GSCM-Global Sourcing-Li and Fung - Zara

Global Supply Chain Management
(GSCM)
IPMX- IIM Lucknow
Dr S. Venkat
OM Area
IIM Lucknow
Email: svenkat@iiml.ac.in
01/12/17
GSCM-IPMX09- S Venkat
Global Sourcing
01/12/17
Objectives
To understand the role of sourcing in SC
Identify dimensions of supplier performance that
affect the SC total cost
Impact of different contracts on supplier
performance and information distortion
Global sourcing problems and benefits
01/12/17
Role of sourcing in SC
Purchasing/procurement
Sourcing- entire set of processes required to
purchase goods and services
Sourcing include- selection of suppliers, design of
supplier contracts, product design collaboration,
procurement of material and evaluation of supplier
performance
Outsourcing in SC means the function performed
by third party
01/12/17
Sourcing related processes

SupplierSupplier selection &
Scoring &
Contract negotiationDesign
ProcurementSourcing Plg &
Collaboration
Analysis
Assessment
Criterion for evaluation- Replenishment LT, On-time perform , Supply flexibility,

Delivery freq/lots, Quality, Transp cost, Pricing terms , Info cord, Design collaboration,
Exchg rates, taxes, Supplier viability
80% of cost decided at design level and hence collaboration

01/12/17
Traditional practices-Hidden Costs
01/12/17
Vendor Rating-An illustration

Sl. No.
Yardstick for measuring performance against each factor

Weights
Excellent
V Good
Good
Average
Below Average
5
4
3
2
1
28
< 1,000 ppm
1,001 - 5,000 5001 - 10,000 10,001 - 50,000 < 50,001 ppm
ppm
ppm
24
100% schedule 1 day after 2 - 4 days after 5 - 7 days after > 7 days after due
adherence
due date
due date
due date
date
21
Base price
up to 1%
2 - 3% above
4 - 5% above
> 5% above base
above base base price
base price
price
price
14
Free Delivery
FOR
Only collection Chargeable basis Ex-works, Ex(Chennai)
free
Godown
13
60 days
45 days
30 days
10 - 15 days
Immediate, Advance
Criterion for rating
Quality
Delivery Reliability
Price
Delivery terms
Payment terms
Total
100
Vendor 1
Sl. No.
Criterion for rating
Weights
Performance
Vendor 2
Rating Factor score
Performance
Rating Factor score
1
2
3
Quality
Delivery Reliability
Price
28
24
21
792 ppm
1 day after due date
2 - 3 %above base price
5
4
3
140
96
63
5400 ppm
2 - 4 days after due date
up to 1% above base price
3
3
4
84
72
84
Delivery terms
14
FOR (Chennai)
56
FOR (Chennai)
56
Payment terms
13
45 days
52
60 days
65
Total
Vendor rating
100
01/12/17
407
361
81%
72%
Supplier evaluation- Example

Green Thumb, a manufacturer of lawn mowers and
snow blowers, has historically purchased a
thousand bearings per week from a local supplier
who charges $1.00 per bearing. The purchasing
manager has identified another potential source
willing to supply the bearings at $0.97 per bearing.
Before making his decision, the purchasing
manager evaluates the performance of the two
suppliers.
01/12/17

The local supplier has an average lead time of two weeks and
has agreed to deliver the bearings in batches of 2,000. Based
on past on-time performance the purchasing manager
estimates that the lead time has a standard deviation of one
week. The new source has an average lead time of six weeks
with a standard deviation of four weeks. The new source
requires a minimum batch size of 8,000 bearings.
Which supplier should the purchasing manager go with?
Green Thumb has a holding cost of 25%. It currently uses a
continuous review policy for managing inventory and aims for a
cycle service level of 95 percent. Weekly demand has a mean
of 1,000 and a standard deviation of 300.
01/12/17

Supplier performance= F(lead time, LT variation)
LT and its variation affects the safety inventory
Minimum batch-size requirement affects the cycle
inventory
Material cost
Cycle inventory cost
Safety inventory cost
Total cost
01/12/17
10
Supplier evaluation- Example Local supplier

DL = D*L
L L d D SL
2
The above relation represents the SD of demand during lead

time and safety inventory is given below
ss F (CSL) L NORMSINV (CSL)

1
s
01/12/17
11
Supplier evaluation- Example Local supplier
Annual material cost

=1,000 x 52 x 1 = $52,000
Average cycle inventory =2,000/2 = 1,000
Annual cost of holding cycle inventory= 1,000 x 1 x 0.25 = $250
Standard deviation of demanded during Lead time (using
Equation given in previous slide) =
2 x 300 2 1,000 2 * 12 1,086.28
Safety inventory required with current Supplier (using Equation

in previous slide) = NORMSINV(0.95) x 1086.28 = 1,787
Annual cost of holding safety inventory=1,787x1x0.25= $446.75
Annual total cost of current supplier=52,000+250+446.75=
$52,696.75
01/12/17
12
Supplier evaluation- Example New supplier

New supplier:
Annual material cost = 1,000 x 52 x 0.97 = $50,440
Average cycle inventory = 8,000/2 = 4,000
Annual cost of holding cycle inventory=4,000 x 0.97 x 0.25 = $970
Standard deviation of demanded during lead time =
6 x 300 2 1,000 2 * 4 2 4,066.94
Safety inventory required with current Supplier =

NORMSINV(0.95) x 4,066.94 = 6,690
Annual cost of holding safety inventory=6,690x0.97x0.25 = $1,622
Annual TC of current supplier =52,000 +250+446.75=

$52,696.75
Annual TC of new supplier =50,440 +970+1622= $53,032
01/12/17
13
Supplier evaluation- Example New supplier
Example
Mat Cost
Cycle Inv cost
Safety Inv cost
Total cost
01/12/17
Suppl1
Suppl2
% change
52000
50440
-3.00
250
970
288.00
447
1622
262.86
52697
53032
0.64
14
Product Categorization by
Value and Criticality
Criticality
High
Critical Items
Strategic Items
General Items
Bulk Purchase
Items
Low
Low
01/12/17
Value/Cost
High
15
01/12/17
16
Global Scenario
01/12/17
17
01/12/17
18
Global sourcing- cost elements
01/12/17
Unit price
Export taxes
International transportation cost
Insurance and tariff
Brokerage costs
Letter of credit
Cost of money
Inland freight cost
Risk of obsolescence
Cost of rejections
In-transit damage
Inventory holding cost
Technical support and sourcing cost
Travel cost etc
19
Dell and Toyota Experience

Dell experience
We can call our suppliers and ask for shipments rerouted even after they are already in transit. This is
possible because of good relationships with suppliers.
They understand that we need them to go above and
beyond for us.
One day, I needed to re-route four boxes that were
already on a [suppliers name] truck. They called the
truck back for me in order to grab those boxes. Also,
as a courtesy, [suppliers name] palletizes some loose
shipments for us, because we cannot accept loose
loads in this facility. Logistics Engineer in
Nashville
01/12/17
20
Dell and Toyota Experience

Toyota experience
Toyota is well known for working with its suppliers to
develop practices that are congruent with its own
operations.
Dell is also known to work closely with its suppliers on a
day-to-day basis, but it does not have the same sort of
partnerships with its suppliers that Toyota does.
Therefore, an interesting question is how similar Dells
culture and practices are to those of its suppliers.
If there are similarities between Dell and its suppliers,
how did those similarities come about?
Through a natural evolution or through intentional
practices?
01/12/17
21
Two approaches for learning

Toyota works with its suppliers and has
helped them gain 14% higher output/ worker
25% lower inventory
50 % fewer defects than rivals
Through a series of mechanisms they have
created a learning network
Dell has fostered virtual integration through
Co-location of certain suppliers
Certification programs and supplier
development
Share know-how with the entire supplier
network
Encouraged a transparent system
01/12/17
22
Li and Fung Case
01/12/17
23
Li and Fung Global Sourcing

1973-Restructuring by HBS
Professionals, public ltd,
IPO 113 times subscription
1970s
HK export hub
Labour intensive products
Competition (Taiwan
Singapore),
disintermediation
1950s
Pak-Liu and
Toming
Hon-Chu regime &

British control
Early stages
1937- Ltd Co & WW II
and Pak-Liu passed away
01/12/17
24

Products- soft/garments (68%)
and hard goods (32%)
1992- re-listed HKSE
Expansion of sourcing
US, Europe & Acquisitions
Expansion of product lines &
Customer network
Post 2000
1990s
Asias Major Trading
1989 drastic change- Pvt co
Restructured-Export & Retail
1980s
01/12/17
68 offices in 40 Countries
4.5k employees and became
Global player
2002 revenue increase 13% &

38% increase in NP
US major clients like Disney etc
Effective use of IT
Global status (2000) and
95% rev from NA & Europe
1979-relocation of manf to
S China, trading in developing
Economies- Taiwan, Spre, Korea
25

Evolution (Early stages to late 1930s)
Started in 1906 from South China, oldest Chinese
Export companies (Environment- trade in China was
under the control of foreign commercial houses)
Originally exporting porcelain and silk to US and later
included bamboo, jade, ivory, rattan ware, fireworks
and handicrafts
Major bottleneck was language for trading and traders
who speak both English and Mandarin became
mediators/agents (L & F is one among them) and
commissions were as high as 15% on each export
Li and Fung established as a ltd company in 1937 in
HK
01/12/17
26

Evolution (Mid 1950s second boom)
1940 (WW-II) trade was ceased and later sold to PakLius family and Li & Fung became sole owner
Restart of Li & Fung in 1949 in HK which was under
the control of British
Second wave of business boom (1950s) due to
refugees and China as manufacturing hub for labour
intensive consumer products
Li and Fung started exporting garments, electronics,
plastic flowers and toys and HK became biggest
exporter
01/12/17
27

Evolution (1970s Competitive period)
1970s HK faced severe competition from developing
economies (Taiwan& Singapore) and margins gone
down to 3% due to disintermediation
Take over by third generation (HBS-Prof and MBA
student) and restructuring at all levels
1973 went public and listed in HKSE and IPO was
over subscribed by 113 times.
1979- opening of Chinese economy and relocation of
manufacturers to south China due to cost
effectiveness (low labour costs)
01/12/17
28
Li and Fung Global SC

Year
1997
1998
1999
2000
2001
2002
2003
01/12/17
Turnover % Growth Gross Profit % Growth Net Profit % Growth

13345772 100.00
361289 100.00
375105 100.00
14312618 107.24
469501 129.95
445168 118.68
16297501 122.12
592885 164.10
574638 153.19
24993018 187.27
790848 218.90
870388 232.04
33028575 247.48
666565 184.50
782311 208.56
37281360 279.35
1134605 314.04
1080468 288.04
42630510 319.43
1285952 355.93
1223118 326.07
29

400
% Grow th (TO)
% Grow th(GP)
% Grow th (NP)
350
(%) Growth-TO/GP/NP
300
250
200
150
100
50
0
1997
01/12/17
1998
1999
2000
Year
2001
2002
2003
30

400
% Grow th (TO)
% Grow th(GP)
% Grow th (NP)
350
(%) Growth-TO/GP/NP
300
250
200
150
100
50
0
1997
01/12/17
1998
1999
2000
Year
2001
2002
2003
31
Li & Fung Global SCM

Decipher
trends
350 mostly
in USA,
Europe
Retailers
Design
Li & Fung
(35 offices
20 countries)
3PL
Logistics
Cotton
Suppliers
Weavers
Dyers
26 countries
7500 suppliers
Garment
Manufacturers
Other
Suppliers
1970s- regional sourcing agent and exhaust of quotas in HK

and look out for other areas and offering of complete product
package
1979-82 expansion from sourcing to manager and deliver of
production programmes including design, manf & delivery
1983 onwards- Developing economies and change of manf hub
and movement of manf to S China dispersed manf
01/12/17
32
Dispersed Manf and SC customisation- Transistor radios,

baby dolls (front and back end of SC in HK and middle
portion of SC was performed in China)
Movement to other parts of China (where costs were still
lower) and SC optimisation
SCM focus on cost reduction (item cost at factory is $1
and at customer end it is $4) major cost due to
distribution
01/12/17
33
Global Sourcing Network:

North Asia 21
Europe and Mediterrian -12
South Asia - 11
US- 9
SEA- 9
South Africa- 3
01/12/17
34
Global Supply Network: Right manufacturer for product based

on qlty, cost, environment, trade-barriers, transportation cost,
environmental rules and stds, child labour etc in importing
countries.
For Levis final garment (need to supply in six weeks) manf in
Thailand from five factories, zippers & buttons from Japan,
yarn purchase from Korea, woven and dyed in Taiwan
Reduction of obsolete inventories of FMCG items by
minimising TA time and buying right things at right place at
right cost and quality.
Tapping of wide network and shifting of production to low risk
areas from high risk areas (9-11 experience)
01/12/17
35

Prod.
Devel
Prod
Desgin
RM
sourcing
Factory
sourcing
Consumer
needs
Manf
control
Sourcing network evolut

SC
Consumer
Shipping
control
Wholesaler
Forward
Consolidation
Local
forwarding
Custom
clearance
01/12/17
36
Li & Fung-Supply Chain capabilities

Developing capabilities
in Logistics & Transportation
Dissecting the value chain
Dramatic
reduction in LT
Better Inv. Mgmt.

Lower mark-downs
Flip info between 350
customers/7500 suppliers
Managing 1.5 m workers

in 26 countries
Participating in design,
manage tiers of suppliers
Constant search for new &

better sources of supply
Going upstream & organising production

01/12/17
37

Major enabler IT
IT for communication, cost reduction, transparency,
integrating suppliers, buyers and manufacturers, fine tune
specifications, real time information on production to help
manufacturers to accommodate the changes
IT helped in achieving many benefits associated with
Postponement strategy of SCs.
Partnership with Levis, Pillowtex etc for design, manf and
marketing of their products.
01/12/17
38
Zara
01/12/17
39
Q1a Competitive Strengths

Fashion Forward Image
Customers visiting Zara stores 17 times a year
as against 3-4 times for competitor stores
Shipments made out of warehouse twice a
week
Transportation time between 1-2 days of
shipment
11000 styles produced in a year
Short Lead time of production once fabric was
in stock
01/12/17
40
Q1b How Zara built its

Competitive Strengths
Parent company Inditex owned a fabric sourcing company,
several textile firms and had a share in fabric finishing facility.
This allowed Inditex to address needs of Zara production at
short notices letting them have a short lead time.
In-house design & production facilities
Local sourcing and reserved subcontracting facilities
Limited commitment to produce from farther locations
Limited commitment to retail in the season
This allowed Zara to have quick replenishment for its stores
and to produce only successful styles and move slow moving
styles from its store inventory
01/12/17
41
Q2 Comparison Cost
Zara was producing 40-50% of its products locally, they
did not go to lower wages locations to ensure they remain
responsive on time as well as styles.
Their costs were also higher than their competitors
because they air shipped their products outside of Europe
to meet timelines of 1-2 days at stores
Faster replenishment at stores requires multiple number
of shipments that also add to their cost
They sometimes killed their own styles to fuel the image
that customers must buy today because they may not
find it tomorrow
However, they made their revenues from discerning,
fashion focussed customers and customizing their price to
include cost + target margin dependent on the store
location.
01/12/17
42
Q2 Comparison Quality
Zara was producing only staple products in
outsourced locations and high fashion products
closer to design centres, this allowed them to be
responsive to the market and keep costs
competitive on staples
They used sophisticated software, CAD/CAM to
assist their production, this ensured uniformity in
quality
01/12/17
43
Q2 Comparison Delivery
Fabric was ready for use within a week due to linkages with
Inditex owned fabric procuring, finishing and producing units
Zara was able to deliver to its store within 10 days provided the
fabric is in store
Centrally located distribution centre. Only one DC serving all the
stores. Automated sorting using Bar codes
Only hanging garments stock picking manual in DC, all other
functions automated
Shipments twice a week, uniform transportation time maintained
using truck or air according to location
No inventory maintained at stores
Movement of non moving items from stores to other outlets or
outlet sales
Automated tagging for destination also added an advantage
01/12/17
44
Q2 Comparison with Competitors

Dimension
Zara
Competitors
Pricing
Costs + Target Margin

for target market
Costs + Target Margin
Local Distribution Centres
No
May have
Store Layout
Uniform
Customised for location
% Season as Markdown
Sale
15-20%
30-40%
Advertisements
Minimal
Extensive
Average Customer Store

Visits in a year
17
3-4
Committed Season
Inventory
50-60%
80%
01/12/17
45
Q3 Zara Sourcing Model

Zara is following largely an in house
sourcing model with 40-50% of its styles
produced locally
It outsources only 50-60% of its staples,
low to medium quality segment other
locations
Zara works through reserving a network of
subcontractors who collect work from its 14
factories in Spain and North Portugal
01/12/17
46
Q3 Sustainability of Zara
Sourcing Model
In the next 5-10 years, with quotas in Asian countries going
away, Euro being introduced in Europe and increase in
wages, Zara needs to rethink its sourcing model
Though its competitive advantage comes from the current
sourcing type, Zara must think about outsourcing a larger
percentage of its product from low cost countries
Low cost countries can produce for their own regions
under Zara if Zara decide to expand in these markets
Turkey, North Africa, China, India, Mexico, some LATAM
countries can be possible production location to service
markets closer to them
Fabric sourcing from cheaper locations will also lead to
reduction in cost
01/12/17
47
Q4 Role of Technology for Zara
Technology has played a significant role in how Zara

developed
CAD, CAM assisted designing and planning for production has
increased its efficiency
Automated spreading, cutting and bundling (largely a manual
task till only a decade ago) also improves efficiency
Owned stores allowed Zara to manage its store inventory
through POS data as well as remove non moving items quickly
Automated DC also improves the speed with which the
product moves and ships out of the DC
They have deployed devices at stores that can mark local
prices on the garments after they reach the store, this has
eliminated any customisation in labelling at DC, postponement
strategy at its best
01/12/17
48
Q5 Can apparel industry be fully

automated
Apparel industry by its very nature can never be fully
automated. There will always some element of
human work involved
This being a skilled industry, technology can be
leveraged only to a certain point, even to operate the
machines, humans are required
Processes such as designing, pattern making,
spreading, cutting, finishing can be automated but
sewing in itself is currently a challenge for
automation
Distribution has become fairly automatic due to bar
coding of the labels
01/12/17
49
SC Risk Management
3 Facets of Managing Complex Risk
Supply Chain Management
Logistics and Transportation Management
Global Inventory Management
Role of Mobile Technologies in managing risk
(fisherman, agri produce, Delhi-Tvm train, RFIDs)
Quality Assurance Security Assurance
Use of disaster recovery approaches for SCM
01/12/17
50
Summary
What is the role of sourcing in a supply chain?
What dimensions of supplier performance affect
total cost?
What is the effect of supply contracts on supplier
performance and information distortion?
What are different categories of purchased
products and services?
What is the desired focus for procurement for
each of these categories?
01/12/17
51

GSCM-Global Sourcing-Li and Fung - Zara

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Global Supply Chain Management

Sourcing related processes

Criterion for evaluation- Replenishment LT, On-time perform , Supply flexibility,

80% of cost decided at design level and hence collaboration

Traditional practices-Hidden Costs

Vendor Rating-An illustration

Yardstick for measuring performance against each factor

Criterion for rating

Criterion for rating

Rating Factor score

Rating Factor score

Supplier evaluation- Example

Supplier evaluation- Example

Supplier evaluation- Example

Supplier evaluation- Example Local supplier

The above relation represents the SD of demand during lead

ss F (CSL) L NORMSINV (CSL)

Supplier evaluation- Example Local supplier

Annual material cost

2 x 300 2 1,000 2 * 12 1,086.28

Safety inventory required with current Supplier (using Equation

Supplier evaluation- Example New supplier

Safety inventory required with current Supplier =

Annual TC of current supplier =52,000 +250+446.75=

Supplier evaluation- Example New supplier

Global sourcing- cost elements

Dell and Toyota Experience

Dell and Toyota Experience

Two approaches for learning

Li and Fung Case

Li and Fung Global Sourcing

Hon-Chu regime &

Li and Fung Global Sourcing

2002 revenue increase 13% &

Li and Fung Global Sourcing

Li and Fung Global Sourcing

Li and Fung Global Sourcing

Li and Fung Global SC

Turnover % Growth Gross Profit % Growth Net Profit % Growth

Li and Fung Global SC

Li and Fung Global SC

Li & Fung Global SCM

1970s- regional sourcing agent and exhaust of quotas in HK

Li & Fung Global SCM

Dispersed Manf and SC customisation- Transistor radios,

Li & Fung Global SCM

Global Sourcing Network:

Li & Fung Global SCM

Global Supply Network: Right manufacturer for product based

Li and Fung Global SC

Sourcing network evolut

Li & Fung-Supply Chain capabilities

Better Inv. Mgmt.

Managing 1.5 m workers

Constant search for new &

Going upstream & organising production

Li & Fung Global SCM

Q1a Competitive Strengths

Q1b How Zara built its

Q2 Comparison with Competitors

Costs + Target Margin

Costs + Target Margin