units, which have, in turn, lost the efficiencies of scale. In recent years, there has been movement towards labour reform, and it is hoped that this will make the business environment even more conducive.
Finally, there are certain macro-level disadvantages that India faces as a country. For one, it has a global logistics disadvantage due to its geographic location. Unlike its competitors Mexico (for the US), Turkey (for the EU), and China (for Japan and the US West Coast), India is distant from all the major markets. Therefore, the cost of shipping is high and shipping time adds to the disadvantage. Cost of shipping is also affected by the fact that inbound freight traffic has been low – therefore, container movement is not at its most cost-efficient. This is changing as India imports more products and inbound freight traffic increases.
India also lacks any serious trade pact memberships, and therefore does not receive preferential access to the major markets. This leads to quota and duty disadvantages, which depress the sourcing volumes from India far below their potential.
The second part of this article outlines the opportunities for sourcing companies, consumer brands, suppliers and investors to form profitable partnerships with the industry ( click here to read it ). .
This article is based on a presentation made at Interstoff-Asia Spring 2003. The author, Devangshu Dutta is a retail and fashion industry professional. He has had the chance to work with companies globally and across the entire supply chain from consumer back to raw material.admin
April 28, 2003
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For more
than four centuries now, Delhi’s Chandni Chowk has retained
its charm. Nothing quite matches its smells and sounds.
When French physician Francis Bernier visited India way
back in 1663, in Chandni Chowk he found shops selling
fruits from Kashgar in Afghanistan, gold and silk brocades
from Varanasi and Surat, jewellery and wine. He noticed
the kahva khanas – tea houses where the locals would gather
to sip the brew and talk about the events du jour. Bernier
labelled Chandni Chowk as the most important commercial
centre of the East. Its pre-eminence continued till the 1930s, when the colonnaded arcades of Connaught Circus stole Chandni Chowk’s lustre.And today, India’s oldest high street has lost a lot of its allure. Shoppers from all over the capital still throng the market, especially when a wedding is round the corner. |
Today, a similar story of rise and fall could well be playing out across India’s major high streets, which have dominated the retail sector for several decades. Their names are all too familiar: Pondy Bazaar, Nungambakkam, Mylapore, Anna Salai and Commercial Street in Chennai. Brigade Road and Indira Nagar in Bangalore. Linking Road, Colaba Causeway and Breach Candy in Mumbai. Connaught Place, South Extension and Karol Bagh in Delhi, and Park Street in Kolkata.
With each of their annual turnovers anywhere between Rs 500 crore and Rs 2,500 crore, these bustling high streets determine the fortunes of several Indian enterprises. Take just one – apparel brand Arrow. Its business head, Janak Dave, says: “Seventy per cent of Arrow’s sales come from just 15 high streets (outlets) in India.”
But now, questions are being raised whether the hegemony of high streets over Indian retail can continue. Glitzy malls are coming up by the dozen all over the country. Delhi already has Ansal Plaza. Seven more are expected to come up in the satellite township of Gurgaon, Haryana, alone. Ditto for Mumbai, and every other Indian metro. With their snazzy interiors, an offering that is a mix of shopping, entertainment and leisure, and facilities like parking and childcare, the malls are beginning to pull traffic away from high streets.
Two years ago, when Ansal Plaza, Delhi’s first mall, came up 2 km away from South Extension, most retailers wrote it off. Today, it is proving to be a formidable competitor to South Extension. Simran Singh, a Delhi-based retail consultant, says: “Today, the high street retailers are all feeling threatened (by the malls). They are wondering whether they should move to the malls.” Of course, no one quite believes that shoppers will simply desert retailers in high streets en masse. Even after being in business for a decade, departmental stores like Shoppers’ Stop, which are the anchor tenants for most malls and ostensibly the main draw, do not cater to more than 2% of a city’s population.
Quiet changes, however, are already taking place in the way generations of Indians have shopped. Today, we are much more comfortable with the quality that brands connote than with a shopkeeper’s word about the quality of a product. Besides, as cities grow outward and urban lifestyles become more hectic, more families now prefer to shop on weekends, preferably not too far away from home and away from the maddening crowds and even more madding parking attendants. Harminder Sahni, a principal at retail consultancy KSA Technopak, agrees: “The consumer is ready now for organised retail.” It is no surprise that malls are becoming popular with city folk.
So, will malls wean away more and more shoppers from high streets? To what extent will that affect business on high streets? How will high street retailers adapt themselves to the new challenge? And will the high street as we have known it, continue to look the same?
A Peek Into History
Some of the answers lie in the way high streets evolved in India. With the exception of Colaba Causeway and Connaught Place, the high streets in India were not even intended to be that. “They were local markets, which somehow became high streets as one marketer after another was attracted by the catch-ment’s profile,” says Devangshu Dutta, founder of Creatnet Services and a retail industry expert. It’s because of poor town planning that high streets formed by themselves, says Arvind Singhal, head of KSA Technopak. The unplanned growth resulted in unplanned marketplaces with an erratic mix of shops and the inevitable parking snarls.
Take South Extension. From a nest-like office above his shop, K.P. Malhotra has seen the market take its present shape. It began with little more than a few shops, all meeting the usual bouquet of suburban demands – dry-cleaning, small eateries, household provisions, tailoring, and so on. Back in 1967, Malhotra himself opened a superbazaar, selling household groceries, toys and medicines. That began to change in the 1970s, as people from adjoining suburbs – New Friends Colony, Defence Colony and Green Park – began flocking to South Extension to shop, even though they had their own community markets. The high street was forming.
According to Malhotra, the reason was simple. DLF, which was developing that part of Delhi, had constructed much larger shops (2,250 sq ft) than what the Delhi administration was making. This allowed the shopkeepers here to offer a bigger range. Moreover, the market was located on Ring Road, a prime thoroughfare. In tandem, these factors pulled in people who lived far beyond South Extension. And, seeing the numbers coming to the market, more and more retailers began setting up shop there. Jewellers and antique dealers came in, as did saree shops, shoe stores and garment outlets. In 1975, multibrand outlets were being set up. By 1988 or thereabouts, when the multinational brands began entering India, the first businesses in the market – the kirana shops, chemists and dry cleaners – were winding up. Their owners were realising there were better businesses – like multi-brand outlets (MBOs) – to be run. Malhotra himself forayed beyond household provisions into electrical goods, before eventually setting up an apparel MBO – Gopaljee.
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By the mid-90s, the MBOs, too, were winding up. Companies were not happy with their performance. Says Rajendra Mohan, who runs Pall Mall, an apparel MBO in the market: “We pick and choose from a company’s entire range, sometimes stocking just one category.” That forced companies to scout for exclusive outlets. That is when the real estate prices on the street went sky high and the balance of power between the brand-owning company and the shop owner tilted all the way in favour of the latter. In the first few exclusive outlets that were set up,
the shop owner (or tenant) collected the stocks and
ran the store. But as the demand for real estate kept
increasing, the shop owners realised there was no pressure
on them to sell. All they had to do was ask for a minimum
guarantee, a sum of money to be paid to them every month
or year irrespective of how the outlet was doing, from
the company. If the company demanded higher sales, the
shop owner could switch loyalties, especially since
there were always some brands jostling to occupy that
same space. |
As more new brands continue to enter the market, the fight for real estate on the high street is getting desperate. For two years now, apparel brand Provogue has been scouting for space for an exclusive outlet in South Extension, without any luck. Provogue’s senior vice-president, Vishal Mirchandani, has assiduously chased every lead and come tantalisingly close to finalising a deal on four occasions. But each time, the talks broke down. These markets are very gossipy, he complains. Each of the four times he had finalised the deal with the shop owner, someone or the other found out what the terms were and offered the shop owner a sweeter deal that kept Provogue out.
But, ever since Ansal Plaza came up in late 1999, it has created a scare among the retailers in South Ex. Ask Malhotra, who also heads the Traders’ Association of South Extension (Part II), and he will tell you that the mega mall has not affected sales. But that’s partly because he also helps companies find property on the street. But, towards the end of the conversation, he said: “The market is crowded only on the weekends. It was not like this earlier. We used to get our bread and butter from this market. All we get these days is bread.”
Of course, South Ex is fighting back. Parking facilities are
being improved. Shopkeepers are also coming together to conduct
their sales at the same time. But that clearly is not enough.
South Extension (Part II) lacks an eatery like McDonald’s or
Pizza Hut. Malhotra and his team have been trying to get an
eatery into the market for a long time now, but to no avail.
McDonald’s was interested, but it baulked at the high rentals.
In a market where rentals are about Rs 250 per sq ft, it was
unwilling to go above Rs 100.
Forging a common strategy among a disparate bunch of shop owners
is not easy either, even for an old-timer like Malhotra. Most
shop owners tend to act in their own self-interest. And they
are not willing to settle for the lower rentals that McDonald’s
offers, even if it is in the interest of the entire market.
With all the shop owners pulling in different directions, getting
the retail mix right on high streets is another huge problem.
Or is it?
Skewed Economics
Consider Linking Road, Mumbai. When the first Shoppers’ Stop came up in Andheri, many felt that this high street in Bandra was doomed. But that proved to be greatly exaggerated – the street continues to flourish. In the years after the Shoppers’ Stop came up, the street has not died. If anything, it has expanded considerably. What has happened, though, is that the composition of the shops on the street has changed significantly. One, most of the multi-brand outlets have downed their shutters. Two, lots of exclusive (single brand) outlets have been set up. Three, the kiranas, chemists and dry cleaners left the street for the smaller streets running parallel to it. Again, because their owners realised that there were more profitable businesses to be run.
From his ColorPlus outlet, store manager Harshad Thakker has seen the market change. In 1993, he recalls, shirt brand Arrow set up the first exclusive showroom on the stretch. Then came Weekender, Benetton, Nike, Woodland, Adidas and ColorPlus. During that period, real estate prices were very low (Rs 200 per sq ft), which increased, reaching a peak of Rs 400 in 1995-96. The high street extended to the north after Titan, Arrow and Bata came in, followed by a Satguru’s, Tresorie and Nike. To the south, a cluster began developing around Blues Bizaar. Opposite that, a Lacoste outlet came up. Followed by a Lee. The other thing Linking Road is known for is footwear. All the big names are here – Woodland, Nike, Reebok, Adidas, Bata. MBOs like Metro, Regal, Lord’s, Scandal, Citywalk and MB have been here since 1997.
In other words, instead of widening the retail mix,
Linking Road homed in on two main categories: apparel and shoes.
You will not find bookshops or music shops on Linking Road.
It is only now that household furnishing shops have started
coming up.
Intrigued? Much of this is linked to the hard economics of high
street retailing and the returns that each retailer expects.
With current real estate costs on Linking Road at Rs 250-350
per sq ft, the only businesses with sufficient margins were
apparel and food.
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Both apparel and food brands compete fiercely to get on the high streets largely because of the sheer traffic that they pull in. Chetan Shah, the head of Pepe, adds: “Conversions on the high street are much higher.” As many as 75-80% of the people who walk into his store on Linking Road end up buying something or the other. But the rentals are now so high that even the apparel and food brands are finding it hard to stay profitable. On an average, says Ashok Mukhi, who runs 22 exclusive stores in Mumbai alone, “minimum guarantees on the street have gone up by 5-7% every year”. He attributes this to jumps in rentals and operating costs. Alternatively, he says, if a company does not want to offer minimum guarantees, they can give retailers a flat 40-45% margin. Comments Provogue’s Mirchandani: “The rates in these places are ridiculous. All the shopkeepers think they are sitting on a goldmine.” (Article continued below…) |
Take the market in M block in New Delhi’s Greater Kailash Part I. Here, every month, two outlets on an average succumb to the high rentals. Malhotra told Businessworld that a 3 ft by 3 ft shop in South Ex had been sold to a paanwallah for Rs 57 lakh!
Somehow, despite the wonky economics, companies still want to be on the high streets. Notes Prakash Nedungadi, president, Madura Garments: “A lot of people see a high-street outlet as quasi-advertising – and take money out of their ad budgets to make the case for these.” Especially new brands tend to look at a high street presence to boost visibility. But the crowd makes it harder for the established brands. Take Pepe. Shah laments how hard it is to find a high street store that can be viable. “Negotiations always involve lots of horse-trading with the owners. The ideal rent to sales ratio would be around 10%. But I doubt if anyone gets a rate like that on a high street.”
A Paradox On High Streets
Till now, when a company walked out of a high street, three others were queuing up to replace it. That will change now. KSA Technopak’s Singhal says: “While South Ex is four times as expensive. The turnover from these stores is not four times as high. It is probably twice as high. Earlier, companies had to be on the high street to get a good hit rate. Today, once the malls come up, it is likely that they will get that in the mall.” Agrees Madura Garments’ vice-president (marketing) Vasanth Kumar: “From our point of view, I can get three (shops) in malls for the price of one store on a high street.”
Margins for an exclusive store are already under pressure.
As the suburban malls enter the fray in Mumbai and Delhi, more
customers will stop travelling long distances for high-street
shopping. New customers will not come to the high street, says
Madura Garments’ Kumar. He adds: “They will go to the malls.
The best the high street stores can do is retain their existing
customers.”
So where does that leave the shops that were opened on high
streets?
The options are limited. Shoppers’ Stop CEO B.S. Nagesh says a new marketplace forms when a mall comes up close to a high street. With the neighbouring shops offering categories that complement the mall, not compete with it. This could be a category like jewellery. Vasant Nangia, the founder of jewellery chain Oyzterbay, says his outlet on Linking Road has been doing much better business since the Shoppers’ Stop came up on that street. He does not prefer a concessionaire stand inside the department store, as there is not enough space to showcase his entire range.
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How do independent shopkeepers fit into this larger marketplace? Well, Pall Mall’s Mohan is going upmarket with a vengeance. In the last three years, he says, “we have moved away from the regular brands to imported brands – Versace Sports, Calvin Klein, Zegna, Cerutti, Valentino.” He is focusing on one segment in menswear and going more upmarket than Shoppers’ Stop. But then, Pall Mall is able to fight back the threat from Ansal Plaza because he works out of a 6,000 sq ft shop. Most retailers are not that lucky – their shops are barely 1,000 sq ft, which limits the range they can offer, or the categories they can get into. What will they do? This is when things get interesting. |
When the retailers start casting about
for new businesses, they will find they live in paradoxical
times. While the high street is under threat, the retailers
themselves have much more freedom to choose what they want to
sell.
A Question Of Real Estate
The possible scenarios look interesting. On Linking Road, high
real estate costs allowed retailers of only two categories –
apparel and footwear – to survive. But real estate prices there
will fall as malls come up. So retailing other categories on
the high street will become viable businesses once again.
Take Brigade Road in Bangalore, for instance. The city has a very small retail market. And now, three malls are coming up in the city. When they do, they will draw away business from the high street. Real estate prices on Brigade Road are already falling, says Anurag Munshi, associate director (research), Jones Lang Lasalle, a real estate company. He expects prices to settle down to the same level as the malls.
In Mumbai and Delhi, retail prices will not fall as soon as new malls come up. Even so, the prices are heading south. There are two reasons for that. Not only is the supply increasing, demand, too, is falling. Companies like Provogue are already planning to concentrate on malls from now on. “We have outlets in almost all the major high streets now,” says Mirchandani. Madura Garments, too, is looking away from the high streets. Kumar plans to open his 2,000 sq ft exclusive outlets, Planet Fashion, in semi-commercial and residential areas. “We expect more business now to come out of the good residential areas,” he says.
In this scenario, a lot will depend on how well-to-do the immediate suburbs are. Take South Ex. It is bang on a prime thoroughfare like Ring Road, so traffic will stay high. Moreover, its local catchment comprises the moneyed class. Malhotra says: “The beauty of this market is that no one here questions the price. The people who shop here have tonnes of money – businessmen with black money, bureaucrats with bribe money.” On streets like this, it is viable for shopkeepers to follow Mohan’s cue and enter niche categories. He cited swimwear and sports goods as two likely categories. As malls force rents on high streets to fall, it might become possible for niche category stores to become profitable again.
But that will not be possible everywhere. Every high street cannot hope to sell Cerutti and Armani and Gucci. All of them do not have a clientele that is affluent enough to support a premium brand. That is when all the players who left the high streets earlier – the kirana stores, the dry cleaners – will come back. KSA Technopak’s Singhal says shop owners on high streets moved out their own businesses when they saw the kind of money they were foregoing by not renting out the spaces to exclusive outlets. As exclusive outlets scrambled for space on high streets, minimum guarantees, money the owner of the space would earn irrespective of the level of business, came about. Now, as the rates fall, the drugstores, bakeries and gift shops will probably come back . Even internationally, high streets have been through the same cycle. They have become more mass, with a tenant mix consisting of plenty of middle-of-the-line brands.
In other words, they will go mass. Just like Chandni
Chowk.
admin
January 15, 2003
Participants:
Karen
Peterson, Vice-President and Research Director, Gartner.
C
Glenn Mauney, Senior Vice-President, Manufacturing
Services, Genco Distribution Systems.
Mike
Nardella, Senior Vice-President, Logistics, ReturnBuy
Inc.
Devangshu
Dutta, Director, Creatnet Services Ltd.
In recent years, “reverse supply chain/logistics” has assumed
much importance in supply chain management. We invited experts
in supply chain management to give their views on various
issues related to reverse supply chain/logistics. Some of
the issues that were discussed include why companies are giving
so much importance to reverse supply chain/logistics? Do companies
need to change their existing supply chain management systems
to implement reverse supply chain/logistics? On what activities
companies should pay attention while implementing reverse
supply chain/logistics? And is the technology used for implementing
the reverse supply chain/logistics same as that used for implementing
the forward supply chain?
The Discussion….
1. In recent years, companies are giving importance to the reverse supply chain. Why are they doing so? What benefits can companies get from the reverse supply chain?
Karen Paterson : I see three main reasons
why enterprises are focusing more on the reverse supply chain:
1)The world wide economic environment has made cost saving
initiatives more attractive and 2) In many industries (such
as high tech and aerospace), better management of the reverse
supply chain translates into higher customer service and,
consequently, higher customer satisfaction and 3) Industries
and the enterprises within them are realizing that management
of the reverse supply chain is a revenue opportunity. For
example, GE Aircraft engines makes more in servicing its aircraft
engines than it does when initially selling them. Companies
are able to reduce their costs, increase revenue and increase
customer service.
C Glenn Mauney : Reverse logistics are taking on an increasingly important strategic role in the supply chain for a number of reasons:
• There is growing recognition of the value that can be recaptured from the unproductive assets resulting from returned merchandize. Those companies who have focused on the reverse supply chain have reported significant reductions in inventories, improvement in cash flow, reduced labor and improved customer satisfaction.
• There is increased competitive pressure to provide an effective, efficient returned goods process. The increase of catalog and e-business shopping resulted in a liberalization of return policies in order to gain customer trust and reduce risk.
• The increased emphasis on new products and product “freshness” has caused a need to clear the distribution channel more often— requiring an efficient means to bring back obsolete, outdated, or clearance items.
• Many countries/states have instituted regulatory requirements regarding recycling and product disposition that requires increased record keeping and tracking.
• The cash flow and bottom line impacts resulting from inefficiencies in reconciling returned goods and credits is significant.
Mike Nardella : Reverse logistics is one of the last frontiers for controlling supply chain costs. It is also becoming a larger challenge for retailers/etailers as returns policies are becoming more lenient. By improving the RL process flow and handling of returns, companies can significantly reduce supply chain costs and provide better recovery for their returned products which impact the bottom line.
Devangshu Dutta : Reverse supply chain would refer to getting goods back from the consumer (trade or individual) and reconditioning them for resale or processing them for disposal. The reasons can include damage, seasonal inventory, restock, salvage, recalls and excess inventory.
This has happened for a long time in a few supply chains, such as catalog and mail order businesses, where “returns” can range from 5% to 50% of gross sales, depending on the merchandize. Reasons could vary, including reasons such as extra purchases by the customer because she was not sure of the size that would fit. These returns would need to be (a) collected from the customer (unless the customer sent them back by a courier or mail), (b) received in a returns warehouse, (c) reconditioned if feasible (such as reironed and repacked) and (d) posted into “fresh inventory” for resale (if reconditioned), or sent into a rejections/disposals inventory. Apparel retailers have also had returns although a much smaller percentage, where the returns might be handled at the store level itself if repairs or reconditioning is minor.
In the case of some products – e.g., refrigerators in the USA – it is a legal requirement for a company delivering a new product to take away the old one because of hazardous materials used in the product. Thus, in this case, the reverse supply chain needs to be not only well managed, but also tightly integrated into the delivery mechanism. Or, for example, beginning in 2003, the EU will require tire manufacturers to recycle at least one old tire for every new tire they sell.
In India, reverse supply chains have been used for promoting sales of new consumer products (witness the multitude of exchange offers in the case of consumer durables)—the products collected back are reconditioned and resold at prices lower than fresh products, but much higher than “scrap” or salvage value.
The reason many companies are beginning to focus on this would become evident from an American statistic: Nearly 20% of everything that is sold is returned. Obviously, as mentioned earlier, this varies a lot by the type of product or the channel. Nevertheless, given the high proportion, in this troubled economic, this is also being seen as a source of cutting costs or increasing sales profit margins or both.
The benefits that companies can draw from managing their reverse supply chains well includes capturing lost profits (such as increasing the proportion of products that can be resold at non-discounted prices), improving their cash and inventory cycle by reusing products in a timely manner (the faster reconditioned merchandize is integrated into fresh stocks, the lower the need for fresh inventory and new investment/cash) and lower costs. An example is Kodak, which remanufactures its single use cameras after the film has been developed (it has recycled over 310 million cameras in the last ten years)— that has an obvious impact on costs and profitability.
2. Do companies need to change their existing supply chain management systems to implement reverse supply chain?
Karen Paterson : In most cases, they do. Most enterprises do not have supply chain management systems, which handle the reverse supply chain, or, if they do, the existing applications are disconnected (transportation isn’t tied to customer service which isn’t integrated to repair solutions) or incomplete. Historically, the reverse supply chain has been under-invested— including the systems to support it.
C Glenn Mauney : Depending on the volumes and complexity of the returned goods flow, there is some information capture specialization and processing efficiencies in returned goods processing that requires some unique systems support and functionality. Tightly integrated automatic data capture, system directed disposition support, unique receipt handling, credit processing, comprehensive and flexible reporting and efficient integration with a variety of other business systems are functional capabilities often not supported in standard WMS or ERP systems. Reverse processes are often paper intensive and require a high degree of flexibility to handle all the exceptions. To date, very few firms have successfully automated information surrounding the returns process (such as the GENCO1 proprietary R-Log® system) and few good in-house reverse logistics management information systems exist.
Mike Nardella : Yes, companies need to make a major paradigm change. No longer can Fortune 500 companies accumulate returns in the back of the warehouse or stores and ignore the issue of returns. No longer can they just liquidate them for pennies on the dollar. They must handle returns with the same caliber of technology, expertise and commitment as in present forward logistics practices.
Devangshu Dutta : Only if their business requires it and can allow it. In some cases, a commercial reverse supply chain is not really feasible (e.g., food) and may only be used for those goods which are defective where a batch may need to be recalled.
3. To earn maximum profits from the reverse supply chain, what activities should companies pay attention to when implementing reverse supply chain?
Karen Paterson : The first and most important activity is to actually understand where the reverse supply chain will contribute to profits. This is a strategic activity that includes executive management. Initiatives that don’t tie in to executive strategy are usually either doomed to failure or will have limited ability to support corporate profitability.
C Glenn Mauney : The key reverse logistics management elements include: Gatekeeping-deciding which products to allow into the reverse logistics system, Collection-assembling the products, Sortation-deciding what to do with each product, Disposition- sending the products to their desired destinations. The initial focus should be on the desired business outcome of the reverse logistics process and then the policies and procedures that are in place to support that outcome. Then the various elements indicated above should be assembled to insure maximum flexibility, efficiency and visibility.
Mike Nardella : Companies should review the following activities to maximize profits from reverse supply chain initiatives; (1) improve recovery by sending returns direct to a company like “Returnbuy, Inc.,” which accepts returns, inspects and repairs them and then resells them for higher margins through various Venues versus traditional Liquidation, (2) reduce cycle time for obsolescence and thus increase value through cutting out the intermediate steps of how returns accumulate while losing value, (3) companies need to determine the cost benefit of present returns policies, (4) there is a growing need to develop or obtain Software to assist in processing and evaluation of returned products.
Devangshu Dutta : In addition to the usual supply chain activities, reverse supply chains also include more than one of the following elements:
The collection process, inspection and sorting and remanufacturing processes are the most labor/time intensive and therefore can be either a source or a sink of time and profitability.
4. Some companies are outsourcing certain activities of the `reverse supply chain,’ while others are carrying out all the activities themselves. On what basis should companies determine the activities they should outsource and the activities they should carry out themselves?
Karen Paterson : Companies should determine which items are core competencies and NOT outsource these items. On others, determining factors would include cost to serve and available skills.
C Glenn Mauney : Many factors will determine the optimal mix of in-house versus outsource activities. The primary deciding factor is based on the overall strategic direction of the enterprise and what core competencies are considered critical to support that strategy. Other factors that come into play include: Space utilization, labor savings opportunities, transportation costs, information system capabilities and resources, asset recovery/value recapture potential
Mike Nardella : Unless companies are able to commit to technology, conveyors and sortation and time resources, they should look to outsource returns. Companies such as catalog centered usually have sophisticated reverse Logistics handling processes because of the high return rates and lenient return policies.
Devangshu Dutta : The same as any other outsourced activity: The parameters for evaluation are in-house cost vs. outsource, whether the company treats this as a core competence and strategically important area to be retained inhouse and whether the company has the specific skill and infrastructure required or whether a specialized service provider would be better equipped to handle it.
5. Is the technology used for implementing the reverse supply chain same as that used for implementing the forward supply chain?
Karen Paterson : At a high level, it is. However, there are a number of items which vary from the technology/applications required in the forward supply chain. Some of these are: 1) Repair optimization; 2) slow moving inventory optimization; and 3) reverse logistics.
Mike Nardella : The technology is similar in that it should be real time and as sophisticated, but different in that it needs to be specifically customized for varying client needs.
Devangshu Dutta : Some of the technology involved is similar (e.g., real time inventory tracking), while other areas are quite different (e.g., warranty tracking, or de-manufacturing i.e., dis-assembly of a product). The overall basket is different from technology employed in the forward supply chain, but needs to be integrated with the forward chain, especially if the goods can be resold.
6. What are the barriers to implementing and managing reverse supply chain effectively?
Karen Paterson : The main barriers are: Change management, cost, competency and technology.
C Glenn Mauney : A recent survey indicated
a number of internal and external barriers to the successful
execution of a reverse logistics program. These were (in order
of response):
•
Importance of reverse logistics relative to other issues
•
Company policies
•
Lack of systems
•
Competitive issues
•
Management inattention
•
Financial resources
•
Personnel resources
•
Legal issues.
Mike Nardella : There is a mindset that reverse logistics is a step-child and treated more like a necessary evil instead of the back-end process of a well oiled logistics process. Another barrier is that to truly understand and handle reverse logistics requires a commitment from Senior Management to dedicate a team of individuals, software, conveyor systems and unique process flows to do it well.
Devangshu Dutta : The barriers can be classified into two categories:
• Internal barriers : That is the preparedness in terms of processes, systems and infrastructure of the company to handle the returns process.
• External barriers : Amenability of the customer (e.g., would a company’s image suffer if the consumer knows that he may be sold a reconditioned product), availability of external infrastructure etc.
7. In future, will companies give as much importance to the reverse supply chain, as they give now to forward supply chain?
Karen Paterson : That really depends on the enterprise and the industry. In industries where service can contribute to the profit margin (such as aerospace) or industries where the reverse supply chain is required for optimal customer service (such as high tech), they will. In industries where the reverse supply chain sometimes contributes to cost reduction (such as fast moving consumer goods), the reverse supply chain will not be as important.
C Glenn Mauney : It is clear that more and more attention is being devoted to the reverse supply chain as companies recognize the critical importance of managing the entire product life cycle. Good reverse logistics is a critical piece of product life cycle management. By integrating the forward and reverse supply chains, a “closed loop” is developed which brings the optimal efficiencies and visibility to the distribution and manufacturing processes—resulting in enhanced customer service, reduced inventories throughout the chain, accelerated cash flows, reclaimed value that is traditionally lost, and significant bottom line impact.
Mike Nardella : Tradition has been that reverse logistics activities are perceived important but only as a necessary evil. Over the past several years companies are realizing the importance of reverse logistics activities as a value-added service. In time it will be elevated in importance—but very slow and gradual with only successful companies giving it the respect it deserves.
Devangshu Dutta : The relative importance will be based on the company’s products and the nature of its business. However, one thing is certain, if a reverse supply chain is required and can be built into the company’s business, the most important factor will be integrating it with the forward supply chain. The two will have to be designed and managed together.
admin
January 2, 2003
Companies spend more time and money in fine-tuning their forward supply chains while ignoring their backward supply chains. However, in today’s competitive business environment when there is both external and internal pressure, companies can no longer ignore reverse supply chains. Efficient reverse supply chains bring many benefits to the companies. However, reverse supply chains are different from forward supply chains and most of the existing forward supply chains are not designed to handle reverse supply chains.
In today’s highly competitive business environment, the success of any business depends to a large extent on the efficiency of the supply chain. Competition has moved beyond firm-to-firm rivalry to rivalry between supply chains. Managers in many industries now realize that actions taken by one member of the supply chain can influence the profitability of all others in the supply chain. Companies like Wal-mart are trying to squeeze more costs out of their supply chain to offer everyday cheaper price to the customers. On the other hand, more and more companies are focusing on their core competencies while outsourcing the rest. But without efficient and effective supply chain, companies cannot benefit from outsourcing.
Supply chain is defined by The Council of Logistics Management as “the process of planning, implementing and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements.” However, a company’s supply chain is not limited to delivering products to the end-consumers. What about the defective products that are returned by the consumers back to the company?
Though reuse of products and materials is a common phenomenon, companies have long ignored this part of the supply chain, known as reverse supply chain or backward supply chain. A common example of reverse supply chain is the soft drinks bottles pickup and delivery system, where soft drink bottles are returned and reused repeatedly. Companies were so long under the impression that returns compared to sales generate little or no money. However, with the growth of direct-to-consumer channels like catalogs and Internet, sales returns of merchandize by the consumers has increased. C Glenn Mauney, Senior VP, Manufacturing Services Genco Distribution System, says, “there is growing recognition of the value that can be recaptured from the unproductive assets resulting from return merchandize.” Goods worth over $100 bn are returned to US retailers annually. According to Devangshu Dutta, Director of a supply chain solutions company, “nearly 20% of everything that is sold in America is returned.”
The Council of Logistics Management defined reverse supply
chain as “the process of planning, implementing and controlling
the efficient, cost effective flow of raw materials, in-process
inventory, finished goods and related information from the point
of consumption to the point of origin for the purpose of recapturing
value or proper disposal.” (Refer Figure 1)
Necessity of Reverse Supply Chain
The foremost reason behind companies giving importance to reverse supply chain is that it reduces operating costs by reusing products or components. For example, previously, Estee Lauder Companies Inc., used to dump nearly $60 mn worth of its products into landfills every year. However, after setting up reverse supply chain it has been able to reduce the volume of destroyed products by half.
Companies have started realizing the importance of reusing products or components; as a result, reverse supply chains are becoming essential part of business. “Retailers/e-tailers are facing challenges as returns policies are becoming more lenient,” opines Mike Nardella, Senior VP, Logistics, return buy. C Glenn Mauney supports his views, according to him, “the increased emphasis on new products and product “freshness” has caused a need to clear the distribution channel more often, requiring an efficient means to bring back obsolete, outdated or clearance items.” For example, Xerox replaces or upgrades hundreds of office printing machines every month.
In some cases companies are forced to set up reverse supply chains because of environmental regulations. C Glenn Mauney, opines, “many countries/states have instituted regulatory requirements regarding recycling and product disposition that requires increased record keeping and tracking. For example, from 2003, European Union is bringing a legislation that will require tire manufacturers operating in Europe to arrange for the recycling of one used tire for every new tire they sell. Some companies are using reverse supply chains as an integral part of new businesses.
For many large manufacturing and technology companies, aftermarket services forms a significant portion of their revenue. Also, providing timely and efficient service has become a key competitive differentiator in many industries. Karen Peterson, VP and Research Director, Gartner, agrees. According to her, “better management of the reverse supply chain translates into higher customer service and consequently, higher customer satisfaction; and industries and the enterprises within them are realizing that management of the reverse supply chain is a revenue opportunity.” For example, GE Aircraft engines makes more in servicing its aircraft engines than it did in initially selling them.
Some firms have also set up reverse supply chain capabilities for altruistic reasons. Nike encourages consumers to bring their used shoes back to the store from where they were purchased. These shoes are shipped back to Nike, where they are shredded, which are then donated to make basketball courts and running tracks. The company also donates funds to help build and maintain those courts. By doing this, companies enhance the value of their brand and also encourage people to purchase their products.
The Starting Point
Though companies have been successful in fine-tuning their traditional supply chains, they need to make change in their existing supply chain management systems to implement reverse supply chain management systems. Says Karen Peterson, “most enterprises do not have supply management systems which handle the reverse supply chain or, if they do, the existing applications are disconnected.”
Opined Mike Nardella, “companies need to make a major paradigm change. No longer can companies accumulate returns in the back of the warehouse or stores and ignore the issue of returns.” The first step in any successful reverse supply chain management system is to define the rules of reverse supply chain system. Karen Peterson views, “the first and most important activity is to actually understand where the reverse supply chain will contribute profits.” Adds C Glenn Mauney, “the initial focus should be on the desired business outcome of the reverse supply chain process and then the policies and procedures that are in place to support that outcome.” Many companies accept all types of returns while others do not. A lot also depends on the type of product. The return policy of the companies should clearly mention the type of return. Customers return products for repair or replacement. Channel partners return goods because of excess inventory or products exceeding their shelf-life. Original equipment manufacturers also initiate recalls. Ford recalled its Explorer model because of faulty tyres. Companies also need to educate the customers and establish new points of contact with them.
The different activities in reverse supply chain process are gatekeeping; collection; inspection and sorting; reconditioning; disposition; and redistribution. In gatekeeping, it is decided which products to be allowed in the reverse supply chain, otherwise companies might be flooded with products which cannot be recycled, remanufactured or disposed. Good gatekeeping is the first critical factor in making the entire reverse flow manageable and profitable. Next, is the process of collection of the chosen items. A major issue in collection is the high uncertainty regarding locations from where used produced products need to be collected, their quantity and timing. Once collected, the items need to be transported to locations for inspection and sorting. The inspection and sorting is necessary to decide what to do with each item. Companies might capture value from returned products by reconditioning components for reuse or by completely remanufacturing the products for resale. Disposition is the activity which decides where the items will finally go. Disposition of items is based on quality or product configuration. In redistribution, the company plans to sell the recycled product. While doing so the company first needs to determine whether there is demand for the recycled product or whether a new market must be created.
Reverse Supply Chain vs. Forward Supply Chain
Reverse supply chains differ from forward supply chains in information flow, physical distribution flow and cash flow. To manage reverse supply chain, companies need sophisticated information systems. Some of the technology involved in reverse Supply chain is similar while in some areas the technology used differs from that of traditional supply chain. According to C Glenn Mauney, “depending on the volumes and complexity of the returned goods flow, there is some information capture specialization and processing efficiencies in returned goods processing that requires some unique systems.” Technology used in reverse supply chain such as realtime inventory tracking system (bar codes and sensors) are similar to that used in the forward supply chain. On the other hand, Devangshu Dutta said that activities such as warranty tracking or de-manufacturing of product is different. Agrees Karen Peterson. According to her, “repair optimization; slow moving inventory optimization; and reverse logistics,” are the areas where reverse supply chain differs from forward supply chain.
In designing a successful reverse supply chain, it is important to know what type of product will be returned at which point in time at which place and in which condition. Hence, importance of data is immense. C Glenn Mauney opines, “tightly integrated automatic data capture, system directed disposition support, unique receipt handling, credit processing, comprehensive and flexible reporting are some of the important functional capabilities in reverse supply chain.” However, the legacy systems or the standard enterprise resource planning systems used by companies are not effective to support these functional capabilities. What is required is a data warehouse with extranet and intranet technology.
| Table 1: Barriers
to Reverse Logistics |
|
| Barrier |
Percentage |
| Importance of reverse logistics relative to other issues | 39.2% |
| Company policies | 35.0% |
| Lack of systems | 34.3% |
| Competitive issues | 33.7% |
| Management’s inattention | 26.8% |
| Financial resources | 19.0% |
| Personnel resources | 19.0% |
| Legal issues | 14.1% |
Cash flows in reverse supply chain are in terms of credits and discounts. Customer expects to get a refund on a return, in the form of credit card reversal or a cash discount. Unit warranty tracking is done by product serialization. While in forward supply chain, cash flows are mainly in terms of cash. Customers purchase goods with cash or credit cards.
Barriers to Reverse Supply Chain
Successfully implementing reverse supply chain is still a
problem for companies, as they face a number of obstacles. Mike
Nardella views that reverse supply chain is still treated more
like a necessary evil of the back end process of a logistics
process. Another barrier according to him is that there is lack
of commitment on the part of senior management. Senior management
should show commitment in the form of dedicating a team of individuals,
software and conveyor systems for reverse supply chain. Devangshu
Dutta opines that there are two types of barriers, internal
and external barriers. Internal barriers include preparedness
in terms of processes, systems and infrastructure of the company
to handle returns, while external barriers include amenability
of the customer.
Conclusion
Reverse supply chain is the last frontier in the supply chain, which remains to be conquered. C. Glenn Mauney opines, “it is clear that more and more attention is being devoted to the reverse supply chain as companies recognize the critical importance of managing the entire product life cycle.” Cost reduction is not the only benefit that can be gained from reverse supply chain. It helps in understanding why products are returned. Was it returned due to quality problem? Were the stores improperly stocked? Was there a labeling problem? Answering these questions enable a company to go to the root cause of returns, resulting in better engineering, manufacturing or distribution. It also helps to get slow-moving products off the shelf, the distribution networks and warehouses. Companies that have been most successful with their reverse supply chains are those that closely coordinate them with their forward supply chains.
