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.

Relating Sourcing to Global Trends

Devangshu Dutta

September 30, 1998

In the simplest terms, sourcing entails “buying a product”. So presumably, if you have the need for a product and know the cost at which you want to buy it, and you can find someone who can sell it to you, it should be a straightforward transaction. What happens in reality is often somewhat different.

The Sourcing Process

You start with a product in mind, with certain specifications. You build certain sales projections based on past performance, forecasts etc., you evaluate supply bases, select one or more suppliers, factor in a logistical plan to get the product from your supplier to your distribution centre or stores, manage the communications, often including information technology to control the 2-way flow of information, and finally hope to achieve the margins that you had planned for. That may well happen, but equally there is all possibility that it might not. On the supplier’s end, equally, the customer’s sales forecasts might not be achieved which might lead to reduced order quantities, the logistics provider might delay or even lose your entire shipment, causing claims, or even loss of a customer.So is a sourcing relationship a gamble?

“Sourcing” is made up of two elements, both of which contribute to the success or failure:

  1. Sourcing approaches, and
  2. Supply approaches

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

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

Global Business Trends

Let us look at what the trends in global business are. One the retail side, three major trends are clearly visible: cross-border retailing is growing, retail consolidation is increasing, and retailers are opting for multiple formats to reach their customers. All of these changes are prompted by the objective of maximising the “consumer ownership” – either by accessing new consumers (in other countries or in a different market segment) or accessing the same consumer who might express different needs at different times. These three major trends are even becoming visible in the same retailer, for example:

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

Each trend places a different set of demands on the sourcing and supply strategies and structures. For example, cross-border moves create the need for multiple supply bases, due to differential production costs as well as import regulations, and also highlight the need to manage increasing logistical complexity. If a supplier is to keep pace with its major customers, it must be able to service them in multiple locations equally well.

Consolidation through mergers and acquisitions creates the opportunities for economies of scale, brings out the need for large, well-equipped suppliers, but also provides the opportunity for supplier rationalisation, which can be a threat to the business of suppliers who may not appear among the list of the “best” suppliers for the newly merged retail business.

Format migration creates different service needs for the same retail customer; for example, a high street retailer who normally has only marginal merchandise returns might face the need to handle as much as 15-30% returns on a new catalogue or internet business. Different formats, or different markets can also require product diversification due to different sizes, or different price-quality norms.

Global Trade Trends

On the other hand, on the trade side, there have been significant shifts in terms of trade agreements such as transitioning of the GATT to WTO, which promises lower import barriers (quotas, duties) and regional agreements such as NAFTA, which are collectively leading to encouraging trade across borders.

There is an increasing availability of new low cost supply bases in close proximity to the major markets (such as Mexico for North America, and Central Europe and North Africa for Western Europe) where export growth is booming, creating serious competition for the well-established trade routes such as Asia to North America and Western Europe, or intra-EU trade.

Cross border apparel trade - growth of imports and regional trade
Growth in imports - global and regional trade

The trend towards cross-border trade is clearly visible, particularly in the US and EU, where imports have gained market share from domestic production. In the EU’s case domestic production, while still higher than imports in terms of share, has actually declined since 1990. USA sourcing shifts point towards a clearly dominant share of sourcing from within the Americas, and indicate a growth of a “Free Trade Area of the Americas” (FTAA) from the NAFTA concept. This would clearly serve the domestic industry’s competitive purposes as well, since production elsewhere in the Americas could be either owned or closely controlled by US manufacturers.

The EU, on the other hand, seems to be diversifying its supply base. While Eastern Europe and North Africa have come up quickly in the recent years, Asia maintains and is growing a dominant share, with many other bases expanding or appearing, such as the Indian subcontinent and new supply countries in South East Asia.

How Should You Respond?

So what should be your response in terms of future business strategy? First of all some fundamental shifts must be made in thinking about sourcing and supply.

If you are a buyer or a sourcing executive, understand that:

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

A study done by the global consulting firm, Kurt Salmon Associates, calculated that for every new country that you move into, a trial order of 10,000 pieces would cost an additional US$ 42,500 in terms of supplier identification, development, product development, quality assurance etc. – that is over $4 a piece. Is every new opportunity worth that cost? Will you be able to gain adequate margins over significant volumes that will make the initial investment pay for itself? Will the new supply country be able to offer an extensive enough production base that go beyond the first products that you have looked at? And even, could the country actually become a market for you in the future (in which case it makes eminent sense to develop it as a supply base)?

To be most effective in the emerging scenario, look for sourcing platforms or “hubs”: countries and supply bases that not only are strong suppliers right now, but those that can serve as launch-pads to enter other countries. These platforms or hubs are typified by being located amidst many other potential supply bases, they possess intrinsic skills to develop product and manage production, and have access to a variety of raw material, both local and imported. Rather than making the buyer hop countries every time there is a problem or a new opportunity due to lower cost, the hubs allows the buyer to concentrate efforts in a region, develop that supply base consistently over a number of seasons or years, while leaving the low cost or new product opportunities open in other countries in the proximity.

Understand costs completely: these include not only the primary product cost, freight and import duties, but also financial costs (e.g. Letters of Credit, financial administration etc.), cost of quality assurance, remote business management costs etc. Further, the drivers need to go beyond primary cost, market access and quotas, and must take into account measures such as “realised margins”, responsiveness and match with customer proposition.

Low labour cost supply bases exist even close to the major markets now – so is Bucharest better or Bangalore? The answer lies in looking beyond costs alone. What capabilities do you possess within your organisation, and what do you want from your supply base? The more product development, supply management and service capability you can build within your own organisation, the greater the number of potential supply bases. Typically, with a highly developed sourcing organisation you would be able to tap into more low labour cost supply bases.

Three key areas define business focus: Price, Product and Service. Each demands a different approach to the customer, and therefore to sourcing and supply. A price-orientation focusses on efficiency, a product-orientation on innovation and product development, while a service-orientation focusses on reliability and responsiveness. You need to determine what combination of these factors determines your positioning in the competitive marketplace.

Also understand that traditional sourcing, based on seasonal patterns and long, variable lead-times are giving way to new methods. Companies increasingly need to classify their products as core products, seasonal products and fashion products. Core products tend to be basic staple items that provide large amounts of business over long periods of time – the focus in these clearly needs to be on planning, replenishment and efficient, cost-effective, consistent supply. Fashion products on the other hand have a very short selling window, and must be developed and brought to the market quickly – their value is in their newness and their being in the market at the right time – the focus here clearly must be on speed in product development and production.

Research indicates that major companies are indicating a shift in their sourcing from traditional seasonal patterns to replenishment-type of sourcing and “speed” sourcing. Have you analysed your own product range and adapted your sourcing accordingly? If you are a supplier you also need to understand these issues, and must adapt your business strategy suitably. Or else you run the risk of losing your business to a lower cost or more responsive competitor, who might either be next door, or half-way across the globe.

The key to survival in the new millennium clearly lies in:

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

To do so, it is imperative to put in place all the building blocks: appropriate management structures, business performance measures, business processes, training and skill development, information technology and supply chain relationships. Ignoring any of these building blocks will only result in a shaky foundation for future business.

© Devangshu Dutta, 1998

Integrating Sourcing Within Your Business Strategy

Devangshu Dutta

April 23, 1998

[This article is based on a presentation to the Textile Institute’s London and South East England Chapter and draws on experiences with developing global sourcing strategies of a number of retailers and manufacturer-suppliers.]

In recent years, sourcing and supply management has emerged as one of the greatest opportunity areas for retail business as well as for suppliers to leading retailers. At the same time, it is possibly also the one most prone to risk. This set of activities holds the key to improving service, product offer and overall profitability, and yet also provides some of the most difficult challenges of doing business globally. Certainly, you need to have winning products. Of course, you need to pick the best supply countries to source from and the best suppliers. Certainly negotiation and cost management are an important part. But the only way to achieve these many “bests” is by ensuring that sourcing is well and truly integrated within your overall business strategy, and that sourcing activities closely follow the direction set by overall business strategy.

Setting the Scene

Let us cast a quick glance over the major changes taking place in the textile and apparel trade globally. The of the most important questions in sourcing are “From where/whom?” and “How?”. They also provide most of the unpredictability and the risk that so characterises sourcing.

For this heavily protected trade, one of the most important developments is the transition from the General Agreement on Tariffs and Trade (GATT) to the World Trade Organisation (WTO). Put simply, the WTO is driving towards increasing mutual market access for producers in countries that are a part of the WTO. The major aim is to remove quantitative restrictions, including quotas, and to reduce import duties, which act as a barrier to cross-border trade. If all goes as planned, 1 January 2005 will see a textile and clothing world trade free from quota restrictions. That one element, which possibly guides apparel and textile sourcing more than anything else, will cease to exist. However, to minimise the “cliff effect”, quotas are being phased out in four stages, rather than abolished at one stroke. So, the WTO agreement should lead to greater supply and lower prices due to lower import duties and no quota premium, and make our lives simpler overall.

Agreement to accelerate quota growth

However, while quotas are still in place, some countries that are relatively smaller exporters of apparel (such as India, Pakistan, Turkey, Indonesia etc.) are being allowed to grow their quotas faster than larger exporting countries (such as South Korea, Taiwan, Hong Kong and China). Also, regional trade agreements are allowing countries close to the major developed markets to export apparel and textile products free of duty and quota already – such agreements include NAFTA (USA, Canada and Mexico) and the European Union’s agreements with former Communist countries, as well as Turkey and North African countries. Annual growth rates of such regional trade are over 20%, compared to the 2-5% growth rate of imports from Asia into the EU and the USA.

Due to these factors, many more cost effective supply bases are developing quickly, adding to the complexity of choice. Many of these are low cost supply countries that now exist not only in Asia, but in Europe and the Americas as well. So which countries should you pick? Is Hungary better than the Hong Kong, the Caribbean better than Cambodia? Should you still be sourcing from the high-cost countries such as Italy, the UK etc. when there are so many low cost bases from which to choose?

Then there is the question of the sourcing method. Virtually every kind of relationship and business structure possible is included in the textile and apparel supply chain:

  • Own manufacturing where the buyer owns the production facilities
  • CMT / contracted operations, in which the buyer directs the overall output of the production facility but does not own or run it
  • Own overseas sourcing office, in which the buyer’s own operation deals directly with off-shore suppliers
  • Buying Agents, Buying Services (or Buying Groups), who act on the buyer’s behalf
  • Wholesalers and importers, who act as independent suppliers to the retailer, but do not actually own any manufacturing
  • Full capability suppliers, who are handed a product concept by a retailer, and take complete responsibility to develop, produce and deliver the product.
  • Brand manufacturers, who create the product concept, own the brand and the factories, and who supply into a part of the retailer’s product range.

Some of these methods are declining, some are increasing in popularity, while others are stable. Should you apply more than one? Should you differentiate depending on the supply country or should you adopt one as “the way” for your business?

Taking the Gamble Out of Sourcing

The problem, clearly, lies in the unpredictability about the benefits from each country and method of sourcing. And, simplistically, the solution lies in taking as much of the uncertainty out. The way to do that successfully is to ensure that your sourcing strategy, organisation and processes are led by your overall business strategy. Many organisations, retailers as well as suppliers, have built up highly successful businesses in the last few years by ensuring that sourcing is one of the core management areas of their business rather than an afterthought. But in many more, sourcing is relegated to the “back-room”, as something that happens mostly outside the company’s boundaries. How can you bring sourcing within the mainstream of your business?

Imagine the sourcing process. Some people might imagine conceiving a product, a style, putting together the fabric and trims, creating a sample, getting it produced within a given time and cost. Others would visualise it beginning with next season’s business plan, a plan to sell certain numbers of a product at a particular price, bought in at a certain cost with a planned profit and mark-down allowance. Still others might remember exchanging endless overseas telephone calls and faxes with their suppliers, the dreaded messages from the shipping company about late deliveries. All of those unpredictables that make sourcing a gamble.

Stop! If you are a retailer, I would ask you to now visualise your retail store, your catalogue, your website. If you are a manufacturer, I would ask you to visualise your customer and their consumers. That is where the sourcing process truly begins. Your business is defined by your consumer or customer, who has certain expectations – a product, a particular price, a time limit, a certain quality. Naturally these demands and expectations are what you are trying best to understand and fulfil. So should your associates who support the process.

No matter what you are, a retailer or a manufacturer, you need to focus on the consumer. The “push” system of supply is outdated – customers have greater, easier access to a much wider choice of goods and services, and expect ever-greater standards of quality, service and customisation. The sourcing and supply process must change too. Previously one end of the supply chain understood consumer demand, and translated that understanding into a product concept that was manufactured, shipped and sold to the consumer through retail stores. Increasingly now, the functions of Design, Development (production), Distribution and Display (retail) must link together to share skills, knowledge and capabilities that allow joint market analysis, product development, common measurement and accurate forecasting, and create a delighted rather than merely “satisfied” customer.

Too often sourcing decisions are made as a reaction to the immediate present and the recent past. Factors such as past relationships, past experience of individual buyers, gut feel and immediate price comparisons are commonly the driving forces. These are all internally focussed; the decisions based on what is available within the business (and its supply base), rather than what the consumer or customer wants.

Let us take business strategy first. Generally, three major areas define and differentiate one business from another: Product, Price and Service. A study by global management consultants, Kurt Salmon Associates in 1998-99, showed that successful businesses had a clear positioning in being focussed on a single or a combination of two aspects. On the other hand, business that were not successful financially, were generally fuzzy in their positioning, in their definition of what the business stood for. Are you clear about where your business stands and what is your platform, on which you sell to your customers? If you are, you have taken the first step to sourcing successfully.

Drivers of sourcing strategy

What are the obvious links with sourcing? If you are price-oriented, surely your sourcing must be driven very much by sourcing cost. But not the FOB cost alone – you need to factor in import duties, transport costs, costs of rejections, costs of maintaining a supplier relationship, and many other factors that are often invisible. If, on the other hand, you are oriented towards Product and Service, surely you need infrastructure within your business or in your supply base to create innovative products, turn sampling around quickly, and ensuring that quality, accuracy and timeliness are the benchmarks used to measure success or failure.

So you now understand what your business is all about, and what your sourcing needs to be. Let us ask a third question, do your buyers, merchandisers, technologists, suppliers and logistics providers have the same understanding as you about the defining factors and the objectives? Unless you draw these links, and make sure that everyone around the business shares a common understanding, you will have to resign yourself to live with unpredictability.

A final point: there is a wide variety of suppliers and supply bases out there. While defining your business, you also should clearly define how much capability exists within your business to handle the sourcing process from concept to delivery. Define your competencies: can you conceive the product, can you design it, prototype it, define technical specifications, produce (or manage the production) and ship it? What are the things you absolutely wish to control, and what are the activities that you want your suppliers to carry out? Once you have done that, choices become simpler. The future direction for selecting supply countries becomes clearer and identifying the winning suppliers becomes a more rational process.

Yogi Berra is quoted as saying, “It’s tough to make predictions, especially about the future.” Certainly, sourcing is a lot about getting your predictions right – the right product, the right quantities and the right timing, the right supply base for future growth. But it helps to make sure that sourcing activity is led as much as possible by targets and business objectives, rather than only by short-term reactions to changes in the environment. Define your business and the business requirements, and let those define your sourcing – that’s the only way to get some of the unpredictability out of sourcing.

© Devangshu Dutta, 1998