Dr D K Batra NIFT -- IFFTI Conference

Call of the Customer -

The Fragmentation of Fashion

The fashion industry is starting to fray,)"Consumers' newfound freedom tocustomize their lives -- from burning their own music CDs to publishing politicalcommentary online –is throwing basic business models of many businesses intodisarray--- Wall Street Journal (2003

Business coming full cycle…

• Prior to 80’s, the different parts of apparel supply chain lay disjointed.

• Then came the age of consolidation – different parts of supply chain came together.

• Business is coming full cycle for last few years – re-emergence of fragmentation.

Reasons for this U-turn• Customer becoming over-demanding.• Erratic changes in customer preferences and

demands.• Quickly changing fashion cycles.

• Customers’ demanding –– Frequent innovation– Greater exclusivity– More choice– Better service

Key Issues • Changing consumer lifestyles and needs, affecting

the entire supply chain

• Changes in Retail Industry and supply chain, impacting sourcing and lead times

• Emerging partnerships in sourcing

• Political and regional trade affiliations, preferential trade agreements influencing trade flows

• Preparedness of Textiles and Clothing Industry for Free Trade regime

The Evolving Consumer

The consumer is becoming individualistic -

“Market of One”

Availability is essential

Time is more precious than money (A consumer in USA spends

4.3 hours per month on Clothing shopping)

68% ofconsumersenter a storewith a clearidea ...

49% can’tfind whatthey arelooking for

Lost Sales Opportunity

“...not my size”

“...price too high”

“...don’t like the style”

doesn’t fit”

Trouble begins … Challenges Galore

• Unpredictable demands of customer.• Tilted balance between competitive offerings to

customer and economies of scale to manufacturers.• Risk of losing competitiveness in business.• Enterprises not able to anticipate priorities and

decision criteria.• Powerful investments in customer intelligence • Tremendous innovation in supply side required.

Fragmentation of demand• more informal and active lifestyles has created new

demand for innovative products.

• high degree of segmentation has occurred as New niches New micro-segments on age, ethnicity, income, lifestyle appear

• Superimposed on these is emergence of new international market segments,as a result of convergence of lifestyles towards an industrialized, urbanized consumer lifestyle model.– Benetton, Polo Ralph Lauren, Laura Ashley, Nike,

Effects of demand fragmentation• Mass production no longer viable for many

• Companies racing to embrace ‘Mass Customization’.

• ‘Market Turbulence’

• Firms getting specially created to implement the mass customization model.

What’s Special?

“Customers will try ‘low cost providers’ because the Majors have not given them any clear reason not to.”

Leading Insurance Industry Analyst (10-98)

Direct to Dell-Dell ComputersDell’s "direct" model dramatically transformed the value chain

architecture –• Outsourced all components; performed assembly. • Eliminated retailers; shipped directly from factories to end customers.• Designed an integrated supply chain linking its suppliers closely to its

assembly factories and the order-intake system.

Following suit – Levi’s• Using mass customization with its Personal Pair women’s custom

fitted jeans program.• Measurements entered into the computer, to suggest a prototype-test

garment.

• Specs of the best fitting prototype sent for manufacturing.

Opposing Fragmentation – Mergers &Acquisitions

• the trend is still of consolidation – big fish grow bigger.

• Increased efficiencies – – Economies of scale– Lower overheads– Greater leverage with vendors.

Trend forcing vendors to consolidate

Increasing Value, Convenience and Selection

Discounters and Mail-Order formats growing

E-tailing redefining the future of retailing, with internet accounting for 2% of sales of clothing by 2003.

USA Europe

5.6% 6.1% 8.0%

28.0%30.4%

33.0%

16.8%16.8%

17.0%

5.0%

23.4%21.6%

20.1% 18.5%15.0%

6.6%6.1%

22.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

1992 1997 2003

Department Stores

Specialty Stores

Other Retail Outlets

Major Chains

Discount/Off-Price/Outlet Stores

Direct Mail

7% 13% 15%

9%10%

16%

32%

7%

6%14%

12%

10%38%26%

16%

6%

3%

7%

24%

27%

2%

0%

20%

40%

60%

80%

100%

1995 2000 2005

Independent SpecialtyStores

Department/VarietyStores

Other

Specialty Chains

Hypermarkets

Discounters

Mail Order

Stagnating Retail Prices

222258

119

43 44

109

1990 1991 1992 1993 1994 1995 1996 1997

Average Retail Prices in UK (in US$)

Impacting the Retail Industry

WoolworthWoolworth

1960’s1960’s

SSSS JCPJCP

MWMW

1980’s1980’s

SearsSearsSearsSearsJCPJCP

WalMartWalMart KmartKmart

Fed.Fed.

MayMay

Merc.Merc.

Category KillersCategory Killers

DaytonDaytonHudsonHudson

DillardsDillards

Non-StoreNon-Store

Non-StoreNon-Store

2000’s?2000’s?

WalMartWalMartCategory KillersCategory Killers

KmartKmart

Dayton Dayton HudsonHudsonSearsSears

JCPJCPMayMayFed.Fed.

MWMWDillardsDillards

Merc.Merc.

EntertainmentEntertainment

ConsolidationandMigration

Situation arising…• Fewer buyers each with greater power.

• Consolidated purchasing in handful of low cost countries.

• Within exporting countries, consolidation of sellers.

• Vendors getting forced to design lines for each chain.

Parallel Trend –Fragmentation of Production

• International fragmentation of production – - whereby integrated production activities are segmented and spread over an international network of production sites.

• Opportunity for smaller companies

• It allows production in different countries to be formed into cross-border production networks -within or between firms.

• confluence of “integration of trade” with disintegration of production” in global Economy.

International fragmentation

– Delocalization of production, – Vertical specialization, – Outsourcing, etc

Occurs when:A good is produced in two or more sequential stagesTwo or more countries provide value-added during the production of goods;At least one country must use imported inputs in its stage of the production processSome of the resulting output must be exported

.

3 MODELS

Relocation of production to

LDCs and NICs

New forms of Production

and subcontractin

g (flexible specialisation)

Subcontracting

production within AICs to inner-city manufacture

rscompetitive advantage -

Cheaper Labour

women work on a casual basis

wages comparable to

LDCs and NICs economic

production in small batches and just-in-

time production.

Effects of Fragmentation: Supply Chain

• Extra costs (offset by reduction in other production costs) paid for the needed services –transportation of goods between production locations, quality controls, etc

• East Asia and Mexico in a new light witnessing concepts such as – – “Supplier-oriented industrial upgrading” – “Demand-driven development” – ‘Vendor Development’ as a function of Buyers.

The Shakespearean Dilemma

Which models must do we adopt to remain competitive in a system as dynamic as this?

Consumer unleashing a new power

+ves of Italian Model• Extremely flexible regard to labor factor firms.• Join creating industrial districts-- productive

flexibility, Globally competitive

• Market power remains equally distributed between domestic suppliers and retailers.

• Instead of efficiencies of scale, scope, and information technologies, the Italian model competes through flexibility, specialization, and an emphasis on product design and quality

India as a Fragmented Sourcing base in Asia

F: FragmentedC: consolidated

CCCFC/FFCCCCRMG

CCCFC/FFFCCCMade-ups

CCC/FCC/FFFCCCProcessing

CFFCCFCC/FFFWeaving

C--CCCCCFC-Spinning

USAMexico

ItalyPakistan

Turkey

India

Bangladesh

China

Korea

Japan

Level of Fragmentation in different stags of Value chain across countries

However, small scale also brings with it the problem of productivity. Various authors and

researchers have placed the current productivity of Indian factories to as low as one-third of levels that might otherwise be

achievable. Smaller companies often do not have the resources to invest in appropriate

technology or retraining, or in the re-engineering of processes. While skilled Indian labour is inexpensive in absolute terms, due to

lower productivity levels, small firms lose

much of this advantage.

India’s unit value realization

• Scope for the consortium approach- enhancing exports growth-using fragmentation

results of the study conducted on improving unit value realization in Indian Garment Exports

UVR of India’s Export categories: Primary Survey

Product Rational Intuitive Standardized Non RationalT. Shirts 234 222 244 215Pants & Shorts 358 235 237 243L. Blouses 379 246 264 382G. Shirts 410 336 340 346L. Dresses 384 255 318 289L. Skirts 501 251 297 216Outerwear 587 323 247 450

Fig in Rupees

UVR as a Differentiatior

– If one analysis the UVR (unit value realization) results obtained from the survey, it is quite clear that on the one hand, some Indian exporters managed to get a good price of their garments. On the other, there is one set of exporters who have been shipping the garments at a very low price.

UVR as a Differentiatior

– For example, in the case of outerwear, the standard deviation from the mean for the UVR was found to be maximum. This means that the Indian exporters exporting outwear are way erroneous in nature in terms of UVR(unit value realization)obtained through exports. The study showed that for instance in outerwear category, the minimum price which an Indian exporter got was Rs. 247(US$ 6), whereas the maximum price of the outerwear garment went up to Rs.575( US$12).

CLUSTER ANALYSIS

Rational Intuitive

Standardised Non Rational

- Tech Savvy- Design Process Oriented- Understand trends- Ornamentation is important

- Not giving due importance todesign development but understand the potential of design. - Stress on need basis design development

- Give stress to sell more- Believe in standardisation of design- Aware of the importance of design &product development- Designs are meant for all people

- Non Tech Savvy- Non Process Oriented- Does not give importance to design development- Ornamentation is unimportant

(64)

(55)(33)

(44)

RATIONAL

Characteristic Channel

Capabilities` Branding

- Medium in size- Woven & Knit Both- Export destination : EU & USA- Av. Turnover : 26 Cr.- Location : Bangalore, Chennai & Delhi

- Importers/Wholesalers abroad- Indian buying house

- High Branding Initiative- Interest in tie up with foreign brand- Strongly believes that retail stores will be set up by Indians abroad- 1/3 rd have own apparel brand

- High capabilities index- Finance flexibility- Product quality advantage- Delivery schedule adherence

INTUITIVE

Characteristic Channel

Capabilities` Branding

- Mixed of Medium & large in size- Majority Woven - Export destination : EU only- Av. Turnover : 30 Cr.- Location : Mumbai

- Importers/Wholesalers abroad- Indian buying house- Speciality chain abroad- Department stores abroad

- High Branding Initiative- Interest in almost all initiative. Looking for the success formula in branding

- Medium capabilities index- Finance flexibility- Raw material sourcing- Cost competitiveness of dept

STANDARDISED

Characteristic Channel

Capabilities` Branding

- Large in size- Woven & Knit- Export destination : EU only- Av. Turnover : 40+ Cr.- Location :Delhi & Mumbai

- Importers/Wholesalers abroad of Indian origin- Indian buying house- Foreign Buying house- Department stores abroad

- Medium Branding Initiative- Interest in store promotion ( India)- Cautious on Indian brands - 1/3 rd have own apparel brand

- High capabilities index- Finance flexibility- ERP system usage - Ability to import raw material- LAN Integration

NON RATIONAL

Characteristic Channel

Capabilities` Branding

- Majority small in size- Majority Knit- Export destination : EU & USA- Av. Turnover : < 20 Cr.- Location : Bangalore & Chennai

- Importers/Wholesalers abroad of Indianorigin as well as non Indian origin- Department stores abroad

- Low Branding Initiative- Interest in tie up with foreign brands- Believes retailers abroad will be willing to stock Indian brands

- Low capabilities index- Merchandising system- Low on raw material sourcing- Low on delivery schedule adherence

Major Findings

• Too much of dependence on one product.

• Few exporters are offering all products type but are catering to EU only

• On the other hand few exporters are offering the single product but to both USA

and EU markets.

• Merchant exporters are having better product mix than Manufacturing exporters.

• Similarly Knit exporters are doing better on product diversification front as

compared to woven exporters

• Indian exporters have made the beginning of building relationship with the

buyers directly.

• Men`s wear exporter are doing better in terms of channel mix as compared to

women`s wear exporters

Differentiation Cost Leadership

Focus Differentiation Focus cost

Leadership Leadership

Strategies Orientation

BROAD

NARROW

•Large-scale Exporters falling in the Standardized range Should be using Focus cost leadership-Process Engineering based etc.

•The small and medium scale exporters can create differentiation through product development & design Initiatives

Impact on the Supply Chain

In the increasingly competitive environment, there would be greater emphasis on a “Responsive Supply Chain”. Information technology will become a primary agent of change.

“In Stock”

“Right Product”

“Low Price”

On Shelf Performance

Inventory Turn

Efficiency

ReplenishmentSourcing

Speed Sourcing

Efficient Communication andProduct Development

Consumers’ Demands

Retailers’Key Issues

Supply Chain Needs

Business life cycles have come a full circle

Resetting the Horizon

• Qualifying elements• Cost advantage (C)

• Product quality advantage (PQ)

• Reliability advantage (R)

• Delivery advantage (D)

• Fabric advantage (F)

• Order winning elements• Time/Speed advantage (T)

• Design/Product Devt advantage (DP)

• Productivity advantage (P)

• Service Advantage (S)

• Image advantage (I)

-2

0

2C

T

DP

I

P

S

F

D

R

PQ

Source : Koshy, Darlie O. (1997). Garment Exports: Winning Strategies, Prentice-Hall India, p.241

Consumer Focus: Time for Partnerships

Joint Activities

Product Development/ Merchandising / Line Planning

Inventory Management /Forecasting

Supply Chain Management

Marketing

Selling Floor

Retailer Supplier

Consumer

Conclusion

• In conclusion, the global economy is increasingly concentrated at the top and fragmented at the bottom, both in terms of countries and firms. Given this consolidation, profits are driven down at the base of global value chains because of intense competition, leaving little money for reinvestment, innovation, or wage increases.

Conclusion

• Thus, sourcing structures for such a dynamic industry have shifted from large-scale set-ups to smaller fragmentized sourcing bases, which are more flexible in nature. Whether such a phenomenon will oscillate back to the former in the future is a challenge for researchers

Conclusion

• The real opportunities to move up value chains in the global economy appear to be increasingly concentrated in a very small number of developing countries, and within the largest of these economies (like China and India), in particular sub-national regions.

The greatest danger for most of us is not that our aim is too high and

we miss it, but that it is too low and we reach it.

Michelangelo