LI & FUNG-THE GLOBAL VALUE

CHAIN CONFIGURATOR

LI & FUNG-THE GLOBAL VALUE CHAIN CONFIGURATOR

SHEFALI CHANDRA

VIDHI SHUKLA

SUMIT KUMAR

INTRODUCTION

Li & Fung founded in 1906 by Fung Pak-Liu and Li Toming in Guangzhou, China.

1920s & 1930s – expanded to warehousing and handicrafts manufacturing

1945 – Li sold his shares to Fung Family 1973 – listed on HKSE 1988 – privatized, streamlined and

incorporated in Bermuda 1995 – acquiring Inchcape Buying Group 2000 – 2 billion dollar global trading

company

It operates in 40 economies and employs 26,000 employees worldwide.

Li & Fung sources and manages the global supply chain for and successful companies such as The Limited, Warner Brothers, Avon, Bed, Bath & Beyond, etc.

Li & Fung joined with the technologically savvy company – Castling, to form lifung.com.

The intranet and extranet technologies were successfully implemented at Li & Fung in 1995 and 1997 respectively.

Value Chain Analysis model

The Value chain concept identifies activities, functions, business processes that have to be performed in designing, production, marketing, delivering, and supporting a product or service.

Value chain model - views the organization as a chain, or series of processes and activities each of which adds value to the product or service for the customer

Comprised of a global network of partners and clients.

69% of total sales from the U.S. Products include a mix of hard goods (quality

controlled products such as toys and sporting goods) and soft goods (clothing and apparel).Profit margin for soft goods was between 6%

- 8%.Profit margin for hard goods was between

10% - 30%.

Porter's Generic Value ChainPorter's Generic Value Chain

M

Inbound Logistics

>

Operations

>

Outbound Logistics

>

Marketing & Sales

>

Service

>

A R G I

N

Firm Infrastructure

HR Management

Technology Development

Procurement

The Value chain concept considers two main types of activities:

PRIMARY Activities – that creates value to customers

SUPPORT Activities – that support and facilitate the primary ones

The primary value chain activities are:

Inbound Logistics: the receiving and warehousing of raw materials, and their distribution to manufacturing as they are required.

Operations: the processes of transforming inputs into finished products and services.

Outbound Logistics: the warehousing and distribution of finished goods.

Marketing & Sales: the identification of customer needs and the generation of sales.

Service: the support of customers after the products and services are sold to them.

These primary activities are supported by: The infrastructure of the firm: organizational

structure, control systems, company culture, etc.

Human resource management: employee recruiting, hiring, training, development, and compensation.

Technology development: technologies to support value-creating activities.

Procurement: purchasing inputs such as materials, supplies, and equipment.

We can use the value chain model to:

– plan for a better way of meeting customer demands;

– identify processes that add value;

– identify processes that reduce cost.

VALUE CHAIN IN LI & FUNG For Li & Fung, the primary activities included:• receiving an order from the customer• Li & Fung utilized its global sourcing network

to place an order for raw material and send the raw material to the production center to plan and design the product as per the customer requirements.

• After product planning, the order was outsourced to manufacturing factories.

Contd…

• Manufacturing factories were chosen from its world wide system of factories so as to benefit from labor costs, quotas, laws, transportation costs etc.

• Li & Fung generated revenues by charging a commission to the factories it supplied raw materials to.

• Through the new information systems and B2B platforms, customers could also make last minute changes to their order requirements..

Contd…

• This flexibility served to increase customer satisfaction.

• Further quality and order control was maintained by keeping one central office in Hong Kong to oversee this process.

• Dedicated and professional teams also managed the shipping and export of the products to ensure that the finished products were delivered in an efficient and timely manner

Support activities play an important role of making the delivery of the products possible. For Li & Fung, an important support activity included

• the technology department in New York, • the 60 employees involved in managing the

IS/IT systems • the financial and administrative support

departments in Hong Kong

VALUE CHAIN PROCESS OF LI & FUNG

The strong historical experience of Li & Fung, its brand name, its well established reputation for high quality low cost products and its continued implementation of information systems and technologies, helped it achieve significant competitive advantages through this efficient value chain process.

BENEFITS OF THIS VALUE CHAIN

To Li&Fung:• higher profits• lower risks • economies of scale. To clients:• Timely• high quality• differentiated products• low cost products

Li & Fung Trading

Li & Fung Trading Li & Fung RetailingIDS Group

Li & Fung Group

Export Sourcing Integrated-Distribution Services

Retailing

Li & Fung Group

• USD14 billion in 2008• Soft & Hard goods• 40 countries, 70 offices

(HKSE#494)

• USD1.7 billion in 2008• Asian Distribution• Global Logistics

(HKSE#2387) (Privately held)

• USD900 million in 2008• Toys ‘R Us, Trinity, BLS• Circle K (HK GEM)

Our China Advantage Central Hub at

China – inventory holding, consolidation, labelling, packaging and palletization

Destination DC cross-docking and bypass

Distribute in China via 34 IDS DCs/depots

China Global Hub

International freight

Vendor delivery

Retail delivery

US hub Europe hub

Sourcing Trend In 2008

- A true Asian multinational

The IDS Group is a member of the Li & Fung family Founded 1906 First Chinese-owned company to engage in foreign trade Turnover in excess of US$5 billion. 13,000 employees Recognised as a leader in supply chain management

Li & Fung Trading

Sourcing and export-trading in soft and hard goods. A supply chain management company

serving Fortune 500 clients

Li & Fung Retailing

Retail operator and license holder of

Toys'R'Us in Asean + Circle K convenience

stores in Greater China

IDS Group

Distribution services in manufacturing, logistics and marketing. A Value-

Chain Logistics company operating in Asean and

Greater China

IDS Group

ROLE PLAYED BY ALLIANCE AND ACQUISITIONS IN LI FUNG’S GLOBALIZATION STRATEGY… The company devised an accqisition strategy

to strengthen its position in the global trading market. The strategy amied at expanding the sourcing network, product lines and customer base.

In 1995 it accquired INCHCAPE Buying Services (also know as Dodwell)

CONTI… In december 1999 it accquired SWIRE &

MACLAINC and CAMBERLEY Enterprises. In november 2000 it accquired Colby Group

Holdings Limited. In mid 2002 it accquired JANCO Overseas. In OCT2003 it entered into alliance with

Nichimen for Japanese retailer. In december 2003 accquired the sourcing

business of Hong Kong based Firstworld Garments Limited.

USE OF ACCQUISITION

Creating a plug-and-play enterprise This requires the appropriate technology

and the modular structure This approach has led to a very high

retention rates of managers after acquisition and best practices of acquisitions are absorbed to improve the overall business

USE OF I.T TO ENHANCE GLOBAL COMPETITIVENESS…

Information Pipeline ViTAL

What are the benefits of knowledge management? Profitable growth through higher efficiency and innovation

Preventing the waste of valuable resources - avoid reinventing the wheel

Ensuring the use of leading-edge technology and thinking across the firm

Increasing customer satisfaction through shorter lead-times and consistent behavior

Creating a competitive cost structure Facilitating breakthrough and incremental innovations

through combination of technologies and ideas from across and outside the firm

An attractive workplace that encourages cross-functional co-operation across the globe Attracting and retaining key individuals

Organization Structure

Unlike many trading companies, which were divided on the basis of geographic regions, Li & Fung was divided into divisions that were focused on a single customer or a group of customers. Victor Fung explained why Li & Fung did not follow a geographic division. 

"...It is hard for them  (such companies) to optimize the value chain.  Their country units are competing against one another for business.

On the other hand, Li & Fung believed its divisions were sufficiently small, entrepreneurial and empowered to take all the relevant merchandising divisions that were into coordinating a production program for a customer. When Li & Fung acquired a large customer, it often created a separate division to serve the customer.  For a smaller customer, an existing division was assigned the responsibility, but usually with a dedicated team.  The divisional system aimed at meeting efficiently the customer’s design, quality, shipping and invoicing needs.

Victor Fung, believed that trading companies could be run effectively only when they were small.  He felt that as the company grew in size, the challenge was to retain the spirit of a small company. 

“By making small, units the heart of our company, we have been able to grow rapidly without becoming bureaucratic.... As the market changes, our organization can adjust immediately."  

Li & Fung had made each product group executive responsible for one country, to make him or her sensitive to local needs.

According to a Li & Fung executive, 

“Most customers don’t want to deal with a big company – they want personal service.  With big trading companies, customers have to go through lots of bureaucracy.  The division set up means that the customer’s staff interact with Li & Fung staff directly at every level.  Day to day, it is like they’re dealing with a small company or even their own buying office.

Li & Fung believed that autonomy had to be backed by discipline.  While allowing the divisions to operate with a great deal of autonomy, Li & Fung had tightly centralized some functions. A standardized and fully computerized information system allowed headquarters to keep track of orders and their execution.  Financial controls were stringent, especially in the case of working capital. The Hong Kong headquarters managed cash flows tightly.

Li & Fung's day to day activities were handled by group product managers. Together with the top management, they constituted the policy committee of 30 people.  The committee typically met every 5-6 weeks and discussed various important issues such as ethical practices of suppliers and country of origin regulations. The committee not only formulated policies, but also prescribed operating procedures to implement them.  

William Fung believed that the company’s organizational structure gave customers a small company’s efficiency with a large company’s support.  

QUESTIONS???

1.  Which one of the three growth strategies did L&F follow in its earlier days. Can you think of some Indian Cos. which follow the same strategy

2. Please use flow diagram charts to depict the value chain of some products in the case. How did L&F optimize the supply chains of its clients. Show a few examples on the slide through appropriate process flow diagrams

3. What kind of privileges and responsibilities does a licensing right carry

4. What are the 5 biggest export trading Cos of the world

1.Sogo shosha

2. Hong kong Dexi(xuzhou) import and export company

5. What are the biggest 5 export trading Cos of India, China and Hongkong respectively currently

INDIA

1.Bello jewels pvt ltd.

2. Prakash enterprises( alloys and steels)

3.Rishikesh Electronics ltd.(textile labs, chemicla labs, knitting machines)

4. Aura Trading(generic drug)

5. Bhawal Steel Agency

6. If you can, please show how L&F created a customer centric organization to handle multiple clients at the same time. You can use something that brings out the flexible organizational system of L&F

7.  Do the divisions so created above, related to the SBU concept studied in the class. How? ( Hint: How do we define an SBU and what are the characteristics)

8.  To pursue global expansion which one of the three growth strategies did L&F use

9. Please explain what are private labels and how L& F help create them. This is available in chapter 16 of Kotler

10. Use appropriate content about global marketing from Chapter 21

11. Some Information about structure of an organization is to be used from first few pages of Kotler chapter 22. You can show a comparative slide of the various structures companies typically use and the one L& F used