The savvy shopper today selects a number of flattering garments from a separates collection. Likewise, apparel retailers and brands should choose several business-to-business (B2B) marketplaces from the many that exist to tackle their particular procurement needs.

B2B marketplaces are exploding onto the scene, signaling a transformation of the procurement landscape. This expansion is producing a land grab by new entrants who seek to revolutionize supply chains and by incumbents who are determined to halt disintermediation.

The retail industry is no stranger to these trends - more than 40 apparel segment business-to-business (B2B) marketplaces have emerged in the last two years. In response, both retailers and branded manufacturers are scrambling to determine what procurement or supply-chain benefits marketplaces are offering and how they can capture those benefits.

In this article, we identify how B2B marketplaces can create value for apparel retailers and brands - by improving overall supply-chain effectiveness and efficiency through new technologies. Next, we describe the three kinds of marketplaces that have emerged. Then, we explain why apparel retailers should utilize a portfolio of marketplaces - not just one or two - to meet their procurement needs. Finally, we outline the challenges that lie ahead in this uncharted territory and suggest some basic principles for getting started.


B2B marketplaces can unleash significant value
Apparel retailers and branded manufacturers can gain significant value from employing the right combination of B2B marketplaces. The opportunity to increase earnings could range to 70 percent over time for some apparel retailers and brands. This opportunity reflects the sector's historically slim net margins and the critical importance of supply-chain efficiencies to margins. The magnitude of the opportunity will depend on an apparel retailer or branded manufacturer's sophistication, scale, automation, and degree of collaboration with suppliers. The victors will be those who reduce their total cost of owning merchandise across the entire supply chain. (Fig: 1) Those who simply focus on capturing short-term aggregation opportunities will not attain these results.



Marketplaces offer enabling pathways for retailers. They address many of the obstacles that plague supply chains, from product development through to merchandise allocation and planning. They represent much greater potential value than merely reducing purchasing costs through aggregation.

Indeed, apparel retailers at the forefront - Gap and Zara - have focused not just on brand development but also on streamlining their supply chains. Putting aside Gap's recent hiccups, Gap and Zara have delivered exceptional, top-line growth over the last five years by leveraging technology and supplier interactions. Their collaborative and efficient communications work to compress cycle times and reduce shared costs.

We believe retailers of all sizes and formats can do the same by leveraging marketplaces and Internet technologies to selectively e-enable and optimize their supply chains. E-enabling the supply chain creates four key value levers (Fig: 2) for apparel retailers and brands. These levers are:
. Reduce supply-chain costs
. Reduce product costs via enhanced market efficiencies
. Increase revenue from more timely delivery of on-trend product
. Reduce process costs associated with managing the transaction
While we would expect most of these improvements to be achieved over the longer-term, apparel retailers will need to enlist marketplaces early to start the process and remain competitive.

Reduce supply-chain costs
Retailers will use marketplaces to reduce supply-chain costs through better design, sourcing, production, logistics, and inventory management. Our experience in the retail sector suggests that supply-chain cost reductions could result in up to 35 percent earnings improvements once marketplaces are running in a steady state. Specific sources of value include:


. Increasing coordination among retailers and suppliers, this will result in fewer delays in critical steps in the supply chain and, ultimately, fewer markdowns.
. Shortening cycle times, which will lower inventory carrying costs.
. Reducing delays, improving event handling, and decreasing the need for unplanned airfreight shipments. Improving information flows will permit retailers and suppliers to better monitor the flow of goods through logistics systems. Increasing confidence in product availability will allow retailers to reduce safety stocks.
. Locking in fabric production early, through shared design and sales information, which creates a competitive advantage.


Reduce product costs
Retailers will use electronic marketplaces to reduce product costs through enhanced market efficiency and transparency. With more complete and up-to-date pricing and vendor rating information, apparel retailers should be able to reach lowest-cost providers. And, retailers and brands should become better able to take advantage of changing global labor rates, import tariffs, and exchange-rate fluctuations across markets. Depending on the product development and buying team's degree of sophistication, purchasing costs could fall by up to 10 percent, or 3 to 5 percent of sales. This reduction translates into an earnings increase of 10 to 15 percent.


Increase revenue
Retailers will use marketplaces to increase revenue from current customers by ensuring that fewer high fashion, trendy, or highly seasonal goods go out of stock. Retailers will be able to plan better, eliminate delays, and shorten lead times by sharing design capabilities with merchants and utilizing marketplaces' collaborative design modules. By using technology to make their supply chains more flexible and responsive, retailers can boost inventory of hot items while simultaneously lowering overall inventory. Over time, these benefits could translate to as much as a 15 percent improvement in earnings.


Reduce process costs
Retailers will use marketplaces to reduce process costs by standardizing technology and business processes to reduce the cost of sales and overhead. By automating their sourcing and logistics handling departments retailers should be able to reduce associated overhead costs to enhance earnings by up to 5 percent. The Internet is forcing communication costs down to near zero, which allows even the smallest players to utilize new technology efficiently. In the longer term, retailers may share data through secure Web sites where information is visible to both merchants and suppliers. This will not only lower communication costs but also improve the accuracy and reliability of information.


Three kinds of

marketplaces exist
B2B marketplaces that have emerged to date fall into three basic models, each with its own ownership structure and practical applications:
. Third-party marketplaces
. Consortium-backed marketplaces
. Private marketplaces


Third-Party Marketplaces
Third-party agents are developing independent marketplaces to increase the effectiveness and efficiency of the agency relationship through one of five levers:
. Improved data capture
. Increased leverage over suppliers to squeeze margins
. Reduced supply-chain costs
. Improved turnaround time
. Increased market efficiencies

Key customers will likely be small apparel retailers - that can't afford custom solutions, yet want to conduct business efficient networks of approved suppliers - and larger retailers in need of specific services or spot capacity from outside their traditional networks.

Third-party marketplaces focus on narrow functions like surplus inventory management, shared design, purchasing aggregation, and market making. Retail.com and Tradeweave.com provide purchasing networks and collaborative design modules that streamline product development. Clo$eout.com plans to auction off surplus inventory. Even these focused efforts will prove challenging, though. Reversing product up retail supply chains is always complex and expensive.

A set of third-party, e-enabling technology providers also have emerged to support private marketplaces with services and platforms that target key portions of the supply chain. These companies create virtual private exchanges that enable vendors to convert, integrate, and train just once in order to participate with all the other retailers and brands that share the platform. As a critical mass of suppliers and retailers adopt these platforms, they will become increasingly useful.

But less than a handful is likely to survive, so selecting a technology partner with endurance is important. Already, some software providers to third-party marketplaces - start-ups such as Appareon - have dropped out after failing to get funding and sufficient customers. The high risk of investing in technology providers may convince retailers to focus on safer, consortium-backed and private marketplaces.


Consortium-backed marketplaces
Consortium-backed marketplaces are owned by leading participants. They are open to all retailers; equity partners make capital investments while others simply pay annual membership fees or transaction fees. Consortium-backed marketplaces plan to offer suites of supply-chain applications that will reduce purchasing costs. These marketplaces are designed to increase supplier competition for commodity purchases like indirects. They also use technology to promote efficiencies via Internet applications that aggregate the buy across multiple retailers and electronically enable suppliers and vendors to increase supply-chain transparency and reduce transaction costs.

Early consortium-backed marketplaces include GlobalNetXchange, an alliance of Sears, Roebuck & Co., Carrefour, and Metro, among others, and WorldWide Retail Exchange, with 53 retail members worldwide, including Target, Ahold, and CVS. Several consortium-backed marketplaces are collaborating with technology providers such as Commerce One, Ariba, and i2, for their exchange technology rather than working with vertically focused retail specialists.
Like other industry marketplaces before them, consortium-backed marketplaces must overcome a number of obstacles:


. Achieving the liquidity and scale required for credibility.
. Developing an ownership structure that incents retail members to participate and invest in marketplace development, while ensuring independent management. Retailers expect ownership in return for participation as charter members.
. Accommodating multiple, complex, buying processes that vary significantly across categories and retail formats. The development of standards-based marketplaces presents an intricate challenge - consider the coordination required to format a single purchase order across retailers and categories.
. Integrating members' legacy retail technologies with new e-enabling technologies from several providers. Marketplaces must develop a broad suite of options to interface with many transactional, merchandise planning, and replenishment systems.
. Managing members' privacy requirements and competitive conflicts. For example, large members may not be willing to share purchasing advantages with small competitors.
. Retaining a senior team willing to work for many owners and bosses.
Despite these challenges, commitment to success appears high.

Private marketplaces
Private marketplaces are developed by large retailers and apparel brands for internal use only. We expect many large, fashion-oriented retailers to develop private marketplaces. They are likely to be retailers' largest area of focus and will take many shapes and forms depending on the scale, category mix, and most significant challenges in retailers' supply chains.

Large retailers with proprietary brands or supplier networks and those who are reluctant to re-tool large parts of their systems will own private marketplaces. They will help retailers remain competitive as new technologies emerge that improve the efficiencies of their supply chains. Wal-Mart Stores' Retail Link private marketplace already is critical to Wal-Mart's ability to drive supply-chain efficiencies. Retail Link has grown in importance because it provides greater information transparency to Wal-Mart's vendors.


Smart retailers will enlist a portfolio of marketplaces
Most apparel retailers and branded-apparel manufacturers will benefit from a portfolio approach to marketplaces. A portfolio approach means using several marketplaces to meet each of the various procurement needs. Within a portfolio, the marketplaces each retailer emphasizes will reflect its scale and the type of merchandise it purchases - direct goods, indirect goods, services, or capital goods. Smart buyers will utilize multiple approaches to buying both direct and indirect products.

All retailers and branded manufacturers will benefit from third-party marketplaces that address targeted issues like new product design or international freight and delivery. Imagine, for example, the economies from aggregating health benefits or utility expenses. We also expect new trading categories to emerge, such as promotional space in weekly and instore circulars.

The smallest retailers and branded manufacturers will gain from leveraging the scale of consortium-backed networks. All retailers will benefit from using consortium-backed marketplaces for indirects and less brand-sensitive products. Consortium-backed marketplaces may also help set process and IT standards that will reduce the cost of linking up with trading partners.

The largest retailers and branded manufacturers will likely invest in their own private marketplaces to source proprietary and branded products. Such products are critical to their competitive advantage, and these retailers already have supplier networks in place. We don't expect apparel retailers with predictable supply chains and forecast requirements to participate in open marketplaces. Those who operate in basic categories - like five-pocket, denim jeans and tees - will work to maintain their scale benefits. However, they may be able to find aggregation opportunities further up the supply chain by developing raw-material-buying consortiums.


Challenges are numerous and progress will take time
Despite the significant opportunities marketplaces offer, they also present substantial challenges. We believe progress will be evolutionary, not immediate.

A key challenge will be to motivate suppliers to adopt new technologies and join marketplaces. Suppliers are likely to perceive marketplaces as efforts by retailers and apparel brands to reduce purchase prices through aggregation. In addition, suppliers will be concerned about sharing competitive pricing data and will resist the substantial conversion costs and efforts associated with joining each new marketplace. Without active encouragement from retailers and apparel brands, many suppliers are likely to choose to wait.

Both retailers and suppliers must move beyond viewing marketplaces as transaction centers. They should instead use marketplaces to minimize their shared costs across all aspect of the procurement process including collaborative design, transaction-cost management, product purchase costs, inventory management, and related freight and logistics costs.

Among the most complex hurdles will be to overhaul traditional buying processes. This will require retailers and branded manufacturers to apply significant change-management programs to buying categories, the skills required, and the structure of the buying organization. A committed senior merchant team willing to push process innovation will be critical to retailers' ability to extract value from marketplaces.

Last, but far from least, will be technical integration. Apparel retailers and brands will need to develop electronic standards to synchronize product, price, and promotion data among trading partners. Successful marketplaces must enable full functionality to all participants regardless of their legacy technologies. Building a one-size-fits-all model is not a trivial challenge. The four key members of the retail supply chain - retailers, distributors, manufacturers, and raw material suppliers - represent thousands of participants in each role, each with unique underlying systems. The difficulty of integrating supplier product information among industry leaders, multi-tier suppliers, and marketplaces is clearly slowing progress.

Getting started with basic principles
To begin the innovation process, we suggest a few guidelines: First, and most critical to long-term success, retailers must identify and focus on the supply-chain components that offer the greatest performance improvement opportunities in the short and long term. This means identifying the business categories for which specific supply chain fixes will yield the highest economic return. Prioritizing and demonstrating quick wins through a pilot approach is critical.

Retailers should separate their direct and indirect spending into categories with similar requirements to develop segmented, e-enabling strategies. For example, a retailer may join a consortium-backed marketplace to purchase non-strategic, indirect categories and reduce purchase costs through aggregation. But, for proprietary, branded products, it may develop private marketplaces or ally with a publicly hosted, third-party marketplace to automate parts of the supply chain or improve collaboration with suppliers.

Second, retailers must create sufficient incentives for suppliers as well as buyers to participate in electronic marketplaces. Suppliers will need to share in the benefits by reducing their costs, gaining preferential sourcing relationships, and accessing new selling opportunities.

It will be important for retailers and brands to become actively involved in developing electronic standards, and synchronizing product, price, and promotion data among trading partners. Large-scale retailers will become kingmakers in this environment and will be able to craft new technologies to best meet their business needs.

Retailers must invest in both technology talent and user skills to ensure adoption. And, they must seek partners with flexible technologies, financial stability, and sufficient track records to ensure survival.


Conclusion
The retail procurement landscape is changing rapidly and creating new collaboration opportunities for suppliers and retailers. We believe B2B marketplaces will create significant value through increased transparency and effectiveness for many retailers and branded manufacturers. No matter the level of buying sophistication and scale, all retailers and apparel brands should evaluate the benefits of incorporating marketplaces into their procurement process. They should mix and match, and put together a portfolio of marketplaces that incorporates the best features of each kind of marketplace.

A retailer's scale will dictate its priorities for creating value through marketplaces. Small and medium-sized retailers will piggyback on the scale of larger retailers for basic purchasing economies in indirect and non-strategic resale categories. Larger retailers will be reluctant to aggregate buys, but will develop private marketplaces to become nimbler and faster to market, especially with proprietary, branded, and fashion merchandise.

Retailers and apparel brands that do not explore the marketplace revolution could be outflanked by a new set of technology-enabled competitors. Placing some judicious bets early is critical to ensuring long-term competitiveness for most apparel brands and retailers.

Despite the myriad challenges, we believe apparel retailers can reap longterm benefits from marketplaces by reducing their total cost of owning merchandise and overcoming supply-chain obstructions. Value will be gained from purchase aggregation. But much more significant value and broader benefits will derive from increasing the efficiency and effectiveness of the apparel supply chain from end-to-end.


Source: The McKinsey Quarterly