Devangshu Dutta
December 27, 2002
This is a brief note to share an impromptu impression (and some anguish) about our apparel exports that came up after reading a magazine article recently. But let me start by sharing quotes from that article:
Quote 1: India is an ideal sourcing base…Company A has a global purchasing process in place, which helps to source from any best “QSTP base” (that’s quality, service, technology and price) across the globe. “Some of the Indian suppliers are providing the best QSTP”, points out the vice-president of corporate affairs for Company A.
Quote 2: Exports today make up 12-15 per cent of Company B’s US $ 200 million (Rs 1,000 crores) turnover, and are expected to contribute 25 per cent of revenues in three years…”We recently won the bid for a specific product. This is a product that we do not make in India, yet our facility won the bid,” explains the director of exports in Company B which made US $ 1 million from the product and will start exporting it to Canada soon.
Quote 3: “The advantages of sourcing from India are assured quality to meet customer requirements, a wide product range, availability and competitive pricing. India is a perfect sourcing base.”
Quote 4: “I believe India should aspire for an export growth of 20 per cent per annum over the next decade – nearly double the current target of 12 per cent in our Tenth Plan.”
Do the above sound like anything you have recently heard from our customers? If so, congratulations! If not, you need to seriously ask yourselves. Why not! Would you believe it if I told you that the four quotes above are from industries where India had virtually no competitive advantage even five years ago (and I am not talking about software), and hardly any presence in the world market?
But that is actually the case. The industries and the companies are automobiles (General Motors), consumer durables (Whirlpool), speciality chemicals (Clariant) and fast-moving consumer goods (Unilever/Hindustan Lever). Cast your mind just 15 years ago to Premier Padmini and Ambassador. I still remember the ad launching the Ambassador Mark IV with its “sleek” looks (that was what the ad said!). And here we are in 2002, when two of the largest car companies in the world, Ford and General Motors are exporting cars and components to other markets. The very same country, the very same industry, and a much more competitive time. And yet, the India supply base is managing to shine! The same is true of the three other industries quoted above. And I haven’t even started talking about the software industry, let alone many other sectors.
So, in that context, let us talk about our traditional (centuries-old) strength, with over 30 lakh people under employment base — the textile and apparel industry. Once upon a time India used to have a market share of 25 per cent in the global trade. People within the industry can readily prepare a long list of problems to share with anyone willing to listen, explaining why we are no longer in that dominant situation. Most people think that the problems the industry is facing are very recent.
In the context of the (correct) view expressed in the government that future growth will be garment-led, let me quote another fact. Indian garment exports missed the target not just in 2001, but also in 1997, 1995, 1993 and 1991. In 1996, we barely scraped past. Does this mean that the apparel export growth target unrealistic? Or is it that the industry is slipping up in terms of taking enough action, and is only reacting to external events? Is there a way to take the industry successfully into the future?
It seems that every time there is some external adverse factor, the Indian industry seems to get badly hit, otherwise it seems to do just fine. Even global trade statistics and Indian export statistics suggest that India is riding piggy back on the growth in global trade. That means when the going is good, it rides the wave, and when the going gets tough, there is very little internal strength for it to sustain itself.
September 11, market recession. Maybe WTO quota-free environment in 2005 will, therefore, do the same thing? As individual companies, some firms (I won’t name them) have invested wisely and may be still around as a growing part of a diminishing base of companies. Others will have to think hard now, if they still want to be around and growing. My suggestion. Don’t think only about “price” or “cost”.
The thought process, and the actions that we take, need to reflect – Product, people, process and technology. Why? Because, if business trends are poor, buyers tend to first dump the worst suppliers. If the business trends are good, buying from the best suppliers increases the most. It’s really a very obvious choice. Only companies that take into account all the above factors, will migrate towards the better end of the scale and therefore survive.
H&M is one of the larger sourcing companies in India. Yet, I remember sharing the stage at a CII conference a few months ago with their global sourcing head, and he said (with some regret, I believe) that India’s share in their sourcing was going down. This is from a company whose own business has been growing rapidly. It is our misfortune that we are not able to capture the growth equally in our exports to this company.
The government also presents a mixed bag of actions and inaction, because there is no clear growth vision that is strongly lobbied by the entire industry (from fibre to apparel as a supply chain), or even from an entire sector (for example, all apparel exporters). A journalist, I was speaking to just about one year ago, quoted a prominent north Indian garment exporter who was extremely pessimistic about his company’s and the entire industry’s business prospects. If there is such “confidence” within the industry, what kind of a picture can we present to external parties? (A short story break: A poor man prayed for years and years to his family’s deity, asking for help in managing his household expenses. Finally he got sick and tired of the whole thing and started to throw the sacred idol out of his house, when the god appeared and asked him why he was so angry. The man vented his frustration about not getting any help from god, despite the years of prayers and meditation. The lord said, “My child, you also need to make some effort to give me the means to help you. The least you could do is to buy a lottery ticket!!”)
Substitute “government” for “god” and “industry” in the place of the man, and we find a similar situation in real life.
People actually sit up when I say that the Indian industry exports about Rs 30,000 crores of garments, and a total of almost Rs 60,000 crores in all textile products. People, even within the industry (surprised?) are not aware of the magnitude of the importance and the impact of the apparel industry. It is one of the best kept open secrets. There is very little hype, and very little interest. Therefore, there is very little support from anyone else that the industry needs support from. The only time the Indian fashion industry hits the news is when a “Fashion Week” comes to town, representing the interests of a segment that does a total of less than Rs 200 crores of business! So will the Indian apparel export industry be around in 2005, or will it be one of the seven missing wonders of the world?
A 6-year old quoted the following in his school assembly a few days ago, “The real difficulty lies within ourselves, not in our surroundings.” I think that is a very good introspection with which to end this note (although I have many more thoughts to share), and a good starting point for the rest of our thought process.
Devangshu Dutta
September 13, 2002
A few years ago when I was called upon to make a presentation about customer loyalty, I ran into this brick wall of, “Do loyalty programs work or don’t they?”
The way around the wall was to not look for a black or white answer. Some programs work and some don’t. The difference, I found, was in the degree of impact on core operations (e.g. product selection, displays, pricing etc.) – i.e. how these were fine-tuned from the feedback and other information collection from the loyalty program.
What was certainly clear is that we can clearly differentiate between loyalty that is “bought” (discounts, freebies, loyalty points etc.) vs. loyalty that is “earned” (i.e. you attend carefully to what the customer is saying she wants, and you make sure that you go all out to provide that).
The hotel and airline industry, where well-structured loyalty programs have their roots, depended heavily on buying loyalty. Interestingly, these are now proving to be long-term liabilities, which initially led airlines to put an expiration date and is now leading them to de-value the mileage points (just like a country would devalue its currency!) – thus customers would need more points to make the same trip.
On the other hand, those retailers, hotels or airlines that have learned from their loyal / club / elite customers, have made sure that their offer is constantly value-added, and in some cases constantly differentiated.
In most markets, the top criteria for a consumer to select a store are operational (location of the store, availability of product, range of merchandise, pricing, etc. etc.), and often there is a huge gap between what the consumer expects and what the retailer serves up. In that context, a loyalty program is like applying band-aid to a fracture!
Does this all mean that all “bought loyalty” is useless and that loyalty programs don’t work? Not at all! Retailers can certainly use loyalty schemes to identify high value customers and cultivate them through ongoing exchange of information, and also reward customers for their purchase behaviour. But building and retaining relationships with customers and increasing the share of customer spending in-store is something that can only be delivered by better operations.
We need to reconsider the motivation to have a loyalty program. “Loyalty” schemes’ primary benefit is not loyalty, but a basis of building relationships with individual customers in gathering “Purchase Trend and Product Information” and in achieving better focus and targeting. These need to be used to improve operational effectiveness which produce loyalty – product focus and a service customization opportunity.
Devangshu Dutta
May 29, 2001
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:
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
October 11, 2000
Over the past few years, the Internet has been revolutionising the way we interact with each other, as individuals, as companies or corporate entities, providing a mass of information keeps growing with no end in sight. With cheap and direct access, we can quite simply move around with a few clicks, most of the time locate what we want, make an informed (and even comparison-based) decision, and exit. Surely, as many pundits forecast, the Internet should bring an end to intermediation of any sort. Well, yes. And no.
Yes, the Internet makes information more easily accessible to everyone. Every week there are literally thousands of websites, hundreds of portals and at least a few dozen exchanges that spring up. These get hit upon either directly, or via the many search engines that, in turn, are also constantly updating and fine-tuning their search algorithms, pushing to create sensible shortlists that are useful for the researcher. One is even named after the butler created by P. G. Wodehouse, with the implicit claim that it will anticipate your needs even before you know of them! However, these are only attempts at generating intelligence (at best), more often just information, quite a lot of which is unintelligible, and very far from the “knowledge” that we human beings seem to create in our minds quite automatically as we go about doing our tasks. Just a few days ago, I was searching for hotels in the US – what I downloaded was a morass of information, and I spent a whole day sorting through it. In this case I could have just as well requested a trusted travel agent to come up with a few appropriate options for me, from which I could have booked my choice.
Our minds are, yet, the best-known computer to man, in terms of versatility. Our minds can store enormous amounts of data – a surprising amount remains in long-term memory (despite the fact that often we can’t seem to remember the name of the person that we just met in the lift!). More importantly, we can connect and inter-relate seemingly unrelated items of information, for example, creating travel itineraries covering flights, hotels and various other details into a plan that is most effective and efficient keeping in mind the time constraints, costs and our objectives for travelling. We are still not fully-there from robot programmes which will automatically find you the best prices, and the most convenient locations or times, let alone do that for hotels AND flights AND trains and any other items that your itinerary contains. Travel is actually probably one of the simpler examples – you could still create parameters which, provided the base information about price, time or location is provided by the service providers, can be used in programmes that can analyse patterns of new and past data, and revert with some shortlisted options.
Let us think of a more complex example – the textile and apparel supply chain. It is one of the most fragmented industries, and possibly one of the most global in terms of trade flows. There are multiple layers of raw materials and intermediate products, most of which pass through some sort of intermediaries (such as commission agents, stockists, importers etc.). In such a form the industry is a prime candidate for opening out to the Internet, where suppliers can create their websites, or store their information through other platforms (such as “exchanges”) which can be accessed by buyers from around the world – easy to set up, independent of time zones and very very low cost. Get rid of the multiple layers that mostly add costs, book orders directly, get rid of stocks… sounds like a heaven-sent opportunity!
Well, that is how it is being seen by the 70-80 exchanges that have come up around the world, or are in various stages of being set up. Some of these have been set up by existing industry players, some by technology companies, and yet others by people who have set up exchanges in other sectors who believe that similar business principles can be applied to the textile and apparel supply chain as they have applied in the other sectors. This should dramatically raise the direct access between suppliers and customers – be the end of agents and other intermediaries – and basically make millions for the companies promoting the exchanges!
Yet, around the world, retailers and brands that buy finished products and raw material do not seem to be rushing to stake any significant proportion of their purchases to web-based sourcing. And there are multiple reasons for that.
Firstly, such a proliferation of exchanges seems to be only a reflection of the fragmentation, and there does not seem the likelihood that any clearly dominant player will emerge in the next few months. There is little or no differentiation between most of these exchanges – most of them offering a sophisticated yellow pages capability, while others offer possibly a few add-ons such as functionality that allows buyers to bid for stocks, or suppliers to quote for products.
Secondly, in certain areas, buyers or suppliers themselves have got involved in setting up exchanges. Some of these are private web-based initiatives (such as Wal-Mart or Littlewoods on the retail end, or LiFung.com or TheThread.com on the supply side), while others apparently are more public and collaborative, such as World-Wide Retail Exchange.
Closed web-based systems are excellent for the company that is initiating it, because it enables the company to streamline operational processes. However, it does create another platform for people to adapt to, though web-based systems are less painful certainly than EDI or other proprietary systems, which require specific investments. Also, occasionally it brings up the question of conflict of interest. For example, how comfortable would one supplier feel in sharing internal information with another supplier who has taken on an additional role?
Other initiatives, such as the WWRE, have got off to a good start, but here internal stumbling blocks are inevitable due to the composition of the groups. Consider the WWRE: 27 retailers currently, in four separate areas of operation (as diverse as food and clothing), with different geographical bases, which make the business imperatives very different for the various participants. Add to that the fact that people are loath to share knowledge that is considered proprietary by them, whether process knowledge or supplier contacts. It is a long-drawn process of consensus management in such a large initiative.
Thirdly, what kind of a service offer is the best? As of now, there is are options available from various B2B service providers, offering varying areas of benefit, from listing services to “software solutions” for various applications, to loose working relationships. Not only do the service offerings actually vary, there are varying degrees of claims and counterclaims that muddy the waters further.
The scenario is actually as confusing as it seems to be – players, whether exchanges, portals or any other kind of company, are dynamically evolving their business models, with changes seemingly almost every week, and new players emerging all the time. In such a scenario, buyers (who are early-adopters) will get into as many exchanges as possible to get the maximum choice, and to hedge their bets. On the other hand, the majority – which comprises of buyers who adopt new technologies later – will hold back to see which exchanges come up as the most widely accepted or most appropriate for them.
Finally, whether we like it or not, textile and apparel products are inherently emotional products. They are, of course, driven by specifications, and those specs can be defined fairly precisely. But what the specifications cannot ever completely convey is how a buyer feels instinctively about including a product in a range. Or, indeed, what the impact would be of making some minor adjustments that can be visualised, discussed and decided in an interactive session between a buyer and a supplier. Or, for that matter, what is the best way to reconfigure a supply chain, under pressure of a new order, or an unforeseen delay in the process. Intermediation is something that has become ingrained in the textile and apparel supply chain.
In such a scenario, it is unlikely that intermediaries will disappear immediately. What is certainly happening, however, that while previously buyers were willing (or forced) to pay for having access to information, pure information itself is being made a commodity. In this frame of reference, companies are seeking out “genuine value-for-money” before they will shell out a buying or selling commission. Process or domain knowledge is an absolute must – only this can enable web-based companies to create unique and genuine value-adding web-solutions. Simply putting up a ‘telephone directory on the web’ will fetch very little in return. Even though a telephone directory has hundreds thousands of entries, how much do you pay for it? Relationship-management and process-management capability will remain in demand, and many of the existing intermediaries certainly show a lot of that.
Vertical integration
One of the most important developments that will certainly be an accelerated outcome of the internet, will be the vertical integration of the textile and apparel supply chain. While, in the past, the very diverse nature of the stages of the supply chain has created and maintained multiple layers, web-based technologies are now enabling companies to structure and manage the apparel supply chain from as early a stage as they wish to, be that fabric, yarn or even fibre. It is more feasible to exert control, without actually physically owning the different bits of the supply chain.
Breaking down size barriers
Another significant outcome is that the web breaks down “size” barriers. Large retailers typically bought from large suppliers, while small retailers typically did business with small suppliers. Any “criss-crossing” (i.e. small companies dealing with larger companies) needed middlemen – individuals or companies that broke bulk or consolidated orders, for small or large retailers, respectively. This had more to do with operating systems, management capabilities and the scale needed for relationship management than it did with actual barriers. Now, however, web-based systems can allow some parity between organisations of different size, because at a low cost the same level of functionality is available to companies of all sizes, This is significantly changing the balance of power, and the overall structure of the industry. Scale was never the only surrogate measure of capability in this industry, but the correlation between actual scale and perceived or actual capability is getting even more vague over the Internet.
The impact of the web on the textile and apparel industry is not going to be immediate – it will take a while to permeate the hundreds of thousands of companies that make up the supply chain – so there is some breathing space.
But surely, in the next five years, the textile and apparel supply chain that we shall be seeing, will be structured quite differently from the existing supply chain. There will certainly be some casualties. What is important is that you – whether you are a supplier or a retailer – should start taking cognisance of the changes to come, and begin changing your own business to avoid being one of the casualties.
Devangshu Dutta
September 30, 1998
In the simplest terms, sourcing entails “buying a product”. So presumably, if you have the need for a product and know the cost at which you want to buy it, and you can find someone who can sell it to you, it should be a straightforward transaction. What happens in reality is often somewhat different.
The Sourcing Process
You start with a product in mind, with certain specifications. You build certain sales projections based on past performance, forecasts etc., you evaluate supply bases, select one or more suppliers, factor in a logistical plan to get the product from your supplier to your distribution centre or stores, manage the communications, often including information technology to control the 2-way flow of information, and finally hope to achieve the margins that you had planned for. That may well happen, but equally there is all possibility that it might not. On the supplier’s end, equally, the customer’s sales forecasts might not be achieved which might lead to reduced order quantities, the logistics provider might delay or even lose your entire shipment, causing claims, or even loss of a customer.So is a sourcing relationship a gamble?
“Sourcing” is made up of two elements, both of which contribute to the success or failure:
The following steps need to be taken to reducing the uncertainty and risk in sourcing approaches and strategy:
Global Business Trends
Let us look at what the trends in global business are. One the retail side, three major trends are clearly visible: cross-border retailing is growing, retail consolidation is increasing, and retailers are opting for multiple formats to reach their customers. All of these changes are prompted by the objective of maximising the “consumer ownership” – either by accessing new consumers (in other countries or in a different market segment) or accessing the same consumer who might express different needs at different times. These three major trends are even becoming visible in the same retailer, for example:
Each trend places a different set of demands on the sourcing and supply strategies and structures. For example, cross-border moves create the need for multiple supply bases, due to differential production costs as well as import regulations, and also highlight the need to manage increasing logistical complexity. If a supplier is to keep pace with its major customers, it must be able to service them in multiple locations equally well.
Consolidation through mergers and acquisitions creates the opportunities for economies of scale, brings out the need for large, well-equipped suppliers, but also provides the opportunity for supplier rationalisation, which can be a threat to the business of suppliers who may not appear among the list of the “best” suppliers for the newly merged retail business.
Format migration creates different service needs for the same retail customer; for example, a high street retailer who normally has only marginal merchandise returns might face the need to handle as much as 15-30% returns on a new catalogue or internet business. Different formats, or different markets can also require product diversification due to different sizes, or different price-quality norms.
Global Trade Trends
On the other hand, on the trade side, there have been significant shifts in terms of trade agreements such as transitioning of the GATT to WTO, which promises lower import barriers (quotas, duties) and regional agreements such as NAFTA, which are collectively leading to encouraging trade across borders.
There is an increasing availability of new low cost supply bases in close proximity to the major markets (such as Mexico for North America, and Central Europe and North Africa for Western Europe) where export growth is booming, creating serious competition for the well-established trade routes such as Asia to North America and Western Europe, or intra-EU trade.
The trend towards cross-border trade is clearly visible, particularly in the US and EU, where imports have gained market share from domestic production. In the EU’s case domestic production, while still higher than imports in terms of share, has actually declined since 1990. USA sourcing shifts point towards a clearly dominant share of sourcing from within the Americas, and indicate a growth of a “Free Trade Area of the Americas” (FTAA) from the NAFTA concept. This would clearly serve the domestic industry’s competitive purposes as well, since production elsewhere in the Americas could be either owned or closely controlled by US manufacturers.
The EU, on the other hand, seems to be diversifying its supply base. While Eastern Europe and North Africa have come up quickly in the recent years, Asia maintains and is growing a dominant share, with many other bases expanding or appearing, such as the Indian subcontinent and new supply countries in South East Asia.
How Should You Respond?
So what should be your response in terms of future business strategy? First of all some fundamental shifts must be made in thinking about sourcing and supply.
If you are a buyer or a sourcing executive, understand that:
A study done by the global consulting firm, Kurt Salmon Associates, calculated that for every new country that you move into, a trial order of 10,000 pieces would cost an additional US$ 42,500 in terms of supplier identification, development, product development, quality assurance etc. – that is over $4 a piece. Is every new opportunity worth that cost? Will you be able to gain adequate margins over significant volumes that will make the initial investment pay for itself? Will the new supply country be able to offer an extensive enough production base that go beyond the first products that you have looked at? And even, could the country actually become a market for you in the future (in which case it makes eminent sense to develop it as a supply base)?
To be most effective in the emerging scenario, look for sourcing platforms or “hubs”: countries and supply bases that not only are strong suppliers right now, but those that can serve as launch-pads to enter other countries. These platforms or hubs are typified by being located amidst many other potential supply bases, they possess intrinsic skills to develop product and manage production, and have access to a variety of raw material, both local and imported. Rather than making the buyer hop countries every time there is a problem or a new opportunity due to lower cost, the hubs allows the buyer to concentrate efforts in a region, develop that supply base consistently over a number of seasons or years, while leaving the low cost or new product opportunities open in other countries in the proximity.
Understand costs completely: these include not only the primary product cost, freight and import duties, but also financial costs (e.g. Letters of Credit, financial administration etc.), cost of quality assurance, remote business management costs etc. Further, the drivers need to go beyond primary cost, market access and quotas, and must take into account measures such as “realised margins”, responsiveness and match with customer proposition.
Low labour cost supply bases exist even close to the major markets now – so is Bucharest better or Bangalore? The answer lies in looking beyond costs alone. What capabilities do you possess within your organisation, and what do you want from your supply base? The more product development, supply management and service capability you can build within your own organisation, the greater the number of potential supply bases. Typically, with a highly developed sourcing organisation you would be able to tap into more low labour cost supply bases.
Three key areas define business focus: Price, Product and Service. Each demands a different approach to the customer, and therefore to sourcing and supply. A price-orientation focusses on efficiency, a product-orientation on innovation and product development, while a service-orientation focusses on reliability and responsiveness. You need to determine what combination of these factors determines your positioning in the competitive marketplace.
Also understand that traditional sourcing, based on seasonal patterns and long, variable lead-times are giving way to new methods. Companies increasingly need to classify their products as core products, seasonal products and fashion products. Core products tend to be basic staple items that provide large amounts of business over long periods of time – the focus in these clearly needs to be on planning, replenishment and efficient, cost-effective, consistent supply. Fashion products on the other hand have a very short selling window, and must be developed and brought to the market quickly – their value is in their newness and their being in the market at the right time – the focus here clearly must be on speed in product development and production.
Research indicates that major companies are indicating a shift in their sourcing from traditional seasonal patterns to replenishment-type of sourcing and “speed” sourcing. Have you analysed your own product range and adapted your sourcing accordingly? If you are a supplier you also need to understand these issues, and must adapt your business strategy suitably. Or else you run the risk of losing your business to a lower cost or more responsive competitor, who might either be next door, or half-way across the globe.
The key to survival in the new millennium clearly lies in:
To do so, it is imperative to put in place all the building blocks: appropriate management structures, business performance measures, business processes, training and skill development, information technology and supply chain relationships. Ignoring any of these building blocks will only result in a shaky foundation for future business.
© Devangshu Dutta, 1998
