Second runner up prize in the John Molson MBA Case Writing Competition 2005, organized by the John Molson School of Business, Concordia University, Montreal, Canada

Li & Fung: The Global Value Chain Configurator

Li & Fung: The Global Value Chain Configurator
Case Code: BSTR149
Case Length: 30 Pages
Period: 1996-2004
Pub Date: 2005
Teaching Note: Available
Price: Rs.500
Organization: Li & Fung
Industry: Trading, FMCG
Countries: Hong Kong, US, Europe
Themes: Globalization
Li & Fung: The Global Value Chain Configurator
Abstract Case Intro 1 Case Intro 2 Excerpts


Managing the Global Supply Chain

Li & Fung's evolution into a supply chain manager took place in three stages, driven by significant changes in the global retailing industry, customer and retailer preferences and economic trends across Asia through the early 1970s. In the first stage (during the 1970-78 period), Li & Fung acted as a regional sourcing agent. The company extended its geographic reach by establishing sourcing offices in Singapore, Korea and Taiwan. Li & Fung's knowledge and reach in the Asian region held value for customers...

Dispersed Manufacturing

Li & Fung broke the value chain into parts which it called 'Dispersed Manufacturing.' Under this, the company performed all high end value-added activities such as design and quality control in Hong Kong and outsourced low end activities like manufacturing to the best possible locations across the world. For every order, the company aimed at customizing the supply chain to meet the client's specific requirements. For example, when Li & Fung got an order for transistor radios, it created little kits (plastic bags) filled with all the components necessary to build a radio and shipped the kits to China, where they were assembled. The assembled radios were then shipped back to Hong Kong, where they underwent final testing and inspection...

Global Supplier Network

When Li & Fung got an order from a customer, it sifted through its global supplier network (See Exhibit V for Li & Fung's Global Sourcing Network) to find the right manufacturer for the specific product and the most attractive combination of cost and quality. The company broke up its supply chain to disperse different production processes to manufacturers in various countries, based on factors such as labour costs, quality, trade barriers, transportation costs and so on. The company coordinated all processes in the value chain, managing the logistics and arranging the shipment of the finished order to the client...

The SCM Strategy

To ensure shorter product delivery cycles, Li & Fung managed the whole supply chain of its customers. To shrink the delivery cycle, the company reached upstream to organize production and ensured small production runs, which resulted in improved response time for retailers, enabling them to alter production in tandem with market trends. For instance, Li & Fung got to know that Levis would order 1 mn pieces of garments, but did not have specific details of style or colours. This would be disclosed only four weeks before delivery was due. Under these circumstances, Li & Fung, based on trust and its strong relationship with suppliers, reserved un-dyed yarn and locked up capacity at mills for weaving and dying...

Customer-Centric Organizational Structure

Li & Fung had an organizational structure that masked its size. In line with the transformation of the company's business strategy during the 1980s, Li & Fung revamped its organizational structure to manage its global sourcing network better and meet customer needs. The company discarded its traditional structure of geographic division as it found inefficiencies in this. During this period, all large trading companies in the world with vast supplier networks were organized geographically with country units as profit centres...

Leveraging it and the Internet

To leverage the potential of IT, Li & Fung took many initiatives through the mid 1990s. It tied up its global network of offices with intranet since 1995, to enable free information flow. In 1998, the company began creating dedicated extranet sites for major customers. These sites enabled the company to interact with customers, track their orders, help in product development and perform many other tasks in a cost efficient manner.

The extranet also enabled customers to track their orders and gain access to related information through Li & Fung's Electronic Trading System, known as XTS, which was linked to Li & Fung's global network of offices...

Global Expansion

During the late 1990s, with the growing popularity of private label brands, shortening product life cycles and acute competition in the retailing industry, companies had to focus on their supply chain processes. As many companies did not have expertise in SCM and outsourcing was a cost-efficient alternative, the demand for companies that offered SCM services increased. Li & Fung, which already had an impressive sourcing network and SCM expertise, increased efforts to position itself as a global consumer goods trading company....

The Challenges

By the end of 2003, Li & Fung emerged as one of the few global consumer goods trading companies with geographical flexibility and depth of expertise required for success in the fiercely competitive business environment of the early 21st century. In the fiscal year ending December 31, 2003, the group's revenues amounted to HK$ 42.6 bn, a 14.3% rise over HK$ 37.3 bn in 2002. Net profits amounted to HK$ 1.22 bn in fiscal 2003, a 13.2% increase over the HK$ 1.08 bn in fiscal 2002. In December 2003, the share price of Li & Fung was quoting around HK$ 13. However, according to company sources, revenues and profits were below expectations....


Exhibit I: Li & Fung's Major Subsidiaries and Associated Companies
Exhibit II: Exports and Imports of Services in Hong Kong (2000-02)
Exhibit III: Hong Kong's External Trade Performance
Exhibit IV: Li & Fung's Supply Chain
Exhibit V: Li & Fung's Global Sourcing Network
Exhibit VI: Li & Fung's Code of Conduct for Suppliers
Exhibit VII: Li & Fung's Five-Year Stock Price Chart(August 1999 - July 2004)
Exhibit VIII: A Note on Hong Kong's Export Trade Industry
Exhibit IX: Li & Fung - Consolidated Statements Of Income (1997-2003)

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