LI & FUNG – THE GLOBAL VALUE CHAIN CONFIGURATOR
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Li & Fung began in 1906 in Guangzhou, China trading goods between China and the US. It expanded to Hong Kong in the 1940s and focused on trading textiles. In the 1970s, facing competition, the company was restructured under new leadership and diversified. It established a global supply chain network through the 1980s and 1990s, dispersing manufacturing across Asia and using IT to integrate suppliers. By 2002, Li & Fung had become a leading global supply chain manager and exporter of consumer goods.
LI & FUNG – THE GLOBAL VALUE CHAIN CONFIGURATOR
- 1. By: Aniket Joshi LI & FUNG – THE GLOBAL VALUE CHAIN CONFIGURATOR
- 2. Timeline of the Case • 1906 – Li & Fung was founded by Fung Pak Liu and Li To Ming in Guangzhou (South China) . It began operations with export of porcelain and silk to US, later expanding its portfolio into Bamboo, Jade, Ivory, Rattan ware, Fireworks and Handicrafts. • 1937 – Li & Fung (Hong Kong) became a limited company. • 1940s – WW II disrupted trading, Li & Fung ceased trading. • 1943 – Fung Pak Liu passed away, after end of WW II Li To Ming retired and sold his stake to Pak Liu’s family, Fung family became sole owners.
- 3. • 1949 – Pak Liu’s son, Fung Hon-chu restarted trading operations in Hong Kong which had come under British control. • Mid 1900s – Trading business picked up momentum in Hong Kong, influx of refugees transformed China from a manufacturing economy to a service economy. • Early 1970s – Trading business in Hong Kong began to struggle due to stiff competition from other Manufacturing economies in Asia such as Taiwan & Singapore. Trading margins went down to 3% as buyers and sellers became more comfortable dealing with each other. Under these circumstances Hon Chu called his sons Victor (Prof. at Harvard) & William (just finished MBA) in an attempt to revive the business.
- 4. • William & Victor worked hard to modernize and rebuild Li & Fung to a well structured organization, professionally managed at all levels. • 1973 – Li & Fung went public and was listed on the Hong Kong stock exchange. Li & Fung’s IPO was oversubscribed 113 times. • 1979 – Chinese economy opened up, many manufacturers in Hong Kong relocated their factories to Southern China due to low labour cost (cost effective). Rapid Industrialization of under developed Asian countries widened the choice of Supply Sources. Li & Fung Co. realized a huge potential for trading business. • 1980s – Li & Fung Co. established regional network of sourcing offices in Asian Countries.
- 5. • 1989 – Trading margins decreased further, Victor and William realized the need for drastic changes to safeguard. Li & Fung was again made a private company (management buyout). Li & Fung was restructured and diversified into export trading & retail as its core business . • 1992 – Li & Fung (Trading) Pvt. Ltd. Was relisted on the Hong Kong Exchange. On expansion Li & Fung realised that sourcing could no longer be restricted to a few countries but required a vast network of sourcing offices to sustain trading business. Company established sourcing offices across the world (US & Europe). Li & Fung also acquired companies to strengthen its sourcing and distribution networks and expand its product lines as well as customer network. Li & Fung also pursued an active IT and Internet strategy to increase efficiency and effectiveness of its communications.
- 6. • 20th Century – Li & Fung Co. became a global trading company Groups major segment were Soft Goods & Hard Goods. Soft Goods consisted of Garments (68% of Business). Hard Goods consisted of fashion accessories, footwear, gifts and furnishings (32% of the Business). • 2002 – Export trade became core business for Li & Fung Co. with active operation of retailing and distribution in China & Asia, retailing as a regional license holder for toys (China & Asia), Venture Capital, Investment Holding & Property Investment.
- 7. Strategies • Managing the Global Supply Chain • Dispersed Manufacturing • Global Supplier Network • The SCM Strategy • Customer Centric Organizational Structure • Leveraging IT & the Internet • Global Expansion
- 8. Managing the Global Supply Chain • Stage I – (1970 – 78 ) : Li & Fung acted as a regional sourcing agent Increased reach to Singapore, Korea & Taiwan Dealing with whole region was far more complex and buyers did not have the necessary resources (Opportunity) Quotas governed World Trade, but weren’t used up in Hong Kong • Stage II – (1979 – 82 ) : Li & Fung turned into a Manager & Deliverer of Programmes Started converting VOC to VOP by developing entire manufacturing programme for a particular product
- 9. • Stage III – (1983 – 2002 ) : A new challenge as Korea, Taiwan and Thailand had emerged as labour intensive manufacturing hubs Hong Kong had become an expensive and a non competitive place to manufacture Chinese economy was being liberalised Labour intensive portion of production was moved to Southern China
- 10. Dispersed Manufacturing • Dissected the value chain, optimized every step of the chain from Product Design till Delivery • All high ended Value Added Activities such as Design and Quality Control were carried out in Hong Kong • Low end activities like manufacturing were outsourced to the possible locations across the world • For every order company aimed at customizing the supply chain to meet the client’s specific requirements • Ex – Transistor Radios Assembly + Mini Kits (plastic bags with components)
- 11. Global Supplier Network • On receiving an order, Li & Fung Co. tried to find the right manufacturer through its global network for the specific product and the most attractive combination of Cost & Quality. • Li & Fung Co. started implementing concepts of Sub Assemblies to deliver a particular order, different processes were carried out by different vendors on the same job with the effective use of its logistics and distribution channel at an optimum cost.
- 12. The SCM Strategy • Li & Fung managed the entire supply chain to ensure shorter product delivery cycles. • Organized production and ensured small production runs which resulted in improved response time for the retailers • Accurately forecasted the product demand to prepare for sub assemblies
- 13. Customer Centric Organizational Structure • Li & Fung discarded the traditional structure of geographic division as it was tough to optimize the value chain in such structures. • Li & Fung organized itself into various small customer centric divisions, entire division focused on serving a big customer, this model assisted in creating a customized value chain for each customer order. • Introduced the concept of Key Account with respect to customer intimacy
- 14. Leveraging IT & Internet • Li & Fung tied up its global network of offices with intranet to enable free information flow. • Li & Fung created dedicated extranet sites for the major customers. • Li & Fung Co. was of the opinion that the key to its business was not hardware but information and its application to the management of supply chains. • Li & Fung Co. strongly believed that Internet and e- commerce would offer more opportunities by helping it drive supply chain costs down and integrating management of supply chain via IT.
- 15. Global Expansion • Li & Fung Co. increased efforts to position itself as a global consumer goods trading company, devised an acquisition strategy to strengthen its position in the global trading market. • Strategy aimed at expanding sourcing network, product lines and customer base. • Li & Fung Co. also looked forward to acquire companies with domain expertise to exploit the advantage of job or work specialisation.
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