L&f Supply Chain Management

The goal of effective supply chain management is to "gain competitive advantage through optimizing flows within the enterprise". The Hong Kong listed company Li & Fung Ltd represents one of the world's best examples of achieving this goal. The company financial history clearly tells that story. Just last year, L&F saw profit attributable to shareholder increase by 23%. In fact, over the past 14 years, L&F has seen steady compound annual growth rate of 22%. Not bad performance for a small family company that started in Guangzhou in 1906 trading silk and porcelain. In 1937, L&F moved its headquarters to one of the world's most efficient seaports, Hong Kong, a move that would have a critical impact on their supply chain management. The L&F Group now has three main business groups in trading, retailing, and distribution. Garments make up the major portion of L&F business also including fashion accessories, furnishings, gifts, handicrafts, home products, promotional merchandise, toys, sporting goods and travel goods.

L&F is a leading company in supply chain management. Its success over the past two decades has made it one of the premier knowledge centers of research and experience optimizing a company supply chain. Several case studies have been done on the company touting it as an ideal business education example of supply chain management success.

So what gives L&F their advantage in supply chain management? The Li & Fung Research Center explains that the company has seven principles forming the pillars of supply chain management. The research group says the key is that the "supply chain must be flexible, agile, cost-effective and responsive. Nowadays it is more common for companies to collaborate in a global context where each of them focuses on its core competency and outsource the rest." L&F has taken its core competency to the extreme by perfecting the science (and art) of outsourcing. The company follows the following principles to assure it stays at the leading edge of supply chain management theory and practice.

* Be customer-centric and market demand driven;

* Focus on one's core competency and outsource non-core activities, in order to develop a positioning in the supply chain;

* Develop a close, risk- and profit-sharing relationship with business partners;

* Design, implement, evaluate and continuously improve the work flow, physical flow, information flow and cash flow in the supply chain;

* Adopt information technology to optimize the operation of the supply chain;

* Shorten production lead time and delivery cycles; and

* Lower costs in sourcing, warehousing and transportation

L&F believes that these core principles are key factors for success in managing a global supply chain. Using the principles, L&F developed strategies in dispersed manufacturing, a global supplier network, customer-centric organizational structure, and the Internet.

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 L&F standards. L&F tried to customize the process as much as possible for each supplier in order to minimize errors. "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."

Sticking to the company principles allowed L&F 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 8000 suppliers spread out over 40 countries worldwide, L&F utilizes an efficient information network to develop built-in contingencies for economic disruptions in any of the involved countries. L&F calls this the "knowledge economy" and using its network can actually anticipate and pre-empt changes in the international as of 2006 Annual Report.

As outlined in the principles, a good IT network is central to L&F's supply chain management success. As early as 1995, the L&F Fung brothers realized the growing importance of the internet in business and established a company-wide intranet linking critical company operations. "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."

Companies now strive to mimic L&F by following the modern adage "substitute information for inventory". L&F continues to leverage the power of the Internet, as customers demand more customized product choices. According to the business magazine "Asiaweek", "mass customization" is the company's new strategy, meaning "Li & Fung can offer buyers a wide variety of choices and combinations of color, size, and design for, say, a polo shirt ...and still speedily execute large orders." In 2002, L&F started up an entire business division focused on B2B sourcing via an internet e-commerce website called lifung.com linking small- to medium-sized businesses with suppliers similar in concept to alibaba.com. L&F leads the world in supplier sourcing as a true "clicks-and-mortar pioneer".

L&F not only makes full use of technology to expand its network but also leverages the strength of its informal network - a central Chinese cultural value. The informal network not only connects over 70 worldwide office locations but suppliers, customers, and transportation. It, is very clear for us, that based on a 100 years built in relationship with their customers and suppliers and optimizing the use of the Internet and the Information Technology Systems in general, L&F reduced their customers inventory and optimized Just-In-Time manufacturing using this informal trust network. This keeps L&F extremely flexible in a constantly shifting world market. "For instance, Li & Fung got to know that Levis would order 1 million pieces of garments, but did not have specific details of style or colors. This would be