admin
January 2, 2003
Companies spend more time and money in fine-tuning their forward supply chains while ignoring their backward supply chains. However, in today’s competitive business environment when there is both external and internal pressure, companies can no longer ignore reverse supply chains. Efficient reverse supply chains bring many benefits to the companies. However, reverse supply chains are different from forward supply chains and most of the existing forward supply chains are not designed to handle reverse supply chains.
In today’s highly competitive business environment, the success of any business depends to a large extent on the efficiency of the supply chain. Competition has moved beyond firm-to-firm rivalry to rivalry between supply chains. Managers in many industries now realize that actions taken by one member of the supply chain can influence the profitability of all others in the supply chain. Companies like Wal-mart are trying to squeeze more costs out of their supply chain to offer everyday cheaper price to the customers. On the other hand, more and more companies are focusing on their core competencies while outsourcing the rest. But without efficient and effective supply chain, companies cannot benefit from outsourcing.
Supply chain is defined by The Council of Logistics Management as “the process of planning, implementing and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements.” However, a company’s supply chain is not limited to delivering products to the end-consumers. What about the defective products that are returned by the consumers back to the company?
Though reuse of products and materials is a common phenomenon, companies have long ignored this part of the supply chain, known as reverse supply chain or backward supply chain. A common example of reverse supply chain is the soft drinks bottles pickup and delivery system, where soft drink bottles are returned and reused repeatedly. Companies were so long under the impression that returns compared to sales generate little or no money. However, with the growth of direct-to-consumer channels like catalogs and Internet, sales returns of merchandize by the consumers has increased. C Glenn Mauney, Senior VP, Manufacturing Services Genco Distribution System, says, “there is growing recognition of the value that can be recaptured from the unproductive assets resulting from return merchandize.” Goods worth over $100 bn are returned to US retailers annually. According to Devangshu Dutta, Director of a supply chain solutions company, “nearly 20% of everything that is sold in America is returned.”
The Council of Logistics Management defined reverse supply
chain as “the process of planning, implementing and controlling
the efficient, cost effective flow of raw materials, in-process
inventory, finished goods and related information from the point
of consumption to the point of origin for the purpose of recapturing
value or proper disposal.” (Refer Figure 1)
Necessity of Reverse Supply Chain
The foremost reason behind companies giving importance to reverse supply chain is that it reduces operating costs by reusing products or components. For example, previously, Estee Lauder Companies Inc., used to dump nearly $60 mn worth of its products into landfills every year. However, after setting up reverse supply chain it has been able to reduce the volume of destroyed products by half.
Companies have started realizing the importance of reusing products or components; as a result, reverse supply chains are becoming essential part of business. “Retailers/e-tailers are facing challenges as returns policies are becoming more lenient,” opines Mike Nardella, Senior VP, Logistics, return buy. C Glenn Mauney supports his views, according to him, “the increased emphasis on new products and product “freshness” has caused a need to clear the distribution channel more often, requiring an efficient means to bring back obsolete, outdated or clearance items.” For example, Xerox replaces or upgrades hundreds of office printing machines every month.
In some cases companies are forced to set up reverse supply chains because of environmental regulations. C Glenn Mauney, opines, “many countries/states have instituted regulatory requirements regarding recycling and product disposition that requires increased record keeping and tracking. For example, from 2003, European Union is bringing a legislation that will require tire manufacturers operating in Europe to arrange for the recycling of one used tire for every new tire they sell. Some companies are using reverse supply chains as an integral part of new businesses.
For many large manufacturing and technology companies, aftermarket services forms a significant portion of their revenue. Also, providing timely and efficient service has become a key competitive differentiator in many industries. Karen Peterson, VP and Research Director, Gartner, agrees. According to her, “better management of the reverse supply chain translates into higher customer service and consequently, higher customer satisfaction; and industries and the enterprises within them are realizing that management of the reverse supply chain is a revenue opportunity.” For example, GE Aircraft engines makes more in servicing its aircraft engines than it did in initially selling them.
Some firms have also set up reverse supply chain capabilities for altruistic reasons. Nike encourages consumers to bring their used shoes back to the store from where they were purchased. These shoes are shipped back to Nike, where they are shredded, which are then donated to make basketball courts and running tracks. The company also donates funds to help build and maintain those courts. By doing this, companies enhance the value of their brand and also encourage people to purchase their products.
The Starting Point
Though companies have been successful in fine-tuning their traditional supply chains, they need to make change in their existing supply chain management systems to implement reverse supply chain management systems. Says Karen Peterson, “most enterprises do not have supply management systems which handle the reverse supply chain or, if they do, the existing applications are disconnected.”
Opined Mike Nardella, “companies need to make a major paradigm change. No longer can companies accumulate returns in the back of the warehouse or stores and ignore the issue of returns.” The first step in any successful reverse supply chain management system is to define the rules of reverse supply chain system. Karen Peterson views, “the first and most important activity is to actually understand where the reverse supply chain will contribute profits.” Adds C Glenn Mauney, “the initial focus should be on the desired business outcome of the reverse supply chain process and then the policies and procedures that are in place to support that outcome.” Many companies accept all types of returns while others do not. A lot also depends on the type of product. The return policy of the companies should clearly mention the type of return. Customers return products for repair or replacement. Channel partners return goods because of excess inventory or products exceeding their shelf-life. Original equipment manufacturers also initiate recalls. Ford recalled its Explorer model because of faulty tyres. Companies also need to educate the customers and establish new points of contact with them.
The different activities in reverse supply chain process are gatekeeping; collection; inspection and sorting; reconditioning; disposition; and redistribution. In gatekeeping, it is decided which products to be allowed in the reverse supply chain, otherwise companies might be flooded with products which cannot be recycled, remanufactured or disposed. Good gatekeeping is the first critical factor in making the entire reverse flow manageable and profitable. Next, is the process of collection of the chosen items. A major issue in collection is the high uncertainty regarding locations from where used produced products need to be collected, their quantity and timing. Once collected, the items need to be transported to locations for inspection and sorting. The inspection and sorting is necessary to decide what to do with each item. Companies might capture value from returned products by reconditioning components for reuse or by completely remanufacturing the products for resale. Disposition is the activity which decides where the items will finally go. Disposition of items is based on quality or product configuration. In redistribution, the company plans to sell the recycled product. While doing so the company first needs to determine whether there is demand for the recycled product or whether a new market must be created.
Reverse Supply Chain vs. Forward Supply Chain
Reverse supply chains differ from forward supply chains in information flow, physical distribution flow and cash flow. To manage reverse supply chain, companies need sophisticated information systems. Some of the technology involved in reverse Supply chain is similar while in some areas the technology used differs from that of traditional supply chain. According to C Glenn Mauney, “depending on the volumes and complexity of the returned goods flow, there is some information capture specialization and processing efficiencies in returned goods processing that requires some unique systems.” Technology used in reverse supply chain such as realtime inventory tracking system (bar codes and sensors) are similar to that used in the forward supply chain. On the other hand, Devangshu Dutta said that activities such as warranty tracking or de-manufacturing of product is different. Agrees Karen Peterson. According to her, “repair optimization; slow moving inventory optimization; and reverse logistics,” are the areas where reverse supply chain differs from forward supply chain.
In designing a successful reverse supply chain, it is important to know what type of product will be returned at which point in time at which place and in which condition. Hence, importance of data is immense. C Glenn Mauney opines, “tightly integrated automatic data capture, system directed disposition support, unique receipt handling, credit processing, comprehensive and flexible reporting are some of the important functional capabilities in reverse supply chain.” However, the legacy systems or the standard enterprise resource planning systems used by companies are not effective to support these functional capabilities. What is required is a data warehouse with extranet and intranet technology.
| Table 1: Barriers
to Reverse Logistics |
|
| Barrier |
Percentage |
| Importance of reverse logistics relative to other issues | 39.2% |
| Company policies | 35.0% |
| Lack of systems | 34.3% |
| Competitive issues | 33.7% |
| Management’s inattention | 26.8% |
| Financial resources | 19.0% |
| Personnel resources | 19.0% |
| Legal issues | 14.1% |
Cash flows in reverse supply chain are in terms of credits and discounts. Customer expects to get a refund on a return, in the form of credit card reversal or a cash discount. Unit warranty tracking is done by product serialization. While in forward supply chain, cash flows are mainly in terms of cash. Customers purchase goods with cash or credit cards.
Barriers to Reverse Supply Chain
Successfully implementing reverse supply chain is still a
problem for companies, as they face a number of obstacles. Mike
Nardella views that reverse supply chain is still treated more
like a necessary evil of the back end process of a logistics
process. Another barrier according to him is that there is lack
of commitment on the part of senior management. Senior management
should show commitment in the form of dedicating a team of individuals,
software and conveyor systems for reverse supply chain. Devangshu
Dutta opines that there are two types of barriers, internal
and external barriers. Internal barriers include preparedness
in terms of processes, systems and infrastructure of the company
to handle returns, while external barriers include amenability
of the customer.
Conclusion
Reverse supply chain is the last frontier in the supply chain, which remains to be conquered. C. Glenn Mauney opines, “it is clear that more and more attention is being devoted to the reverse supply chain as companies recognize the critical importance of managing the entire product life cycle.” Cost reduction is not the only benefit that can be gained from reverse supply chain. It helps in understanding why products are returned. Was it returned due to quality problem? Were the stores improperly stocked? Was there a labeling problem? Answering these questions enable a company to go to the root cause of returns, resulting in better engineering, manufacturing or distribution. It also helps to get slow-moving products off the shelf, the distribution networks and warehouses. Companies that have been most successful with their reverse supply chains are those that closely coordinate them with their forward supply chains.
admin
December 13, 2002
By Devangshu Dutta,
December 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.
admin
May 28, 2002
Organised by the Northern Ireland Textiles & Apparel Association(NITA), the half-day conference will feature contributions from Harvard experts Frederick Abernathy and Daniel Weil, and New Delhi-based international consultant Devangshu Dutta.
Local perspectives and case studies will be provided by David Reade of Desmonds and Ken Watson of the Industry Forum.
Speaking ahead of tommorow’s event , NITA director Linda McHugh said the conference would address the issues surrounding increased consumer and retailer demands.
“Retailers are constantly demanding lower costs and faster response times.” she said.
“As a result one of the biggest challenges facing the textiles clothing industry here is how to balance manufacturing close to market to get those response times, with sourcing certain product off shore i order to meet the current market price.”
Conference delegates are expected from across the textiles
and clothing section, including retailers. However, Ms.McHugh
insists the ‘Strongest Link’ will be useful to anyone with an
interest in supply chain management.
admin
July 16, 2001
(Press Quote from CIO)
Read this article to
Do B2B have a future, or are they bubbles waiting to burst? While the media and researchers offer conflicting views on this, without a doubt the dotcom bust has bust taken the sheen off net-based business models. New players are now treating a cautious path. But B2Bs are definitely here to stay. What should the players do to remain in the game?
The press does play favorite…. sometimes! Dotcom obituaries have given way to essays on B2Bs. Hardly a day passes when our senses are not impinged with B2B strategies, success stories, disintermediation and the impending B2B doom (or boom). Consider what various research and consultant groups have to say.
At the same time, we hear rumors of Ariba closing down operations in India, stock prices of major B2B solutions providers plummeting and net-based companies incurring quarterly losses. More recently, the Gartner Group has predicted a bloodbath in the Asian B2B segment, when ninety per cent of the existing B2B (in Asia alone) will perish.
Businesses have been communicating with each other since the beginning. What has changed, however, is the technology that carries the communication, from pigeons to mail to fax to EDI…and now to communication via the internet. This has opened vistas of opportunity like never before.
Classifying B2B marketplaces on the basis of mutually exclusive categories can be erroneous because newer models of B2B are still evolving, and there is much overlapping in the types of transactions and services rendered in different marketplaces. Nevertheless, B2B companies can broadly be categorized on the basis of nature of ownership, types of transactions and services rendered. They can be private or public, horizontal or vertical, infomediaries, procurement exchanges, brokering sites and third-party marketplaces.
Indian scenario
In India, through the exposure to B2B marketplace is still
limited, we do have all types of companies. “Apart from
the PC penetration in India being lower than other parts of
the world, the trends are the same in terms of services and
functionality provided by B2B companies,” Says Devangshu
Dutta, Director, LinkApparel, that not only links buyers and
sellers of apparel industries but also provides them supply
chain optimization and other value added services.
In India a large number of B2B portals provide simple catalogue services-providing information on the availability of items to buyers and suppliers, thus acting as infomediaries. They basically provide a matchmaking platform between buyers and sellers, with services like Request of Quotation (RFQ), free listing, queries, etc., with little or no auction services. Then there are companies that provide multiple bids auctions, reverse auctions and managed auction services like SteelRX.com and LinkApparel.
There is also an emerging trend of large players in a particular industry segment coming together to form a private exchange. This has happened more in the steel (metaljunction.com – a collaborative effort on the part of SAIL, Kalyani and TATA) and automotive sectors. We also have examples of large companies having created private B2B exchanges for transaction between their own suppliers and dealers, like LG Electronics and Samsung, for instance.
India also has the advantage of the presence of global B2B solutions giants like Sesame, Ariba, and Commerce One. “We are consciously bullish about the Indian market. India has big IT and healthcare companies, and its telecom sector is exploding. “The economy is doing well and all this presents very good business prospects for B2B solutions,” avers Seetoh Hon Chew, COO, Sesami Inc.
Emerging trends
The dotcom bust has brought to the fore the disadvantages
of a purely net-based business model. “A ‘click-n-mortar’
approach is being adopted as market realities have made the
players realize that it is important to service the customer
from a physical location,” says Rishi Sahai, Investment Principal,
Infinity Venture Fund, a VC firm that has invested in many
B2B startups. “Complete online strategy is not possible in
the near future even in technologically advanced countries
like the U.S. For this every segment in the value chain should
be able to communicate with each other,” contends Anurag Saraf,
CEO, SteelRX, a B2B marketplace for the steel industry. “We
have a very strong offline model, with representatives in
six cities who are in constants touch with the customers,
” he says.
“It is becoming increasingly apparent that there is little value in just moving transactions online, ” feels Asutosh Padhi, Associate Principal, McKinsey, who tracks B2B trends worldwide. “Real economic benefits from B2Bs lie in services around transactions, that enable ‘real world’ reductions in coordination and processing costs, cycle times and inventory levels,” he asserts. He foresees broad-ranging alliances between technology players and providers of real-world services such as quality assurance, logistics and payments.
Double-edged sword
Unlike B2Cs, B2Bs are better-evolved; the technology is more
sophisticated and entry barriers are great. Critical mass is
achieved with greater difficulty and business models are more
defensible. “The threat is of several players with inadequate
experience tying to attack crowded vertical with similar value
propositions. Eventually such players will head towards bankruptcy,”
asserts Sahai.
“In India, like anywhere else in the world, when a hype is created everybody rushes to it as if it was gold, but only the serious players who understand the market dynamics will get through,” emphasizes Dutta. “There are a lot of me-too and look-alike companies proliferating. So one has to either be unique or very strong – in terms of money and the relationships with buyers and sellers – to survive,” he says.
For Rakesh Bhatnagar, CEO, Net4barter.com the biggest threat is attitude. “People spends so foolishly and assume so freely without practicality, that the whole business model goes away. We have to keep in mind that like in offline businesses even B2B need some gestation period.”
| On the future opportunities for B2Bs, Sahai shoots a typical VC proposition. “The numbers are compelling. The market will be $2.7 trillion (according to Forrester Research) by 2004 ($1.4 trillion if you exclude extranets). If the B2B marketplaces make even one per cent of this as transaction fees, then revenues would amount to $27 billion. On an average if 50 vertical emerge out of the chaos, and if two competitors emerge per vertical, then revenues would still be $270 million each.” | Unlike B2Cs, B2Bs are better-evolved; the technology is more sophisticated and entry barriers are greater |
In effect there is tremendous opportunity for companies, and huge growth potential. Padhi agrees with this observation and feels that the crux of the whole matter is who is going to capture the real value first. The greatest opportunity these exchanges offer is for the existing companies, as it will not only significantly improve their performance – since in India supply chains are highly inefficient and fragmented – but also help companies in significant ‘supply consolidation’. Large suppliers will gain from B2B initiatives.
“It is the SME segment that has gained the most from B2B
initiatives. SMEs have not only expanded their business reach
across India but are actually generating revenues from it,”
says Brijesh Agrawal, CTO, Indiamart.com, an online marketplace
that focuses on the SME segment.
Benefits: Are they for real?
| Industry players believe
that the introduction of e-commerce and online exchanges
have definitely brought about benefits in more ways than
one. Apart from the lower running costs, many feel that
there is better coordination between upstream and downstream
operations along the supply chain. There is also greater
transparency when it comes to price, even for equipment
and services. With increased ability to track inventory,
companies can now reduce their minimum inventory levels,
thus saving storage costs. Dutta feels that even achieving
just the right inventory levels can bring additional profit
margins rather than only cost savings. B2Bs have also
expanded in an unprecedented manner, enabling the market
reach of both buyers and sellers, even making price negotiations
(auctions, discussions, RFQ/REP, etc.) from remote locations
distinctly possible. |
B2B is a new concept. People have to be educated, money invested and infrastructure built. But, promises about B2Bs are definitely not overstated. |
The greatest disadvantage
of the internet business model is that one can’t simply trust
the other party. There are fly-by-night- operators lurching
on the net to fleece gullible suppliers. “An intermediary could
have simply averted the whole episode,” adds Bhatia. Padhi considers
the potential benefits of B2Bs to be underestimated. “It is
just a matter of time. People expect miracles out of IT systems,
but there is a lead-time involved in terms of new technology
adoption. To get the benefits, the entire eco-system the company
works in, has to embrace the technology and that takes time,”
adds Padhi.
Disintermediation: Myth or reality?
| Industry players believe
that the introduction of e-commerce and online exchanges
have definitely brought about benefits in more ways than
one. Apart from the lower running costs, many feel that
there is better coordination between upstream and downstream
operations along the supply chain. There is also greater
transparency when it comes to price, even for equipment
and services. With increased ability to track inventory,
companies can now reduce their minimum inventory levels,
thus saving storage costs. Dutta feels that even achieving
just the right inventory levels can bring additional profit
margins rather than only cost savings. B2Bs have also
expanded in an unprecedented manner, enabling the market
reach of both buyers and sellers, even making price negotiations
(auctions, discussions, RFQ/REP, etc.) from remote locations
distinctly possible. |
Winning B2Bs
|
“Disintermediation will surely happen as far as brokering of information is concerned. Traditional agents and dalals feeding on the opacity of the whole transaction will surely move out,” points out Kumud Goel, MD, KLG Systel, which has created a B2B marketplace for the construction industry. Padhi considers disintermediation unlikely, and points out that in many industries intermediaries play a very valid role their function much beyond mere match making, such as credit risk, providing finance, holding inventories, etc. It might happen in some small industries but that is not going to be a general trend. “What will happen is that the lower order intermediaries will evolve quite substantially and they will focus on the higher value-added activities”, says Padhi.
Integrating SCM and CRM
ERP transformed the entire transaction processes internal to
the organization. But B2B is everything that happens outside
the organization, whether on the supplier side or the customer
side. Given this split, companies have the option of implementing
their own independent SCM and CRM solutions. In Padhi’s view,
more companies will go for independent CRM solutions, since
there is a perceived risk that data needs to be proprietary
and therefore needs to be kept within the company. On the supply
side, companies will collaborate to create standard solutions,
since each supplier supplies to many buyers. If buyers are offered
different supply chain solutions in the same industry, it becomes
difficult for the suppliers to participate in a meaningful way
in the process.
“There is a strong need for developing a set of supply chain standards, with some basic definition of what purchase order, inventory information, etc. are,” states Padhi.
For Dutta the key to SCM in a B2B environment is “active collaboration” between organizations in all the processes, right from product development to order management. Saraf feels that SCM and CRM integration is a prerequisite for a wired world.
Logistics bete noire
Generally speaking, logistics involve an entire gamut of things
– sourcing requirements, inventory management, demand estimation,
order tracking, delivery logistics, etc. “Optimal logistics
demand that the right quantity of the right product reach the
right place at the right time,” says Bhatnagar.
| COMPARATIVE B2B
SCENARIO : INDIA AND U.S. |
||
| Parameters | India | U. S. |
| SCM | Inefficient | Efficient |
| Procurements (Focus) | Direct Goods | Indirect goods |
| E-biz Infrastructure (Legal, regulatory) | Developing | Well-established |
| Logistics | Weak | Strong |
“Problems of logistics are real. Creating an infomediary is not going to help. It is not only the information which constraints the valuechain, but also the infrastructure supporting and enabling it,” says Dutta.
CIOs’ strategy
The emerging B2B scenario will pose many challenges to CIOs.
What should be their strategies and priorities? Padhi feels
that the generalization of the role of CIOs will be difficult,
but feels CIOs will have three options: first, to setup their
own IT systems and get their own packages; second, to join independent
exchanges; and third, to get along with other industry players
and form their own private exchange. “CIOs should carefully
analyze the benefits of each of the options in terms of time
and cost savings, standardization, before taking a decision,”
contends Padhi.
For Dutta the strategy is “do not go by fads”. (Read Dr. Milind Oka’s series in CIO Enterprise) Companies need to identify the critical areas of the business, for only an honest assessment vis-a-vis competition will serve as a global benchmark.
Roadblocks
The roadblocks for any new concept are not confined only to
infrastructural areas. They also have a lot of psychological
implications. B2Bs are no exception.
Speed, connectivity, absence of proper payment gateways and bandwidth are its main adversaries. Bhatnagar feels that security is also a major issue. “There is a psychological discomfort when it comes to payment through the net,” he says. However, for him, infrastructure is a non-issue. “If you create a solution which is resource hungry and bandwidth hungry then you have a problem. So you need to create an environment that is compatible to Indian systems,” he asserts.
For Dutta the biggest issue is mindset; that is, creating the right mental framework for adoption of the system. Fear of what is going to happen in future in the light of economic slowdown and globalization, uncertainty in terms of policy adoption, and doubt in terms of success of the policy are the major factors that impede e-commerce transactions.
For Padhi, huge investments in supplier upgradation programmes and the absence of regulatory infrastructure are the major bottlenecks. Saraf does not consider security as a big issue since most of the transactions are done offline. “For basic security concerns there are standard solutions that are used worldwide,” he contends.
The future
Gartner Group’s forecast coupled with Cassandra’s prophecy
about the impending B2B doom has put a question mark on the
future course that B2Bs are more at a conceptual and trial
stage not only in India but also in the U.S., which makes
large-scale B2B transactions look like a distant dream.
“In India government sectors are yet to take the initiative for B2B commerce. And since the government is the biggest buyer in many sectors, the private players will not be able to sell anything to them online,” muses Goel.
| “People are expecting
too much too soon,” quips Saraf, adding that it was like
sowing a seed and expecting fruits even before the sapling
has sprouted. “It is a very new concept and people have
to be educated, money invested in new technology, and
infrastructure built. B2B’s promises are definitely not
overstated,” he says. |
Like offline businesses even B2Bs need some gestation period |
Hype or no hype, B2Bs are here to stay, but the future will
see many obituaries written about players jumping onto the B2B
wagon without getting their basics right.
By Satyapriya Verma, Senior Correspondent with TMG.
(Courtesy: CIO India).
This is an extract of an article published in CIO, July 2001.
admin
May 29, 2001
The sourcing principles followed by many apparel organisations seem to be governed by apathy. Once supply relationships have been defined, it often becomes a struggle to change them. Yet keeping the supply base refreshed is probably one of the single most important functions that a buyer can perform explains Devangshu Dutta.
For many decades from the early 1900s onwards, retailers followed a ‘trader’ or ‘merchant’ model, largely buying from those suppliers who could provide the best prices. Of course other parameters were considered as well, such as desirability of the product, but price was the major driver. It was also rare for retailers to go out to look for suppliers – suppliers normally turned up at the merchant’s doors to sell their wares.
There was little, if any, strategy to selecting the ‘supply base’. Retailers were much too busy building their presence in the market, opening new stores, acquiring new markets, growing their product offer; in short, concentrating on the business of selling to consumers. International trade existed, as it has since the dawn of history, but was led by traders. Retailers, by and large, followed the domestic sourcing route.
The retailer goes abroad
The 1950s were driven by the need to rebuild war-shattered economies
through trade and economic cooperation. Bi-lateral, and later
multi-lateral, trade agreements were brought into force. An
awareness of other countries around the world was also brought
into sharp focus through two successive world wars, particularly
the second. Retailers began to explore supply bases outside
their home countries, and from the 1960s to the 1990s this international
trade grew by leaps and bounds. Naturally, as the pioneers went
overseas, so did their competitors – it is very hard to compete
profitably, when your rivals are buying comparable merchandise
at much cheaper prices.
As a result, by the early 90s the supply base of any large retailer in the major consuming markets would take in more than 30-35 countries from which products might be sourced. And as the number of supply countries grew, so too did the number of suppliers. It would not be unusual for 500-1000 suppliers to be dealing with a single retailer.
Consolidation, conservation and conservatism
Retailers such as Wal-Mart in the USA, M&S in the UK, Carrefour
in France and many others have had preferred suppliers who grew
along with them. These suppliers were typically based in the
home country of the retailer, and set up production units or
sourcing organisations overseas from where they could supply
goods to their customer at a competitive price. In some cases,
their sourcing strategies were driven by their own analyses;
in others the retailer led the way (such as M&S or Wal-Mart
identifying the next preferred supply country).
In the 1990s a scientific sourcing principle began to be applied. It was good to cut down supplier numbers, since this reduced the management effort on the part of the buyer to constantly look for new suppliers and maintain current relationships. Terms such as ‘key’, ‘preferred’ or ‘strategic’ supplier came into vogue.
As an example, witness the dramatic supply base reduction undertaken by most large retailers in the UK. Some organisations even looked to supermarkets to understand and apply their supply base management principles, where product categories were dominated by, or completely split up between, less than four suppliers. In a few cases, it reached such extremes that one supplier virtually controlled a retailer’s entire product lines.
Some organisations even quantified the cost of moving into new supply countries in an attempt to understand whether it was worthwhile and how best to shape their sourcing strategy.
At the end of the 90s and into 2000, however, there seem to be rumblings among retailers about the need for some more diversity in their supply bases. Statements such as “we are uncomfortable with our overexposure to country X”, or “I wish I could manage to meet some more suppliers to get a feel for what is happening out there in the marketplace – otherwise our range ends up looking like everyone else’s”, or even, “sometimes we feel we miss out on innovative factories because we are so deeply bound with our existing supply base”, reflect the general consensus.
So, the question is, has supply base consolidation been taken too far?
Time for a new deal
The first step should be to acknowledge that the business of
retailing needs a healthy balance between predictability and
innovation. Predictability, as much as is possible in sourcing,
could be represented by relationships with known and trusted
suppliers. It would take a very strong individual, and a very
large safety net, to work every season with large numbers of
unknown, new suppliers. It would also require a lot of management
time and effort to keep educating new suppliers about the business
and its needs.
However, equally, it must be acknowledged that the fashion business is not like automobile or aircraft businesses where practically the entire market and supply base is known.
Nor is it as expensive to develop new products or product components. In the automotive industry new models cost hundreds of millions of dollars to develop – and with such high stakes, buyers tend to select their suppliers carefully and, once the relationship is established, stick to the relationship for a fairly long period of time, with both parties investing resources in it for mutual long-term gain.
In the fashion industry, on the other hand, most product development investment does not exceed a few thousand dollars. This is well within the capability of not only the largest preferred suppliers of the large retailers, but most of the supply base around the world. Whether design-led or technology-led, new products and new looks are constantly being created. Similarly, innovative business practices that generate more responsive factories, improve quality or reduce costs, are not the sole domain of large, old and established companies.
The two critical areas that need to be addressed by any retailer are:
There are many answers to these questions. One of them, which provides a structure or framework in which to work, is the link between product-type and sourcing strategy.
In this, as a first step, a buyer must make a mental division between ‘largely predictable’ products and ‘fashion’ products. Largely predictable products include not only basic or staple items, such as the three-pack of underwear or a $150 suit, but also seasonal items (such as swimwear) for which sales vary dramatically from summer to winter but follow a rhythmic pattern, with some variation, over the same season from year-to-year. For one company such predictable products might be 80 per cent of the business, while for another it might be no more than 20-40 per cent of the entire range.
For such products, supply base hopping is almost certainly the wrong strategy to follow. The sensible strategy would be to concentrate energy on developing relationships with certain key supply bases and suppliers who provide a long-term sustainability or constant improvement in terms of cost, quality and other performance parameters.
On the other hand, there are other products that follow the dictates of changing fashion moods more closely. For these products, putting a long-term commitment on any significant proportion of this segment to specific suppliers can be counter-productive. It can create a sense of security in the supplier, or even the buyer, possibly reduce the drive towards product and service innovation, and maybe even make the overall sourcing-supply relationship relatively inefficient over a period of time.
There is a sense of ‘supply dependence’ associated with supply consolidation, in comparison to the sense of ‘interdependence’ that comes from a flexible (even though not fully open) network of buyer and supplier relationships. A cosy ‘strategic’ relationship that assumes a two-way exclusivity also creates a relatively narrow channel of ideas and developments, and becomes largely process-driven at the cost of creativity. This is fine if you are selling the same product year-in, year-out; but certain suicide (or slow poison, at best) if you are in any part of the fashion market.
This is not to imply that strategic relationships can’t work in the ‘fashion’ arena. But make sure that in such a relationship the suppliers who are worried, nay paranoid, about their own survival. In the best organisations, uncertainty brings about creativity – pick a strategic supplier like that, and you’ve picked a winner!
Achieving the golden mean
Of course, a perfect balance between long-term strategic suppliers
and new relationships is as elusive as the perfect business
strategy. If one set of rules governed sourcing in the apparel
and textile industries, the sector would have been consolidated
around this many decades ago.
Previous experience is certainly a worthwhile guide to selecting suppliers and supply countries. But the competitiveness of supply bases is changing all the time, and suppliers are constantly developing new capabilities around the world. As someone once said, in business relying only on past experience is like driving a rally sports car blindfolded, while the navigator guides you looking through the rear windshield!
By using the tools to discover, build and maintain new relationships efficiently, most buyers should keep their doors open for new suppliers to walk in and display their capability. Closed doors mean closing the possibly to innovative products, significant margin improvement, and even new methods of doing business that might bring about tremendous improvements in ‘sourcing profitability’.
In a different context, a presentation at the National Retail Federation (NRF) seminar in the USA in 1999 by consultant Kurt Salmon Associates mentioned the potential need to move away from the ‘super-specialised’ and ‘super-analytical’ role of today’s retail buyer to bring in shades of the ‘merchant’ of the past.
The truth is that successful retailers have never really abandoned the merchant principle. This degree of freedom is essential to maintaining the healthy influx of new ideas that keep a retailer’s brand alive with the customer and keep it moving ahead in the market. During the selection process, smart buyers even look at the customer list of their suppliers with a conscious effort to imbibe product trends, technical knowledge and best practices from other companies in their own or other markets.
Managing diversification
The key factor that needs to be managed is the effort on the
buyer’s part. If a buyer could manage more relationships with
the same amount of time and effort, he would probably make more
effective use of his own and his supplier’s capabilities to
create a more dynamic product and service offer.
Two primary tools come to mind for creating and managing a more diversified supply base: collaboration and technology.
In ‘collaborating’ with the supplier, the idea is to see both buyer and supplier as part of the same demand-supply chain. In fact, take it right back to the supplier’s supplier. Understand that the processes run across organisations, rather than residing in any one – the buyer has as much responsibility and accountability in the sourcing process as the supplier. Information must be shared more transparently, and the overall sourcing process must be managed together, beginning from the product conceptualisation to final delivery. Brainstorming helps, ‘blame-storming’ doesn’t. This approach is as equally valid with a new supplier as with an old, trusted supplier. Good buyers already follow this approach, and it shows in their company’s market performance and financial results. And it does not even add lead-time; in fact, in many cases, it cuts down time.
Secondly, make use of emerging technologies. Don’t just depend on a company’s database or EDI systems. There are a number of tools available today which are relatively inexpensive and easy to use – from the basic supplier profiles available on the numerous marketplaces and exchanges around the world, to more advanced technologies that enable collaborative management of product development and sourcing process management.
There are even well developed systems that can act like virtual assistants, helping buyers and suppliers to keep track of order-specific tasks, and updating each other automatically of the status of these tasks. If you did not have to spend effort on fighting the fire caused by the task that you forgot yesterday, would you have a little more time available to speak to that new supplier whose profile you liked but just could not make the time to meet?
There is no quick fix, and each situation will be different.
But I believe that for many buyers, the choices are becoming
rather stark. Innovative or staid product? Market leadership,
or complete loss of the pole position? Survival or decline?
The choices that you make today have a habit of showing up in
the profit and loss statements of tomorrow.
© Devangshu Dutta 1998
This version of the article was published in just-style.com on 29 May 2001
