ASIA FOCUS : CASE STUDY

From middleman to market leader

The managers have transformed Li & Fung from a trading company to a supply-chain co-ordinator

Li & Fung is an export trading company based in Hong Kong, famous for its innovative development and use of supply-chain management (SCM). The family-run company's 8,000 employees work with more than 7,500 suppliers in more than 40 countries, to provide the following services to a customer base that includes major American and European retailers and brands :

- Designing and developing prototypes of products based on concept designs from customers;

- Sourcing raw materials and factories. Li & Fung optimises the quality of raw materials and production by contracting multiple suppliers and manufacturers across many countries;

- Monitoring production quality and schedules by interacting closely with supply-chain partners; and

- Arranging logistics and customs clearance in order to deliver finished products to retail customers shop shelves.

Li & Fung was founded in 1906 in Guangzhou (then Canton) as a traditional Chinese trading company: a broker between western (especially American) buyers and Chinese sellers. The company's margins dwindled to a paltry 3% over the years as buyers and sellers grew more comfortable dealing with each other directly, thus squeezing brokers such as Li & Fung. To ensure the company's survival, managers belonging to the third generation of the Fung family have transformed the company into a supply-chain co-ordinator.

Li & Fung does not own any sources of raw materials, factories or logistics facilities. Instead, the company has built long-standing relationships with thousands of supply and manufacturing companies worldwide. Using a complex set of information systems, Li & Fung maintains a detailed, up-to-date view of suppliers' strengths and performance history. This helps it find optimal sources of raw materials and output to meet customers' needs.

The company achieves such optimisation by dissecting the value chain, and dispersing constituent activities among suppliers and manufacturers in different locations. That is, rather than settle for a single location or supplier that can do the best job when compared with all others, Li & Fung collaborates with several suppliers and manufacturers, co-ordinating a series of value-added activities tailored to each client's specific requirements.

In the view of the company's non-executive chairman Victor Fung: "[A typical customer order may be] from a European retailer to produce 10,000 garments. It's not a simple matter of [Li & Fung's] Korean office sourcing Korean products or our Indonesian office sourcing Indonesian products.

"For this customer ... we might buy yarn from a Korean producer ... and ship it to Taiwan [for dyeing]. The Japanese have the best zippers and buttons ... we order the right zippers from their Chinese plants. Then we determine that, because of quotas and labour conditions, the best place to make the garments is Thailand. So we ship everything there.

"And because the customer needs quick delivery, we may divide the order across five factories in Thailand. ... Five weeks after we have received the order, 10,000 garments arrive on the shelves in Europe, all looking like they came from one factory, with colours, for example, perfectly matched ... we are customising the value chain to best meet the customer's needs. (Paraphrased from Fast, global and entrepreneurial: Supply chain management, Hong Kong style. An interview with Victor Fung, by Joan Magretta, published in the Harvard Business Review in September/October 1998.)

By "pulling apart the value chain and optimising each step" at a global level, Li & Fung claims to be able to deliver a sophisticated product and to do so fast. The company's skillful co-ordination of a global network of suppliers and manufacturers enables customers to shorten their buying cycle, allowing them to manage inventory more effectively and to respond to market trends faster.

This benefit has proved especially powerful for Li & Fung's customers in consumer-driven, fast-moving markets such as apparel: Customers can respond much better to time-sensitive customer tastes, releasing six or seven seasons a year instead of the traditional two or three.

To make supply-chain co-ordination work at such a complex level, Li & Fung has built solid relationships and trust with more than 7,500 suppliers and manufacturers across the world. The company provides orders big enough to ensure priority attention from partners, but takes care to encourage partners to work with other customers in order to enhance their capabilities and to not depend on Li & Fung for their own survival.

Drawing on detailed benchmarks along its process network, Li & Fung also provides suppliers and manufacturers with feedback that helps them improve their performance continuously.

Finally, to ensure the ultimate focus on customising the value chain for each customer, Li & Fung has structured itself unusually around small, entrepreneurial divisions that focus on one large customer each (or on a similar group of smaller customers), rather than organise geographically. This has helped Li & Fung ensure that its divisions do not compete against one another for business at the expense of losing sight of the company's core capability of pulling together a tailored, global value network for customers.

Li & Fung's model of dispersed production has been extremely successful: The company announced $7.15 billion in revenues and $242.49 million in operating profits in 2005. Not surprisingly, the model has been adapted across Asia over the years. No longer buoyed by a cost advantage, companies in hubs such as Hong Kong and Singapore now undertake sophisticated planning and co-ordinate production by partners in emerging lower-cost centres in China, India and Southeast Asia.

Despite the growing interest in SCM among companies across the world, Li & Fung continues to lead in terms of the scale of its supply-chain network and customer-focused organisational structure. It has become an indispensable intermediary for customers who wish to benefit from increasingly larger-scale, far-flung and complex supply networks.

SOURCES

- Joan Magretta (1998), 'Fast, global and entrepreneurial: Supply chain management, Hong Kong style.' An interview with Victor Fung. Harvard Business Review, September/October 1998, Volume 76 Issue 5, pp. 102-114.

- John Hagel II (2002), 'Leveraged growth: Expanding sales without sacrificing profits.' Harvard Business Review, October 2002, Vol 80 Issue 10, pp. 68-77.

- Robyn Meredith (9 Jan 2006), 'Commercial Crossroads'. Forbes magazine. Accessed online on Dec 8, 2006 at http://www.forbes.com/home - asia/global/2006/0109/036A.html

- 2005 financial information from Li & Fung Limited. Accessed online on Dec 8, 2006 at http://www.lifung.com/eng/ir/fininfo.php

Bangkok Post

Last Updated : Saturday April 21, 2007