Category: Leadership

 KISHORE BIYANI: The Man They Wrote Off

admin

June 14, 2004

Two years ago, no one took Kishore Biyani seriously. His company, Pantaloon Retail, was seen as a one-man show. Biyani himself was regarded as unpredictable, and not a long-term bet. Today, he is the biggest retailer in India. In two years, Kishore Biyani has bounced back to become India’s largest retailer. Here’s how the maverick ignored conventional wisdom on retailing, and won.

By M. Rajshekhar

The makeover of 26, Residency Road is almost complete. On this Thursday morning, Bangaloreans walking down this tree-lined avenue slow down to stare at the megalith that has replaced the old Victoria hotel. It’s a sharp, new mall. The sort with escalators and huge grey metal flanks clamped to the walls outside.

That seems to be something of a running motif throughout Kishore Biyani’s life. Ask people who India’s largest retailer is, and chances are they will say B.S. Nagesh of Shoppers’ Stop or RPG Retail’s Raghu Pillai. And yet, it is Biyani who is the largest player in the Indian market today. This June, when he announces the 2003-04 results of his company Pantaloon Retail, his topline will be about Rs 650 crore. A clear Rs 100 crore more than RPG’s, the second largest player in the Indian market. Shoppers’ Stop is in third place with revenues of Rs 400 crore.

Back in 2002, when Businessworld last wrote about him, the ‘bania’ from Mumbai was in much the same position as the Congress Party was before the elections. No one took him seriously. Biyani hung around the periphery of the retail industry, which was dominated by personalities like the suave Nagesh, unlike whom, he was taciturn to the point of being tongue-tied. He fidgeted constantly during formal meetings, which made the task of carrying out any serious conversation with him quite an ordeal. Little wonder, he seldom received invitations to speak at industry seminars.

No one quite liked him either, because the man strongly believed – and said so bluntly – that his peers in the retail business were mere copycats. “Most Indian retailers tend to blindly copy from Western models. I am looking for a pan-Indian model of retailing,” he would say to anyone who cared to listen. His search for the ideal model also meant that he took colossal risks – something that scared away most financiers used to dealing with more conventional businessmen. On top of that, Biyani made no bones about the fact that he liked to run a one-man show. “I use people as hands and legs. I prefer to do the thinking around here,” he once famously said. As a result, both professional managers and investors avoided him. And few people gave him any chance of succeeding.

Between then and now, a lot has changed. Biyani has moved centrestage. Today he has three highly successful retail formats: the Big Bazaar hypermarket; Food Bazaar, that straddles the food and grocery business; and his original Pantaloons apparel stores. The property opening in Bangalore is his fourth model, a mall called Central. By the end of next year, he expects to have 30 Food Bazaars, 22 Big Bazaars, 21 Pantaloons and four Centrals. Right now, he has 13 Food Bazaars, 9 Big Bazaars (the 10th is opening next week in Nashik), 13 Pantaloons and one Central. Between them, Biyani’s stores occupy 1.1 million sq. ft of retail space. By the end of next year, they will occupy 3 million sq. ft.

With the opening of Central, Biyani says his portfolio is complete. Even as his competitors like the Rahejas (who own Shoppers’ Stop) embark on new formats (food and grocery), Biyani says that his appetite for experimentation is now sated. “I will no longer try out newer formats. My focus will be to consolidate our operations.” Don’t take him too literally, though. What he means is that he will continue betting on new opportunities ranging from gold to car accessories, but not on quite the same scale as, say, his first Big Bazaar or his first Food Bazaar. Instead, he will concentrate on ramping up each of his four main formats.

Drawn by his growth, in the last two years well-known financial institutional investors like Goldman Sachs and Citigroup Global Markets have picked up stakes in his firm. And when the stockmarkets looked buoyant just a few weeks before the poll results, the Pantaloon stock was among the best performing on the BSE. It quotes at Rs 311 today, up from Rs 51.25 a year ago. Things are going so well now that Biyani has stopped talking about selling out to foreign retailers when they come in.

“Things have really fallen into place in the last two years,” he says. It is noon, and we are walking through the mall. Inside, the whole place is a mess. There are less than 30 hours to go before Bangalore’s newest and largest mall opens for business. And, so far, nothing is in place. The escalators are not working. The shelves are still coming up. The merchandise is still coming in. The stuff which has come in hasn’t been unpacked yet. Cardboard cartons, plastic sheets lie everywhere. And yet, there is something oddly relaxed about Biyani’s demeanour. He wonders about the stockmarket. Why is it rising? Can Manmohan Singh be the next PM?

Perhaps Biyani is in an unusually good humour because he knows that the chaos will settle down soon enough. Just like it has with his entire business. A big factor, he says, was Big Bazaar Mumbai. The format was a huge gamble, says Bala Deshpande, who served as ICICI Venture’s representative on the Pantaloon board. Around 2001, when the first Big Bazaar opened, Pantaloon’s topline was Rs 180 crore. The company needed money to expand, but had just Rs 4 crore of profits. The share price was low (Rs 18), so it could not have raised much from the bourses. Biyani would also have had to part with a lot of equity – his family and he hold 40% in Pantaloon today. Biyani took a Rs 120-crore loan that pushed his debt exposure to as high as 1.5. If Big Bazaar hadn’t worked, he would have ended with huge debts and a loss.

But, as it turned out, the store clicked. In week one, the first Big Bazaar store pulled in over a lakh customers, and did a crore in turnover. By the end of the first year, Biyani had opened three more Big Bazaars. Riding on the hypermarket, Pantaloon saw its turnover of Rs 286 crore (2001-02) climb to Rs 445 crore (2002-03). Investors began to take notice. They also became more comfortable with the idea of him being a maverick. Says Biyani: “Investors look for growth. And there are not many growth stories in Indian retail. Most companies are growing very slowly.”

It helped, also, that around the same time, Biyani began to pay a lot more attention to what the investors wanted. Says Deshpande: “As the new investors came in, they told him that he needed to delegate in order to grow.” And so, he went on a hiring spree. Biyani pulled in the head of Globus, Ved Prakash Arya, to handle operations; Jaydeep Shetty from Inox to create new brands; Sanjeev Agrawal to handle marketing; Kush Medhora from Westside to look after new store rollouts; Ambrish Chheda came in to look after Food Bazaar and handle business development; Bina Mirchandani came in to look after the merchandising; V. Muralidharan came in from Lifestyle to head Central…

Persuading the professionals wasn’t easy. Take Kush Medhora. Initially, he didn’t want to join. “I thought the company was unprofessional from the way the first few stores looked. I had also heard that the company was a one-man show.” But during the job interview, Biyani told him he wanted to abdicate everything except strategic planning and the selection of new locations. That helped Medhora make up his mind.

There is probably another reason why Medhora joined. He enjoys the adrenaline rush. His job, opening new stores, keeps him on the road for 220 days in a year.

As the company grows by leaps and bounds, it is discovering all the advantages of scale. In everything, from raising finances to negotiating rates, the economies of scale kick in. To go from its current 1.1 million sq. ft of retail space to 3 million sq. ft by the end of 2005, Biyani estimates he will need an investment of about Rs 250 crore. Of that, Rs 32 crore has been raised through a convertible debenture offer made in November 2003. Another Rs 60 crore is being raised though debt. The current cash flows should take care of debt servicing without much problem. Meanwhile, the rapidly growing profits can be ploughed back to fund the expansion. The company has an EBITDA (earnings before interest, tax, depreciation and amortisation) of a little over Rs 65 crore. Right now, says C.P. Toshniwal, chief of corporate planning, “Our turnover is around Rs 650 crore. But by next year, the turnover will be Rs 1,300 crore. So, we will have an EBITDA of Rs 130 crore, all of which help fund the expansion.” In contrast, Shoppers’ Stop will throw up Rs 24 crore as EBITDA this year.

Interestingly, even as Biyani gets more cash from his business, at the same time, he is making that cash work harder. In the old days, he says, “I would have paid Rs 7 crore-7.5 crore for a 50,000-sq. ft store and I would have done an annual turnover of Rs 35 crore. Now, I spend about Rs 4 crore for a store of that size, and do a business of Rs 50 crore-60 crore.”

You can attribute that partly to the mall-making frenzy in this country. There is a shortage of anchor tenants in this country – at least ones that can pull customers in, and Biyani is exploiting that. Not only is he able to negotiate lower rentals, he has begun insisting that mall owners also develop the place for him. In the old days, he says, “We would buy the property, do the fittings and so on. Now, I just take a fully-appointed building from them.”
Day two. Kishore Biyani is standing on a scooter. The Businessworld photographer is trying to get some elevation into the photograph. From that unsteady perch, he is talking about why he thinks the best is yet to come for his chain. All his formats, he says, are seeing an interesting evolution.

Take Pantaloons. This is the brand that started Biyani’s transformation into a retailer. Back in 1997, Biyani was manufacturing two brands, John Miller and Bare. Both were struggling. Even though his products were good, and the pricing was competitive, high distribution costs and margins were making the whole business unviable. And so he decided to set up his own stores. That year, the first of these came up in Kolkata. At this stage, the plan was that the company would open another 2-3 such stores, no more. Recalls Kabir Loomba, who worked with Biyani as a chief operating officer (COO) in that period: “When the first store came up, we did not know when the second store would come up.” But the Kolkata store was an eye-opener. Biyani had been hoping it would do about Rs 7 crore in its first year. It did Rs 10 crore. Loomba feels this taught Biyani an important lesson: the Indian market was under-retailed. This was when the aggressive retail expansion started.

Over the years, Pantaloons has been through a few makeovers. And right now, it is getting another one. Biyani is junking the old positioning of ‘India’s family store’ and is planning to target the youth instead. His consumer insight is, like always, a shade radical: “Within a family, people were thinking and dressing and acting very differently. Which is why I believe studying Indian consumers by demographics and psychographics is a waste of time. We should look at communities: techies, metrosexuals, etc.”

Zara has a neat model that lets it launch new lines in less than 21 days. What made it possible is that it had its own factories. Biyani is doing something similar. Faster manufacturing, says Anshuman Singh, who looks after the supply chain, will let the company keep less inventory, which will make it more responsive to market changes while reducing the amount of stocks to be sold at a discount. At the same time, as fresh stocks hit the market faster, sales will rise. By becoming much more responsive, says Biyani, “We can up our margins by 5-6%.” Right now, he has brought the time lag down from 90 to 40 days.

But fashion tastes in India don’t change that fast. So the real question is: what will it take to drive disposability of clothes higher? According to retail consultant Devangshu Dutta, that is price. “Pantaloons will have to really bring prices down, by half or so. But that might create a problem between Pantaloons and Big Bazaar, for the latter is also based on apparel.”

And then, there is the format that fascinates and worries Biyani: Food Bazaar. Right now, of the company’s topline of about Rs 650 crore, Rs 250 crore has come from Pantaloons, the apparel store, another Rs 230 crore from Big Bazaar and the rest (Rs 160 crore-170 crore) is contributed by Food Bazaar. Biyani worries that Food Bazaar is growing too fast. He says: “I could double the stores I have and still face no problem. But it is important to recognise that it should not be more than 30% of my topline.” (That is why, he says, “I have underplayed food in Big Bazaar.”)

That flies in the face of conventional wisdom. Most retailers believe food is central to their retailing operations. If you look at the rival hypermarket format Giant from the RPG stable, 50% of its revenues come from food. In contrast, Biyani doesn’t want the share of foods to rise over 30%. He has a simple explanation: in India, cost of modern retailing is very high, and food doesn’t offer adequate margins. If cost of operations is 30%, food margins are just 12-14%. In contrast, apparel and non-food segments offer margins of 25-30%.

Part of his success is the ability to paint on a blank canvas. Incredibly, when Big Bazaar was conceptualised, he put in place a team of four people, including himself, none of whom understood the hypermarket business. And one of the first insights the team had was that all neighbourhood markets are the same – each of them has a bania, a dry cleaner and a chemist. “We knew we would have to create that same mix of the mandi in whatever new format we evolve.”

Or take Food Bazaar. “I am going to change the face of food retailing in India,” promises Biyani. Right now, he is working on a new focus for Food Bazaar. He calls it ‘farm to plate’ – essentially, a plank to improve freshness in the products. Boasts Chheda, the chief of business development: “The Ahmedabad Food Bazaar has a full-scale dairy set-up in place with a capacity to produce 1,000 litres a day. We make our own paneer and pasteurise milk. The company is also adding spice grinders and atta chakkis (flour mills).”

It’s an example of how earthy entrepreneurs think differently. Says Biyani: “It is obvious to everyone that what Indians prize most in their food is freshness. That is what I need to give my consumers. But most managers take that as a mandate to set up a cold chain in this country. But I wonder, why cannot I have a farm next to my store? Managers always complicate things. It is the MBA culture. B-schools teach you how to manage complexity, but I don’t think that is necessary. Life is quite simple.”

Central is a smart concept too. It is a seamless mall. In other words, while there are lots of retailers under one roof, the look and feel is like that of a department store, down to the unified billing centre. And yet, all the stocks are held not by Biyani, but by the partners. By the end of September, Biyani will add two more – a 210,000-sq. ft monster in Hyderabad, and a smaller one in Pune. A fourth one will come up by May next year. The four Centrals will do about Rs 360 crore in turnover in the first year.

To continue innovation, Biyani has a new businesses team. Newly constituted under the charge of former Globus manager, Anand Jadhav, it is trying to identify new businesses for the company. Says Jadhav: “In 4-5 years, same store growth might start to plateau. To keep that rate of growth intact, we are identifying new businesses we can expand into, or use to replace less profitable ones.” Right now, Jadhav and Biyani come up with the ideas and Jadhav’s team sees how each of the areas can generate a topline of Rs 100 crore in two years. So far, he has zeroed in on footwear, music and car accessories. His mandate: to launch 3-4 business ideas every year.

Talking about managing innovation brings us to contrast Biyani and Nagesh. Nagesh believes Biyani will have to give up on gut-feel soon. “Gut-feel is not consistent. He will just confuse his managers terribly. There is no doubt in my mind that Kishore will have to go in for tech-driven answers.”

In many ways, the two are poles apart. Nagesh is extremely systematic. He gets systems in place and then scales up very fast. Biyani works the other way around. He believes in growth first, and that problems can be fixed along the way. As the Indian market evolves, it will be interesting to see who has the better retailing organisation. The scientific Shoppers’ Stop, or the serendipitous Pantaloon. It will also be interesting to see how Pantaloon retains its founder’s intuitive spirit even as the professional managers and systems take root.

It is a little after 6 p.m. The diya is lit. The ribbon is cut. And the mall opens for business. A lot of employees are hanging around, all eager to see how the mall does. Medhora is standing, grinning, near the entrance. “Five days before the store opened,” he tells me, “A tenant called to say he could not get any cabinets for his counter. We had to run to find carpenters. We got the cabinets just in the nick of time.”

The mall begins to fill up. The first glitches reveal themselves. The public address system is not working too well – the speakers are too high. And then, a few minutes after the mall opens, the power fails. The lights dim. The escalators stop moving. Opening glitches, shrugs Biyani.

---

Indian exports in 2005: One of the seven missing wonders?

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.

 

---

Developing Customer Loyalty

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.

---

Supply Base Consolidation: A Step Too Far?

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:

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

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

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

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

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

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

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

Achieving the golden mean

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

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

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

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

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

Managing diversification

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

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

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

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

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

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

---

The Brave New (Old) World

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.