Wearing thin?

Profitability for Indian textile and clothing companies isn't coming as naturally as was expected. The global market is turning out to be highly fickle, characterised by unpredictable demand, whimsical consumers, multiple trading partners and difficulties in cross-border trade. Given these challenges, how can value be created and preserved in the business?

An exclusive report by retail consultancy KSA Technopak suggests that the entire supply chain needs to re-invent itself if it is to become competitive.

What roles would textile and garment manufacturers have to take up in the changed global scenario?

International trade in textiles and clothing was worth more than $ 360 billion in 2002, 4 per cent more than in the previous year. Given the size of this market and its growth rate, it should have been relatively easy for shrewd textile and clothing companies to remain profitable. But although international trade is growing, the industry is under serious price pressures. Moreover, these price pressures are set to get worse when quotas restricting exports from developing countries are eliminated on January 1, 2005, in accordance with the Agreement on Textiles and Clothing (ATC).

Given these challenges, it is essential that companies remove hidden cost elements in the whole supply chain if they are to remain competitive. Furthermore, this effort cannot be limited to just a few producers: if any one firm is to succeed, all the links in the supply chain need to undertake this process.

Creating and preserving value in the textile and apparel supply chain

Creating and preserving value can help textile and apparel firms become more competitive, and hence gain market share. Value can be created or preserved by either reducing costs or improving products. Reducing costs can help in improving margins. Costs can be reduced through manufacturing process improvements to increase productivity and business process optimisation, through collaboration.

Improving products through innovation will generate additional demand and, therefore, provide additional value. Consumers are often willing to pay a premium for products that are differentiated and adapted to their needs.

Consider what happens to 1 kg of cotton fibre as it is processed into a product in the textile and apparel pipeline in India and is eventually retailed and sold to the consumer. First, take the example of a shirt retailed by a mass merchant, made from 132 x 72 piece-dyed poplin (powerloom fabric) dyed to a medium shade. The fabric is woven from combed yarn of Ne40 count4 made from 100 per cent cotton. Now, examine a pair of classic khaki chinos, again retailed by a mass merchant, made from mill-made twill fabric of Ne2/40 combed yarn.

Analysis of the value addition at each step reveals that the biggest value addition in the chain takes place at the garment to retail stage. In fact, the value is more than doubled at this point.

 

Value addition in the supply chain for men's poplin
shirts and khaki chinos
	Fibre	Yarn	Fabric	Garment	Retail
Men's poplin shirts
Amount1	1 kg	0.80 kg	4.85 m	2.1 shirts	2.1 shirts
Value2 ($)	1	2.05	4.7	9.85	22.75
Value added3 ($)	n/a	1.05	2.65	5.15	12.9
Value added as %4	4	5	12	23	57
Khaki chinos
Amount1	1 kg	0.75 kg	2.30 m	2 trousers	2 trousers
Value2 ($)	1	2.25	7.5	14.5	37.5
Value addition 3 ($)	n/a	1.25	5.25	7	23
Value addition as % 4	3	3	14	19	61
NB: data for each process stage except retail relate to manufacturing in India.
1) Calculated as 1 kg of fibre, leading to the number of apparel items after accounting for all wastage in the chain.  2) Value realisation of the end product at the stage indicated.  3) Difference in value between the two stages.  4) Percentage value added of the overall value of the garment at retail.
Source: KSA Technopak

The true maximum savings in the supply chain can be brought about in this area by collaborations, better planning and shorter lead times. 

The total potential for a reduction in business process costs across the supply chain is around 35 per cent (on the retail price). However, there is more potential to improve margins in garment-making and in retailing than in spinning, weaving or processing.

Margin improvement in retailing can be achieved through collaboration and by forming partnerships throughout the textile supply chain. Such steps would also result in better margins for all the other players in the chain.

Manufacturing process improvement

There is limited scope for reducing manufacturing costs in the spinning, weaving and processing sector. However, production efficiency in apparel factories can be improved to a significant extent by focusing on methods and training of manpower. Efficiencies can be increased by around 15 to 20 per cent, leading to cost reductions of around 10 per cent.

In apparel manufacturing, focusing on production management, flexibility in operations (to reduce idle time), operator training, and implementing standardised industrial engineering practices can help reduce production costs.

Business process optimisation

In order to make the supply chain efficient, collaboration is becoming a necessity. Companies in the automotive and consumer durables sectors have been active on that front for some time; the textile and apparel industry also needs to graduate to the same level of coordinated supply system.

For one leading European apparel retailer, some of the benefits gained by collaborating with suppliers were:

• Twenty per cent reduction in manufacturing cycle time;
  
• Forty per cent increase in capacity utilisation;
  
• Ninety-sex per cent reduction in charge-backs arising from improved order conformity;
  
• An improvement in the percentage of on-time deliveries to more than 98 per cent;
  
• A rejection rate down to less than 1 per cent through implementation of quality control procedures; and
  
• An improvement in the sample adoption rate, in some cases to as much as 70 per cent.

Technology has become a major facilitator in information-sharing throughout the supply chain. It is estimated that the opportunity to increase earnings for the retailer could be as high as 45 per cent. This benefit could then be passed down the chain. Today, it is expected of a supplier to provide all services to the buyer and buyers are willing to pay a premium for full-service packages. Vertically integrated companies are, therefore, likely to benefit.

Improvement through innovation

Significant growth in revenue will only come from jaw-dropping new products and services. In this respect, the apparel industry contrasts poorly with sectors such as automotive and telecommunications. Apparel has barely changed, except in the area of functionality.

Here, durability has improved, and special washes, finishes and functional features have been introduced. The percentage of income spent on apparel by consumers has been falling over the years. However, customers will always make room for something new, useful and value-packed.

There is potential for charging consumers a premium price for something they particularly want to buy: Starbucks gets away with charging customers $ 3.50 for a latte! That's because the coffee chain came up with a mouthwatering array of alternatives to the boring American coffee.

Reversing years of steady margin erosion requires "a truly-novel value proposition" requiring systemic, radical innovation. This can happen by making innovation a part of the corporate culture. Managers need to start thinking about innovation as a business concept in its own right. And remember, the entire company should be driven towards innovation, not just the top management.

Some of the current innovations that are taking place are: machine washable wool, biodegradable fibres derived from renewable sources such as corn starch, and the use of lipase enzymes to remove waxes and oils from fabrics. Radical developments are also taking place in the production of "intelligent" garments that can sense the wearer's physical condition.

In conclusion, the biggest potential for eliminating inefficiencies and affecting improvements in the textile value chain lies in collaborating and integrating the supply chain. Every member of the chain should contribute towards making its front end ""retail end "" more effective.

Collaboration between textile and apparel supply chain members will help to realise improved margins and build better delivery systems as far as the retail stage.

However, beyond collaboration, the industry needs to perpetuate a culture of innovation and of commercialising that innovation. Product innovation and services offer the key to growth over long-term.

(This report was prepared by Arvind Singhal, Suhasini Sood and Vishesh Singh. Singhal is Chairman of KSA Technopak in India; Sood is a Senior Consultant with the firm and Singh a Consultant)

The thin fabric of opportunity

There's outstanding potential for the Indian textile industry in the wake of the likely phase-out of quotas on January 1, 2005.

At least, that's the conclusion reached by a number of seminars and studies in recent times. One study even projects a potential of as much as $ 30 billion of apparel exports by 2013, a massive hike from the figure of just about $ 5.5 billion in 2004. But then, if it's a matter of potential, you can take almost any sector in India "" be it agriculture, tourism, pharmaceuticals or healthcare "" and come up with multi-billion dollar export opportunities for the country.

Unfortunately, in probably all these cases, and almost certainly in the case of the textile and clothing sector, it is unlikely that we shall achieve any significant success in the near future. Quota phase-out is one such instance where India is poised to actually miss the bus rather than hopping on for a long, fruitful journey.

The primary reason for India's highly-compromised competitive situation post-multi-fibre arrangements (MFA) is to do with the peculiar structure of the Indian textile and clothing industry. In the past 20 years, Indian policy-makers have systematically destroyed the very core of this industry. Efforts to undo this damage have only been initiated in the past two or three years and it will take many more years before these efforts will show any significant results.

Some facts stand out. In 2002-03, the organised mill sector produced just about 3.6 per cent of all fabric production in India (and about 5.5 per cent in terms of value), with the remaining being accounted for by the powerloom and handloom sector. Perhaps no other industry in India (or for that matter, anywhere in the world) is characterised by such a total lack of organisation.

On account of absurd policies inflicted on the hapless organised textile sector by successive governments in the past two decades, primary investment in new capacity has almost come to a total halt in the last five years.

KSA estimates of total new investment (including some modernisation) in the Indian textile and clothing sector in the past half-decade is less than Rs 10,000 crore (excluding investment in fibre production). The sector has received practically no foreign direct investment and there are no signs of this trend reversing anytime in the near future.

This is to be seen in the context of both the Planning Commission as well as KSA estimates of an investment need in the range of Rs 85,000 to Rs 95,000 crore over the next three to five years to make the industry competitive and of some global scale.

According to KSA estimates, excluding the output of leading fibre producers such as Reliance, Indorama and Grasim, the total revenues of the top 20 textile and clothing companies in India do not exceed Rs 10,000 crore. There are just about 15 apparel exporters in the country whose revenues exceed Rs 100 crore, and another 30 who earn between Rs 50 and Rs 100 crore.

In a world that is seeing rapid consolidation of brands and retailers "" thereby requiring larger suppliers "" the strength of even the biggest of Indian companies (barring a few) to scale up to global size remains untested.

Further, India's export product basket for garments comprises mainly three categories (in the list of top 10). In yarn, it already has a dominant share. In fabrics, India's exports were largely "grey" but with buyers increasingly seeking packages, fabrics have to be processed and converted into garments. In the case of fibres, India's strength so far has been confined largely to cotton, which means that season-wise, Indian garments offer solutions only for spring and summer.

What does this imply for the Indian textile export business? While most of the major organised players will perhaps benefit from the quota phase-out (in fabric and garments), their overall numbers and contribution to the total Indian textile and clothing industry (about Rs 1,27,000 crore, including domestic and exports in 2003) may add up to an incremental increase of just Rs 3,000 to Rs 4,000 crore in 2005 at current prices (or even in 2006), which is just about 5 to 6 per cent of total export value (of yarns, fabric and garments) in 2003-04.

And even this increase is suspect due to the likelihood of a steep decline in export prices post the quota phase-out, giving a real possibility of stagnation or even an actual decline of India textile and clothing exports in value terms in the near term.

- Arvind Singhal  (email: arvind@ksa-technopak.com)