Catering to the B2B luxury market

The focus of the luxury goods industry is normally on B2C sales with all distribution and communication strategies centered around the end consumer (retail stores, brand communication, pricing etc). However there is a large market in B2B as well. These comprise of two main types:

1. The product as a component of another product (eg. automotive audio/video players or glassware for perfumes)
2. Products sold to large businesses in bulk volumes (champagne to restaurant chains, cosmetics to airline or hotels)

Does SCMluxe vary from B2C to B2B. The answer is a resounding YES!

Some of the characteristics of SCMluxe for B2B that distinguishes it from the more common B2C value chain are: 

Champagne container for shipping



1. Packaging and Retailing - Packaging is aggregated in bulk - for eg. pallets, containers so that space is saved and transport is easier. The retailing end of the chain focuses less on presentation (this will happen when B2B finally gets converted into a B2C sale
2. Quality checks are conducted by buyers and sampling plans and inspection becomes routine
3. Vendor managed inventory and JIT or contract manufacturing is more in vogue and margins are generally smaller
4. Design is mostly dictated by the buyer and hence controlled minutely. R&D plays a smaller role except in initiatives to control cost 

   

   Champagne container at a Michelin restaurant

   
5. Procurement is demand driven and inventories can be better controlled since demand is known and predictable (forecasting and minimum offtake contracts with buyer can be negotiated)
6. Less focus on branding and retailing

However SCMluxe for B2B has the same pros and cons as the generic SCM - a trade off between assured markets/demand and higher volumes against lower margins vis a vis the more unpredictable but more profitable B2C supply chain. Strategies for B2B hence focus more on controlling costs and enabling the handling of large volumes (with minimum costs) so as to maintain razor thin margins. The ability to do so will provide competitive advantages for the leaders to stand out and succeed in an increasingly challenging business environment.

Kimberly, Marange and the diamond chain

The diamond chain starts off with mining diamond roughs in Africa/Russia/Australia, processing, cutting, polishing in India to finally being shipped to markets in USA and Europe.

Will the value chain partners support a block on Zimbabwe?

Zimbabwe poses a particular problem in this value chain as discussed in post "Marange and blood diamonds". Though Zimbabwe does not exactly fit the criteria for blood diamonds (it does not have a rebel army for instance) as defined by the Kimberly process to identify blood diamonds, western nations, especially the US have introduced sanctions against the sale of diamonds from Zimbabwe. Generally the response to the ban of sale of blood diamonds on humanitarian grounds has had good results with the sale of blood diamonds dropping from 5% of all sales in 2002 to less than 1% in 2012. However the sanctions on Zimbabwe will prove to be a strain on achieving further results. Let us see why:

Supply chain intermediaries such as cutters, polishers in India and China are not particularly happy and tend to push back on sanctions against Zimbabwe due to 3 main reasons:

1. Diamonds from Marange, Zimbabwe are 20% cheaper than those from Russia, Australia or by De Beers
2. Mines in Russia and Australia are nearing end of life whereas Zimbabwe is just taking off
3. Indian processors have already built a competitive edge in cutting and polishing Zimbabwe roughs which take approximately 3 months of effort compared to 1 month for other roughs. This acts as a high entry barrier to other processors and they would not want to loose this advantage to newer players in the market
4. Costs of processing is much cheaper in India and China. For e.g its costs $10 per carat in India and $15-$20 per carat in China (though of much lower quality) whereas it costs over $100 per carat in the US for processing a rough stone

Thus we see that the $23 billion Indian diamond processing industry with currently over 6% ($900million) of its sales originating from Zimbabwe roughs is not going favour these sanctions. But do they have a choice when the customers demand it? Already most processors publicly claim that only Russian, Australian or De Beers stones are offered to US customers. But are they compliant or are both suppliers and customers turning a blind eye to the issue? What is the cost/price that the customer is willing to pay/buy for humanitarian purposes on a different continent? there will a trade off between profits and compliance....how much? .....that is the million dollar question