Reference no: EM131374411

Established in 1906, Hong Kong-based Li & Fung is now one of the largest multinational trading companies in the developing world, with annual sales of over $11 billion in 2008, up from just $1.2 billion in 2000. The company, which is still run by the founder's grandsons, Victor and William Fung, does not see itself as a traditional trading enterprise.

Rather, it sees itself as an expert in supply chain management for its 500 or so customers. These customers are a diverse group and include clothing retailers and consumer electronics companies. Li & Fung takes orders from customers and then sifts through its network of 7 ,500 independent suppliers located in 40 countries to find the right manufacturing enterprises to produce the product for customers at the most attractive combination of cost and quality. Attaining this goal frequently requires Li & Fung to break up the value chain and disperse different productive activities to manufacturers located in different countries depending on an assessment of factors such as labor costs, trade barriers, transportation costs, and so on.

Li & Fung then coordinates the whole process, managing the logistics and arranging for the shipment of the finished product to the customer. Typical of its customers is The Limited, Inc., a large U.S.-based chain of retail clothing stores. The Limited outsources much of its manufacturing and logistics functions to Li & Fung. The process starts when The Limited comes to Li & Fung with designer sketches of clothes for the next fashion season. Li & Fung takes the basic product concepts and researches the market to find the right kind of yarn, dye, buttons, and so on, then assembles these into prototypes that The Limited can inspect.

Once The Limited has settled on a prototype, it will give Li & Fung an order and ask for delivery within five weeks. The short time between an order and requested delivery is necessitated by the rapid rate of product obsolescence in the fashion clothing industry. With order in hand, Li & Fung distributes the various aspects of the overall manufacturing process to different producers depending on their capabilities and costs. For example, Li & Fung might decide to purchase yarn from a Korean company but have it woven and dyed in Taiwan. So Li & Fung will arrange for the yarn to be picked up from Korea and shipped to Taiwan. The Japanese might have the best zippers and buttons, but they manufacture them mostly in China.

So Li & Fung will go to YKK, a big Japanese zipper manufacturer, and order the right zippers from their Chinese plants. Then Li & Fung might decide that due to constraints imposed by export quotas and labor costs, the best place to make the final garments might be in Thailand. So everything will be shipped to Thailand. In addition, because The Limited, like many retail customers, needs quick delivery, Li & Fung might divide the order across five factories in Thailand. Five weeks after the order has been received, the garments will arrive on the shelves of The Limited, all looking like they came from one factory, with colors perfectly matched.

The result is a product that may have a label that says "Made in Thailand," but is a global product. To better serve the needs of its customers, Li & Fung is divided into numerous small, customer-focused divisions. There is a theme store division that serves a handful of customers such as Warner Brothers, there is a division for The Limited, and another for Gymboree, a U.S.-based children's clothing store. Walk into one of these divisions, such as the Gymboree division, and you will see that every one of the 40 or so people in the division is focused solely on meeting Gymboree's needs. On every desk is a computer with a direct software link to Gymboree.

The staff is organized into specialized teams in areas such as design, technical support, merchandising, raw material purchasing, quality assurance, and shipping. These teams also have direct electronic links to dedicated staff in Li & Fung's branch offices in various countries where Gymboree buys in volume, such as China, Indonesia, and the Philippines. Thus, Li & Fung uses information systems to manage, coordinate, and control the globally dispersed design, production, and shipping process to ensure that the time between receipt of an order and delivery is minimized, as are overall costs.

Case Discussion Questions

1. What are the benefits to Li & Fung's customers of working with the company? Why do companies such as The Limited outsource the coordination of manufacturing to Li & Fung, rather than do it themselves?

2. Li & Fung does no manufacturing itself. What then is its role? How does the company create value?

3. What do you think drives the choices that Li & Fung makes about who should produce what for its clients?

4. What is the source of Li & Fung's competitive advantage in the global economy?