Digital procurement: an apparel reality?
With the global economy under pressure, it's time to think bigger, better and bolder. In terms of sourcing, companies can introduce major savings to their purchasing costs by moving to digital procurement. But is it likely to become a reality in the apparel sector? In this feature, Sudhir Patni and Rohit Kuthiala look at the process of digital procurement.
A revolution of sorts is underway, with customer demand replacing product supply as the main market driver. With its ability to forge direct links between retailers and their suppliers this change is being stimulated by the Internet, and means that tailor-made products can be offered at the cheapest price and as quickly as possible. The whole concept of sourcing and procurement is being redefined.
In the apparel retailing industry, buying still takes place by reviewing numerous garment samples, analysing their pricing and holding face-to-face negotiations with suppliers on final costing.
But bidding and placing orders like this does not sit well with the new ways of doing business. Traditional manual, paper-based purchasing processes are both labour and time intensive. The expenses incurred in sampling (most of the buyers pay for development samples) and travelling to various places around the world add to the cost of sourcing and procurement - and have a dramatic affect on companies' bottom lines.
This process also lengthens product lead times. With fashion trends and sales getting more and more unpredictable, all retailers want to buy as close to the selling time as possible. The traditional way of buying does not help this new requirement.
The term 'digital procurement' has struck many industries. Companies are either buying or establishing ways to buy goods, partly or completely, via the Internet. As these processes move online, auctions are becoming a powerful weapon in the procurement arsenal. Will, or can, this become a reality for apparel retailers?
Digital procurement takes place online and is an auction in which the order is placed with the lowest bidder - as opposed to normal auctions where the item goes to the highest price - and is sometimes referred to as a 'reverse auction.'
To implement a reverse auction the retailer brings all its suppliers together via the Internet. Suppliers/vendors then bid for orders (a fixed type, quality and quantity of garments), and head office and/or regional offices compare bids in real time.
This system is not as simple as it seems. Companies need to prepare databases for the items they generally source, and in order to develop an online quote system a comprehensive database is required.
The process of online bidding and quoting can be divided into three phases: initial contact, competitive analysis, and supplier quoting.
The first phase - initial contact - consists of a basic questionnaire about the supplier/vendor that takes in general business and technical data such as turnover, location, expertise in specific garment types (knits, woven, denims, synthetic or cotton), quota availability, technological and manufacturing capabilities, and quality assurance. The survey should be designed so that as much information can be collected as possible and the data evaluated easily.
The second phase involves competitive analysis of suppliers in terms of quality, their technological capabilities, production capacities and processes, and management attitude. The results form a shortlist of suppliers and filter out unsuitable companies before they move to the online quotation process.
Barriers and filters
The final phase involves the actual process of auctioning. First, however, it is necessary to:
- Decide how long the reverse auction should run. It could be anything from a few hours to a couple of weeks, though it should last at least a few days in order to attract enough suppliers and give them time to plan their costing and bidding strategy. In turn, they may have to negotiate with their own suppliers and end up making vertical partnerships to bid in the reverse auction.
- Decide whether the auction will be open to all or specific suppliers only - ie, have a regular reverse auction or a private reverse auction. In a private reverse auction, only those suppliers selected by the buyer are notified and allowed to bid. This is where the competitive analysis comes in.
- Put together a detailed description, construction or spec sheet for the garment being sourced. This will allow the supplier/vendor to offer the best price.
- Decide on the order size, delivery dates, schedules and location.
- Decide the unit "buy price" - the price at which the retailer would like to purchase the product from the supplier. Although never quoted to suppliers, this price can be referred to as the target price.
- Decide on the starting bid price - the price at which the reverse auction is opened for bidding. This price is always greater than the buy price.
- Work on the terms and conditions: shipping terms, quality parameters, payment terms, etc.
Using special software, this data can then be posted for all suppliers - or certain suppliers selected for a private reverse auction. Buyers can also post up-coming auction events to all regional offices and suppliers worldwide. Depending on the order quantity and the type of garment, auctions can be set up at any level - in a particular country, across a region or worldwide.
A request-for-quote (RFQ) is then sent to all eligible suppliers/vendors. This is a detailed description of the product, its specifications and the retailer's requirements, and may include the terms and conditions.
Suppliers can then make bids for the product, each trying to quote the lowest price and closely monitored by the head and/or regional offices. Orders tend to be placed with the lowest bidders, although price is just one of many factors influencing the buying decision. Auctions can also factor in exchange rates, shipping costs and other expenses that creep into transactions.
The cost savings tend to be high, and the larger the order size the more sense it makes to procure items through reverse auctions. A few suppliers also claim reverse auctions are driving down prices by opening up the procurement process. And suppliers/vendors can tailor their bids as bidding progresses - something that was not possible in a sealed bid process, where bids had to be submitted by a certain time and the lowest won the contract.
Benefits for both …
General Electric, the world's fifth-largest company, was one of the first to realise the potential of reverse auctions, saving US$480 million in the year 2000 alone. Despite this however, auctions are still in their infancy.
Help and support
Sourcing in this way involves a lot of work upfront: gathering information on suppliers/vendors, analysing it, grouping vendors according to buyers' requirements and criteria, for example. The software required is not cheap either, so the whole system does not yet offer a cost-effective solution for small retailers and buyers.
To cater to these specific needs, some IT companies provide a complete support package. With the help of comprehensive databases of thousands of suppliers and vendors from around the world, they provide extensive business, financial and production information on each supplier/vendor, saving buyers time and money spent searching, collecting and analysing such information.
Most US apparel retailers outsource their products from China, India, Mexico and countries in South East Asia, most of which have computer and IT know-how. This infrastructure can be used to retailers' advantage.
European companies source from places like Turkey, Morocco and Romania for shorter lead times, and China, Cambodia, Bangladesh, Indonesia and India for their price benefits. Goods from many of these countries have duty free access to European markets, and the IT skill in some of these countries is very good too. But each day IT infrastructures are getting better, faster and cheaper across all borders.
With the global economy under pressure, it's time to think bigger, better and bolder. In terms of sourcing, companies now have a chance to introduce major savings in their procurement costs. But can the apparel sector, really take advantage of this and is, digital procurement likely to become a reality?
A lot depends on whether fashion can ever become a generic commodity. Design, colour, hand feel, drape and fit all affect the final sale - and come into play when deciding on suppliers. But with new technology helping to control the complete supply chain process, reverse auctions can be part of the future.
Sudhir Patni trained as a textile engineer and has worked in manufacturing and sourcing for leading apparel companies. His most recent position was at Gap Inc, based in India and Singapore where he was sourcing from India and the Far East for the three Gap Inc brands. Sudhir is currently pursuing an MBA in supply chain management at Weatherhead School of Management in the US and is president of the school's supply chain management association.
Rohit Kuthiala has several years' experience in the global sourcing of fabrics and garments. He has previously sourced varied product ranges and home textiles for Banana Republic, the most upmarket brand of Gap Inc, from the Indian sub-continent. He currently works for a leading global apparel supply chain company and is involved in sourcing garments from China, South Asia and the Far East for European markets. Rohit has an in-depth understanding of both US and European retail industries and their sourcing patterns.
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