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.

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:

1. Sourcing approaches, and
2. Supply approaches

The following steps need to be taken to reducing the uncertainty and risk in sourcing approaches and strategy:

1. Understand global trends
2. Define business strategy and select a clear “position”
3. Use the business strategy and positioning to define the sourcing strategy and processes

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:

• Wal-Mart expanding outside its home market through acquisitions, while also diversifying into different formats – discount stores, hypermarket, neighbourhood stores and internet retailing, or
• Tesco approaching the customer through supermarkets, neighbourhood stores, convenience stores, hypermarkets, the internet and catalogues, and also growing its business through acquisitions in western and central Europe and south-east Asia.

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:

• Sourcing strategy needs to be driven by market fashion and consumer proposition.
• Different, appropriate sourcing methods can co-exist in the same business.
• “Best practice” depends on consumer and product life cycle needs of each business.

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:

• Understanding your customer and your customer’s customer
• Selecting a clear positioning based on Price, Product and Service, and
• Defining your competencies in the supply chain.

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