Li & Fung – the Global Value Chain Configurator
This case study explains both the philosophy behind supply-chain management and the specific practices that Li & Fung has developed to reduce costs and lead times, allowing its customers to buy “closer to the market. ” Li & Fung, Hong Kong’s largest export trading company, has been an innovator in global supply-chain management. Li & Fung has also been a pioneer in “dispersed manufacturing. It performs the higher-value-added tasks such as design and quality control in Hong Kong, and outsources the lower-value-added tasks to the best possible locations around the world. The result is something new: a truly global product. To produce a garment, for example, the company might purchase yarn from Korea that will be woven and dyed in Taiwan, then shipped to Thailand for final assembly, where it will be matched with zippers from a Japanese company.
For every order, the goal is to customize the value chain to meet the customer’s specific needs. To be run effectively, the company maintains, trading companies have to be small and entrepreneurial. He describes the organizational approaches that keep the company that way despite its growing size and geographic scope: its organization around small, customer-focused units; its incentives and compensation structure; and its use of venture capital as a vehicle for business development. The Issues raised in the case study are: Understand how a regional trading company used its core advantage (its vast sourcing knowledge and network) to become a global value chain manager, providing global economies of scale and scope to its customers •Study the importance of efficient value chain management for a global company •Examine the role of IT and the Internet as major drivers of globalization •Study the importance of acquisitions and alliances in a company’s globalization strategies •Understand how innovation, differentiation and customization can be used as strategic and competitive advantages by a company, to maintain its leadership in the domestic market, and emerge as a global player •Study the changes taking place in the retailing and trading industry with respect to customer requirements and examine the need for a customer-centric business model for an export trading company a. According to John Mathews , A professor of management in Macquaire Graduate school of management, Sydney; and author of “Dragon Multinational: A new Model for Global Growth,” Li & Fung is one of the first truly global companies. How did Li & Fung use the value chain configuration in its globalization process? Li & Fung’s major strategy was to become an intergraded global player in the Supply chain management.
It focused on its value chain to achieve its objective. Li & Fung’s top management constantly examined the value chain to understand where the value lay and how it could be further increased. By the 1980s, Hong Kong had become a relatively expensive and uncompetitive manufacturing location, compared to other countries in south east Asia. For example, in the transistor radio business, Hong Kong faced intense competition from Taiwan and Korea. The situation prompted Li & Fung to improve efficiency and cut costs by reconfiguring its value chain. The company began to send kits containing components to China for the labour intensive assembly process.
The assembled transistors were then brought back to Hong Kong for inspection and testing. Li & Fung replicated the strategy for Baby dolls. It did the design work and prepared the moulds in Hong Kong. The moulds were shipped to China, for plastic injection, painting and tailoring of the doll’s clothing. The dolls came back to Hong Kong for inspection, testing and packing. Hong Kong’s well-developed banking system facilitated efficient LC negotiation while its status as a regional shipping centre helped in the distribution of products around the world. By the late 1990s, Li & Fung’s value chain configuration across countries had become even more sophisticated.
For a typical garment order from a retailer in the West, Li & Fung would decide to buy yarn from say, a Korean producer, but do the weaving and dyeing in Taiwan. It would source zippers from the Chinese plants of leading Japanese companies. Based on quotas and cost of labour, Li & Fung would then decide where the production of garments would take place. To reduce dependence on a single production point, the order would typically be distributed among different factories within the country. In the case of shirts for the American market, Li & Fung would buy cotton from America, knit it and dye it in China and sew the garment in Bangladesh. By spreading its value chain across different countries, Li & Fung had reduced the time between obtaining orders and their execution.
With customer tastes rapidly changing, retailers in the West had more seasons a year and a shorter lead time for the fashion trends to be noticed. As a result, the business had become time sensitive. Li & Fung had attempted to build excellent relationships with its suppliers, and win their loyalty to ensure that they responded quickly to any situation . For a company so heavily dependent on outsourcing, quality control had become a major issue. Li & Fung carried out regular inspections at the raw materials, manufacturing and finished goods stages. Li & Fung had attempted to differentiate itself from its competitors by its ability to locate raw materials and components.
Trading staff had detailed information on where the cheapest and the best quality material such as embroidery, electronic components and plastics were available. The above examples provide a detailed insight in to the use of the value chain configuration in Li & Fung’s globalization process. b. Li & Fung owes much of its ongoing success to its expertise in global value chain configuration. Define the concept of value chain and critically discuss the importance of value chain management for global companies drawing from the experience of Li & Fung. Answer: The value chain is a concept from business management. A value chain is a chain of activities. Products pass through all activities of the chain in order and at each activity the product gains some value.
The chain of activities gives the products more added value than the sum of added values of all activities. It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A diamond cutter can be used as an example of the difference. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond. The function of value chain management is to design and manage the processes, assets, and flows of material and information required to satisfy customers’ demands. Supply logistics related costs account for a substantial part of the typical firm’s total cost.
On the revenue side the Value chain decisions have a direct impact on the market penetration and customer service. Globalization of economy and electronic commerce has heightened the strategic importance of value chain management and created new opportunities for using value chain strategy and planning as a competitive tool. Electronic commerce has not only created new distribution channels for consumers but also revolutionized the industrial marketplace by facilitating interfirm communication, especially relevant for global companies, and by creating efficient markets through trading communities. Moreover combination of enterprise information infrastructure and the Internet has paved the way for a variety of value chain optimization technologies.
The global companies in current market place need to look at the importance of the value chain management process from the following parameters, which were also essentially used by Li & Fung: •To develop an understanding of key drivers of value chain performance and their inter-relationships with strategy and other functions of the company such as marketing, manufacturing and accounting. •To impart analytical and problem solving skills necessary to develop solutions for a variety of value chain management and design problems and develop an understanding for use of information technology in value chain optimization. •To understand the complexity of inter-firm and intra-firm coordination in implementing programs such as e-collaboration, quick response, jointly managed inventories and strategic alliances. To develop the ability to design logistics systems and formulate integrated value chain strategy, so that all components are not only internally synchronized but also tuned to fit corporate strategy, competitive realities and market needs. •To understand which information should be exchanged in a value chain and how it should be used to benefit the entire value chain. •To identify improvement opportunities that exist within value chains in different industries and to quantify the improvements that various value chain strategies offer. •To understand which barriers companies face during the implementation of new value chain strategies. Li & Fung was the leader in positioning itself as the global value chain manager.
It was able to achieve the objective by integration of operational strategy with its organizational strategies, customer-centric organizational structure, technology and Internet initiatives, and globalization efforts, which contributed to the company’s emergence as one of the world’s leading consumer goods trading companies. At the heart of all above was the value chain management. This was driven partly by the fact that manufacturers and retailers were increasingly able to communicate and do business with each other directly, thereby threatening the existence of pure “middle men” or “agents”. The founding partners at Li & Fung believed that the role of an agent went beyond matching the needs of the buyers and sellers to add value in innovative ways.