[By Arvind Saraf]
Surat, a bustling city on the west coast of India, had been manufacturing silk and cotton since the 1700s. Entrepreneurs (including my family) poured in from all over India from the 1970s onwards, setting up their garment businesses. The city now has more than 40,000 power looms, about 400 dyeing and printing mills, thousands of embellishment units, and tens of thousands of manufacturing traders who work with these units and account for approximately 65% of synthetic fabric production in India. Traders from Surat supply to the wholesale markets in Chandni Chowk in Delhi, Kalba Devi in Mumbai, Bada Bazaar in Kolkata, Chickpet in Bangalore, and most other cities in India.
Dilip Shadeja runs an apparel retail shop named Sindh dresses in Varanasi, India. He buys his supply from the Surat wholesalers, and sells to a mix of existing and new walk-in customers. He is amongst the 18 million small retailers who make up more than 80% of retail in India.
The apparel industry, from manufacturers, traders and retailers, is dominated by small/medium businesses (SMBs, also referred to as SMEs), traditionally family-owned and run.
The sector is highly competitive, with net margins in single digit percentages. 70% of units in this sector have applied some form of digital tools but only 1% really use deep technology such as IoT, Artificial intelligence or Robotic process automation. While the total value of retail in India is $600 billion, close to $65 billion is lost annually due to supply chain inefficiencies.
I have had the opportunity to interact with these SMBs due to my family roots in Surat, along with my more recent experience of 8 years as an entrepreneur. The stress, challenge, and fear of survival amongst these SMBs is very real.
Relevant technology and digital solutions promise viability, survival, and growth of the businesses. More than any time in the past, the need and opportunity to adopt these tools is now.
The nature of business
Apparel manufacturing is a multi-step process, starting with raw material (natural or synthetic yarn) that gets woven into fabric, dyed, or printed, optionally embellished with surface work (e.g. embroidery, stonework, or handwork) and stitched. A trading manufacturer (esp. SMB) works on the designs to make and sell under his trade name, take the corresponding inventory risk, but often outsources many of the above manufacturing steps to other vendors or suppliers. Traditional SMB Apparel trading is low margin, with net margins in single digit percentages.
Apparel trading is inventory led – which means a business must buy the inventory before it can be sold. Most of these businesses (retailers or wholesalers) do not have access to institutional credit. They depend on their known supplier (wholesaler or manufacturer) to sell to them on credit with an agreed payment period. The payment credit period allows the buying trader the time to sell the product and repay back the supplier. The supplier makes the credit decision based on the buyer’s prior payment history or feedback from the other suppliers known to him (‘references’). A retailer with a period of poor sales could default on his payment to his supplying wholesaler, which may cascade these defaults to the manufacturing trader and their vendors. The credit risk limits the supplier options and hence design choices for the buyer.
Various auxiliary processes, critical to the industry, such as logistics, warehousing, marketing material creation (i.e. photo studios and printing) are also highly SMB dominated.
There are various business processes that must be run timely and efficiently, with minimal wastage for these businesses to be viable:
- Production and supply:
- Purchase of raw material or finished goods, aligned with planned production or projected sales.
- Coordination of work-in-progress inward or outward, including material requirement planning.
- Planning the usage and production of machines with the workforce.
- Marketing, sales, and distribution:
- Keeping existing customers (and new) informed of new products, inventory status, offers and discounts in a real time way; enabling buyers to track order dispatch and logistics status.
- Reaching out to new buyers, be they businesses or end customers.
- Assessing credit worthiness of buyers, including reference checks. Payment receivable tracking, starting with capturing trade terms and follow up on it.
Digitization opens the prospect of better tracking, visibility, and thus better decisions. Currently,
software to digitize above processes may not exist or are often entity-specific and not interoperable. Therefore, information gaps between the different companies remain.
Technology for social impact has been talked about for more than two decades, from the early wave of affordable computing (~2000-2005, e.g. MIT Media Lab’s One Laptop per Child, Simputer), improved communication around SMS (~2005-2010), to internet’s increased reach (e.g. growth of e-commerce). However, the opportunity now is much more real.
People have computing and connectivity in their hands, and they have been using it to further their business, with about 1 million businesses using WhatsApp to share product catalogue images, ledgers or general selling. Goods & Services Tax in 2016 and now COVID-19 has expedited the need to go digital. A decade ago, most apparel SMBs looked at technology startup innovation space as a separate world, not making sense to them, not applicable to them. Now, many look at it with curiosity, as a way out of challenges they see.
Mobile app first platforms now are enabling the following:
- B2B marketplaces, allowing manufacturers to list their products and retailers to buy from them. This allows global product discovery by the retailers, while also expanding reach and visibility of these businesses. Existing buyers can also see better retention.
- Enabling newer and lower fixed cost forms of retail. E-commerce has promised to take away some of the inventory risks, rental, and fixed costs from the merchants, but has not delivered financial viability yet. Social commerce is seeing innovation and adoption with similar promise.
- Enabling businesses to manage their existing channel sales better through technology and data. The channel could include direct customers, businesses, or a network of salesmen.
- SaaS (statistical software) solutions for businesses to manage some part of supply or book-keeping, tightly coupled to their buyers or suppliers use of WhatsApp.
- Platforms aggregating the highly fragmented logistics providers catering to this industry.
- Factoring out credit / working capital friction from the businesses by using prior transactions and references, beyond those used by banks and financial institutions.
Indian manufacturing and retail (overall, not limited to apparel) is different from North America, Europe or even China, but similar to most other emerging markets. SMBs are significant employment generators but now need technology driven efficiencies to survive. Technology products that work for India now have a much larger opportunity to deliver core impact globally. The success of some early startups is a sign of a promising future.
Arvind Saraf is a Computer scientist (trained at IIT, MIT & Google) and a Technology entrepreneur. He spent a decade setting up impact technology ventures in India – including co-founded a Ratan Tata backed healthcare social tech venture (Swasth India), digitized a bootstrapped apparel brand (Triveni sarees), and built and scaled a VC backed SMB focussed B2B fashion tech venture, Wishbook. He currently heads Engineering at Drishti – a company using AI to drive continuous improvement in manufacturing.