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Li and Fung
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Strategy: Assignment 3

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Meenu Mittal
PGIB
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Roll no 34

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 Li and Fung

Q1) Explain about Li & Fung Business Model. Comment on the sources of the competitive
advantage. Is it sustainable? Why?

Li Fung does not see itself as a traditional trading enterprise but as an expert in the global
supply chain management for its 350 or so major customers, providing the convenience of one
–stop shopping for the raw material sourcing, production planning, management quality
assurance, export documentation and shipping consolidation. These customers are a diverse
group and include cloth retailers as well as consumer electronics companies.

Li and Fung break up the value chain and disperse different productive activities to
manufacturers located in different countries depending on the assessment of factors such as
labour costs, trade barriers, and transportation costs. It coordinates the whole process,
managing the logistics and arranging for shipment of the finished product. It has a policy of not
owing any production facility itself, preferring instead to shop around.

It has divided its business into two lines:

1. Soft Lines
2. Hard Lines

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 Li and Fung

In addition to being the largest supplier of apparel and toys to Wal-Mart, the company
operates the sourcing activities of Toys “R” Us, Timberland, and Tommy Hilfiger, among
others. Recent announcements include an outsourcing agreement with specialty retailer
Talbots Inc., and an $83 million sourcing agreement with Liz Claiborne Inc.  In all, the company
operates 80 sourcing offices in most all regions of the world.

Sources of Competitive Advantage

 It acts as a value added intermediary between the developed world and manufacturers
in the developing world.
 To better serve the customer needs of the customer, Li and Fung is divided into
numerous small, customer focused divisions.
 It is a leader in establishing real time internet based link with its customer.
 Its core ability is to coordinate a globally dispersed manufacturing process to get
products quickly to customers at low cost.
 The Group leverages its intimate market knowledge, experienced sourcing
professionals, cutting-edge technology and state-of-the-art information systems to
ensure that all orders are delivered on time, on budget, and according to customers'
exact specifications.

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 Li and Fung

 Li & Fung is an orchestrator.  It does not manufacture, hold inventory, or bears credit
risk.  In theory, everybody knows Li & Fung as a middle man, but in reality, Li & Fung is
the supplier to its customers, and the buyer to its suppliers.

Li & Fung’s main strategic advantage is its ability to manage a large network of vendors and
suppliers across traditional and newly upcoming sourcing markets in a way which creates
significant efficiencies for the benefit of its customers. The company manages the flow of
raw material and finished goods through a process which it calls “borderless
manufacturing”.

Q2) At one time, many of the Li & Fung’s customers preferred their own logistics and
purchasing functions in-house. Now, they outsource these functions to Li & Fung. Why? What
is the value add that the intermediary such as Li & Fung delivers to the customers?

Li & Fung is committed to meeting the needs of international businesses through competitive
pricing; impeccable quality; reliable, on-time delivery; and the highest standards of service.

Taking full advantage of modern technology, a dedicated Extranet links together all the key
components of the supply chain to provide tracking capabilities, streamline the flow of business
information and provide much more granular control of supply chain activities.

Internally, Li & Fung's global sourcing network leverages the capabilities of our Intranet to
ensure rapid dissemination of information worldwide-taking full advantage of the speed and
reach offered by modern information networks.

The Group leverages its intimate market knowledge, experienced sourcing professionals,
cutting-edge technology and state-of-the-art information systems to ensure that all orders are
delivered on time, on budget, and according to customers' exact specifications.

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 Li and Fung

Q3) if Li Fung is to execute on the promise to deliver on the value added to the customers,
what skills and competencies it must have?

 Li & Fung's product specialist teams are committed to managing the labour-intensive
business of consumer goods sourcing, offering your business the advantages of a
professional, dedicated global sourcing team.
 The Group enforces a rigorous Supplier Code of Conduct; and in addition, all sourcing
teams undergo extensive training to gain the awareness, knowledge and necessary skills
to meet compliance requirements. Systematic inspections, audits and comprehensive
vender education ensure production from socially responsible suppliers.
 Abilities of Li & Fung to successfully practice both efficiency and agility within one of the
most challenging supply chain environments
 Knowledge of products, suppliers, production capability and distribution needs have all
been integrated into a holistic fulfilment model.
 They have 80 offices in over 40 economies.

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 Li and Fung

Q4) why do you think LI & Fung does not have a policy of not owning any production
facilities?

 By not owning production facilities, Li & Fung is not obligated to accept the output of its
own plant, or to maintain it, especially when that plant may not be able to manufacture
products that are specifically to the standards and requirements of its customers. With
no facilities to keep busy, Li & Fung is free to search the world for the best supplier for
its customers.

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 Li and Fung

 Li & Fung do not own any production facilities because their expertise is in managing
and coordinating the best production facilities to coincide with their customer base. This
way they limit cost, can have flexibility to utilize the best in every market and also they
can shop the market for best quality and prices.
 Li & Fung followed a strategy of Dispersed Manufacturing. Dispersed manufacturing
meant that the company would outsource as much as possible without sacrificing the
quality delivered to the customer. It required “end value-added activities such as design
and quality control” stay in Hong Kong while other activities would go to the cheapest
suppliers that met Li &Fung standards. Li & Fung is an expert in this strategy.
 Sticking to the company principles allowed Li &Fung to create a company culture that
made this strategy of dispersed manufacturing work. Production costs were low
allowing flexibility in other soft costs such as materials and goods. With over 7000
suppliers spread out over 40 countries worldwide, Li &Fung utilizes an efficient
information network to develop built-in contingencies for economic disruptions in any
of the involved countries. Li &Fung calls this the “knowledge economy” and using its
network can actually anticipate and pre-empt changes in the international economy.
 The core strength of the company lies in handling the large supplier and customer
network and sifting through the supplier network when need arises to provide quality
product at economical rates for the customers. Sticking to this strength requires that the
company does not own any facilities which may divert the focus from the core
competence.

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 Li and Fung

Q5) Do you think Victor Fung is correct when he states that it is unlikely that the internet will
ever connect the complete supply chain? Why might he be correct? What might happen in
the long run?

Victor Fung is not right in saying that the internet will not link the entire supply chain. It is
bound to happen; in fact it is already happening. Today large numbers of customers rely on
vendor managed inventories where the suppliers are periodically updated about the vendor’s
level of inventory online. In fact the internet has made it possible to communicate orders much
faster. Today the ERP systems being developed which include SCM and CRM are slowly moving
towards web based applications, hence it would be easier to communicate online. Also large
numbers of countries are connecting through vast chain of online links and many countries are
in fact contributing and adding on to those links to take on more traffic.

In the long run it is felt that the world will become truly virtual with the internet being used to
carry out day to day business operations more and more and large number of processes like
vendor and customer management not requiring human intervention. The systems may be able
to locate the suppliers from their list based on their profiles, and may be able to automatically
place orders, track order progress, send reminders to the suppliers. Hence this may reduce the
human requirement at Li and Fung and may even require Li and Fung to change the peak they
are climbing. If that is not done in all likelihood they will be substituted by technology, since it

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 Li and Fung

poses a huge threat to substitution and Victor Fung does not seem to have identified it. They
need to identify that they are approaching a strategic inflection point in their business.

Q6) what are the strategic challenges being faced by Li & Fung today? What are the likely
challenges the company may face over the forthcoming 5 years? Why?
What are your strategic recommendations for the period of 2011 – 2014? Why?

Business model expansion through focusing on accessing Chinese consumers for 2011-2013..
The Strategic challenges faced by Li & Fung are:

 Organizational complexity - Li & Fung brought cost saving to customers by empowering

what used to be middle-office, well-aligned strong cash incentive and knowledge
arbitrage.  That is why historically Li & Fung’s financial result did not show operating
leverage.  However, from around 2006, Li & Fung centralized shipping and compliance
function of its sourcing divisions serving various customers, and it also started sharing
regional office resources across different teams serving different customers.  I.e. Li &
Fung is increasing middle office functions. This brings the long-missing economies of
scale, but at the same time poses some potential problems.
 Ambitious value chain expansion- Previously, even if Li & Fung was expanding product
categories, its role was still knowledge arbitrager and network orchestrator.  Today, for
example, with IDS acquisition, it is largely locked in to IDS’s logistics network.  There is nothing
wrong with this move itself.  After all, it is all about finding the right balance, but with increasing
integration, the risk of losing the balance has grown.
 Improving margin - The higher Li & Fung’s margin becomes, the more reasons there are for its
competitors to jump in and for its customers to reconsider  working with Li & Fung. 
 Competition with customers - Li & Fung more or less owns Roots Asia.  It pays licensing fee to
Roots of Canada, but it does everything from product development to marketing and sales.  For
example, recently Li & Fung developed new children’s sleepwear line in-house, procured it
through its supplier network, and sold it successfully in Toys”R”us Asia stores which Li & Fung
group owns through unlisted subsidiary.   Li & Fung might say it is just part of an expansion
strategy of helping customers reaching Asian customers, but few will believe it.

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 Li and Fung

 Hazy strategy over asset ownership - Li & Fung’s business is asset-light.  The company has
negligible amount of PP&E and inventory and in fact, it has negative net tangible asset. The
question is not whether asset-light model is superior to asset-heavy model, but whether the
asset the company owns is value-adding or not.
 Competition with suppliers- It is not in direct competition to the majority of its suppliers who
make garments, bags, and shoes.  However, as Li & Fung expands its product category, what the
tension with suppliers could grow.

Strategic Recommendations:

Soft Line Business: Expand soft lines business through postponement and acquisitions
 Acquire small entrepreneurial companies near Cross Dock facility to customize
products
 Leans Supply Chain –Make‐to‐order strategy reduces safety stock and variability
 Agile –Aggregate forecast is more accurate than SKU level forecast
 Cost Reduction ‐Reduction in lead time and ordering cost.

Hard Line business: Increase focus on hard lines to reduce variability and boost sales. Buy‐back
Agreement to increase sales in Hard Lines.Buy‐back Agreement will help to:‐
 Avoid double marginalization problem
 Incentivize customers and suppliers to order goods in economic downturn.
 Increase in customer confidence
Quality: Improve operational efficiency to increase profitability and customer satisfaction.

Information Sharing enables Collaborative Planning.

 Use the existing IT Platform to share information with customers and suppliers
 Networked supply chain sets common goals for suppliers and customers
 Performance Measurement using ‘Score Cards’ increases supply chain efficiency.

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