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.
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.
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.
[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.
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:
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.
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