Global Manufacturing and Materials Ma

nagement at Li & Fung

Group 6

Kim, Tae Gyu

Ye, Byeong Hyo
Won, Jong Hun
Jun, Ra Kyoung
Choi, Sung Mahn
Agenda

1. Business Background of Li & Fung

2. Case Issues
3. Li & Fung Case Analysis
– Global expansion
– Value Chain Configuration
– Leveraging Information Technology
– Organization Structure
– Alignment between Strategy and Capabilities
4. Implications
5. Discussions
1. Li & Fung Background

Video
Li & Fung Trading
 Coordinated Global Network
70 Offices in 40 Countries and Territories

Americas Europe/Mediterranean South Asia East Asia

(9 locations) HONG KONG - Head office
(13 locations) (11 locations)
(21 locations)
New York City London Bangalore
Boston Shanghai Dalian
Huddersfield Chennai
San Francisco Amsterdam Mumbai
Dominican Republic Nanjing Beijing
Romania New Delhi
Guatemala Florence Karachi
Honduras Seoul Qingdao
Turin Lahore
Guadalajara Taipei Tokyo
Tunis Dhaka
Mexico City Hepu Ningbo
Istanbul Colombo
Nicaragua Macau Liuyang
Denizli Sharjah
Huizhou
Izmir Bahrain
Dongguan
Oporto Africa Southeast Asia Longhua
Jordan (3 locations) Guangzhou
Cairo (9 locations)

Durban Singapore Shenzhen

Mauritius Bangkok Zhongshan
Madagascar Shah Alam Shantou
Manila Zhanjiang
Hanoi
Ho Chi Minh City
Jakarta
Phnom Penh
Saipan
2. Case Issues

 Understand how a regional trading company used its core advantage t

o become a global value chain manager
 Study the importance of efficient value chain management for a global
company
 Examine the role of IT and the Internet as major drivers of globalizatio
n
 Understand how innovation, differentiation and customization can be u
sed as strategic and competitive advantages by a company
 Study the changes taking place in the retailing and trading industry wit
h respect to customer requirements and examine the need for a custo
mer-centric business model for an export trading company
3. Li & Fung Case Analysis
 The Evolution of Supply Chain Management

Consumer Needs Product Development

Raw Material Sourcing
Product Design

Factory Sourcing

Manufacturing Control
The
TheSupply
SupplyChain
Chain

Shipping Control

Forwarder Consolidation
Local
Forwarding Consolidation
Consumer Wholesaler/ Retailer

Customs Clearance
Global Expansion Opportunities vs Challenges
Opportunities
 Globalized in a short span
of time
 Pressure from the US and
European retailers to cut c
osts by moving to cheaper
sourcing locations
 Shortening product life cy
cles
 Direct outcome of the com
pany’s efforts to add more
value to its trading activiti
es
Challenges
 Hiring local staff, developing
new vendors, dealing with
local government authorities
and coming to grips with
local cultures
 Proximity to customers,
wage levels and
manufacturing capabilities
 Need greater supervision
and travel costs in order to
generate profits for new
operations
 Multitude of national trade
restrictions
The Changing Role Of The Trading Company
Level of Value Added

Borderless
Manufacturing
Sourcing

Buying
Agency

1906 Now
Manage the suppliers

Case study - Borderless Manufacturing

Assembly Product Design

Lining
Label, elastic, studs, toggle
and string
BY
Shell
X

Filler

Zipper

Performing production slicing to identify the best location/ country to

undertake each stage of process, adding value along the way &
integrating the entire supply chain
The Changing Role Of The Trading Company
Level of Value Added

Virtual
Manufacturing

Borderless
Manufacturing
Sourcing

Buying
Agency

1906 Now
The Changing Role Of The Trading Company

Supply Chain
Management
Level of Value Added

Virtual
Manufacturing

Borderless
Manufacturing
Sourcing

Buying
Agency

1906 Now
The concept of “Soft $3”

Product Wholesale
Sourcing Logistics Information Management
design retail

$1 $4

The cost that is spread throughout the

distribution channels – the “Soft $3”
Li & Fung’s SCM Strength

1. Be customer-centric and respond accordingly to the market

demand
2. Focus on one’s core competency and outsource non-core
activities, and develop a positioning in the supply chain
3. Develop a close, risk- and profit-sharing relationship with
business partners
4. Design, implement, evaluate and adjust the work flow,
physical flow, information flow and cash flow in the supply
chain
5. Adopt information technology to optimize the operation of the
supply chain
6. Shorten product lead time and delivery cycles
7. Lower costs in sourcing, warehousing and transportation
Alignment between Business & IT

 Three main business groups – Trading, Retailing, and Distribution

 Established company-wide internet linking critical company operation
s
 Dedicated Extranet links key components of supply chain
 Provides tracking capabilities, streamline the flow of information and
provide much more granular control of supply chain activities
 Believe that IT strategy is central to supply chain management succe
ss
 Leverage the power of the internet as customers demand more cust
omized product choices
 In 2002, started up an entire business division focused on B2B sourc
ing via an internet e-commerce website called lifung.com linking sma
ll- to medium-sized business with suppliers similar in concept to aliba
ba.com
Challenges on IT

 No substitute for human expertise for some activities

 No connection with IT system to manufactures working in
countries like China, Philippines, Bangladesh, other Asian
countries, Africa and Caribbean
 Relied on personal visits, phones, faxes and couriers
Organization Structure

 Divided into divisions that were focused on a single custo

mer or a group of customers
 Divisional system in order to meet the customer’s design,
quality, shipping and invoicing needs
 “By making small units the heart of our company, we have
been able to grow rapidly without becoming bureaucratic
….as the market changes, our organization can adjust im
mediately”
 Offered its staff competitive remuneration schemes
Alignment between Strategy and Capabilities

Strategy Capabilities
Buying Agency Acquisitions are key to grow market share in target
geographic markets
Li & Fung is growing through global integration

Sourcing Sources from virtually anywhere in the world and

builds customized solutions for its retail customers
Borderless Network of 10,000 suppliers and staff in 40 different
Manufacturing countries
Virtual manufacturing Builds customized solutions for its retail customers
Able to be both locally relevant and globally
optimized

Supply Chain Orchestrates a supply chain network of 14,000 staff

Management and 10,000 specialized companies in 40 countries
Implications

 Li & Fung’s competitive advantage : Strong Supply Ch

ain Management
– Innovation: global network though Dispersed manufact
uring
– Flexibility: Nimble organization design through Custom
er-centric divisions, One-Stop-Shop Service
– Speed
Case Discussions

1. What is the value added that an intermediary such as Li & Fung

delivers to its customers?

2. If Li & Fung is to execute on its promise to deliver value added to

its customers, what skills and competencies must it have?

3. Why do you think that Li & Fung has a policy of not owning any
production facilities?

4. Do you think Victor Fung is correct when he states that its is

unlikely that the Internet will ever connect the complete supply
chain? Why might he be correct? What might happen in the long
run?
Q1. What is the value added that an intermediary
such as Li & Fung delivers to its customers?
Q1. What is the value added that an intermediary
such as Li & Fung delivers to its customers?

1) Faster speed
• By optimizing supply chain & using information technology

2) Reduced cost
• By reducing purchasing, inventory and transport cost

3) Higher quality
• Market research & best choice of supply chain

4) Reliability
• Quality monitoring & Quick response to market change

5) Others
• More focus on business areas of core competency
Q2. For value added service to its customers,
what skills and competencies must it have?
Q2. For value added service to its customers,
what skills and competencies must it have?

1) Market understanding
• To provide market trend information
• To meet market (customer) demands

2) Broad (global) procurement channels

• To identify and supply best raw materials
• To meet product quality required

3) Sound management and operation mechanism

• To build transportation and shipping delivery service
• ‘Import Direct’ - electronic commerce application software

4) Information Technology
• To improve overall supply chain efficiency
• To interface business online transaction
Q3. Why Li & Fung has a policy of not owning any
production facilities?

Is it really right not owning any production facilities?

Q3. Why Li & Fung has a policy of not owning any
production facilities?

Yes : Flexible by Outsourcing

One of the best embodiments: Virtual Manufacturing

- Assure Strategic Flexibility
→ Financial Healthy to operating
- Aligning Environment, Strategy and Structure
→ Global Strategy for diversified goods

Over 20% ROE, about $1 million sales / employee

3. Why Li & Fung has a policy of not owning any
production facilities?

Yes : Flexible by Outsourcing

Robust even in
Economic Crisis
Quote : William Fung

“Everybody thinks that a trading company is just taking an or

der from the right hand and giving it to the left hand. The i
dea is that, maybe foreigners don’t know which factory to
go to, so you perform an introductory role, may be a qualit
y control role and there it stops….whenever we go in, we
don’t just give them (the suppliers) and order and hope tha
t they know what to do. We hand hold them through the w

hole process. That’s why we say we almost are a virt

ual factory…It is the way we orchestrate the pro
duction, come up with samples and feed them information.
All that is going way, way beyond that original matching fu
nction.”
Q4. Regarding the usefulness of the Internet,
Victor Fung is correct?

“It is unlikely that the Internet will ever connect the

complete supply chain.”
4. Li & Fung : Internet Issues

William Fung
“I’m not an Internet guy, I’m a business guy”

When they launched the new B2B e-commerce

portal,
“The Internet facilitates SCM.”
“We weren’t going to be disintermediated.”
“The key is to have the old-economy know-how
and yet be open to new-economy ideas.”
4. Li & Fung : Internet Issues

In 1995,
- Launched an intranet to expedite and simplify internal
communication.

In 1997,
- Launched secure extranet sites.
- Linked the company directly to a key customer
and was customized to that customer’s individual needs.
- Provided a platform for manufacturers and retailers.
 4. Regarding the usefulness of the Internet,
Victor Fung is correct?

1) Pros
 a leader in establishing real-time Internet-based links
with its customers
2) Cons
 where communications systems aren’t advanced
enough in places like China, the Philippines, etc.
 to make sure that the manufacturing process is going
well.
 to make sure that manufacturers comply with a
customer’s standards in terms of how they treat labor
3) Future?
 usefulness of the Internet will be increasing.
Quotes

"In an age when the Internet is supposedly going to elimi

nate the middleman, here's a middleman, an old Asian
trading company that has made itself indispensable." 1
- An Article in Forbes.

"We deliver a new type of value added, truly global prod

uct that has never been seen before. We're pulling apa
rt the value chain and optimizing each step and we're
doing it globally." 2
- Victor Fung, Chairman, Li & Fung, in June 2000
Reference

 “Li & Fung (Trading) Ltd” Harvard Business School Case,

1995
 Victor Fung, “Financial Times, 6th November 1997”
 “Supply Chain Management, Hong Kong Style” Interview
with Victor Fung, Harvard Business Review
 www.lifung.com