Li and Fung: strategic operations and global supply chain management

Li & Fung Case Study

Li & Fung has developed over the past century as a successful global trading company, connecting demand and supply as a very competitive middle man. The company's main area of activity is that of matching the producers and manufacturers (most often in areas of South Asia and East Asia) with the company demand in Europe and North America. On the other hand, it had also been involved in supplying raw materials to producers in an attempt to streamline operations and reduce producers' production costs. As some of the managers at Li & Fung have explained the problem, the company manages the supply chain in all its entirety in order to make it more efficient and less costly.

As the managers analyzed future plans for the company and future opportunities for expansion, there were three distinct ways identified in this sense: organic growth, expansion through acquisition and extension of its supply chain to new markets via the Internet. Organic growth implied a growth of the company by opening up new centers around the globe and expanded the business. The expansion through acquisition implied purchasing competitors, which implied gaining new clients, integrating their operations into the current Li & Fung's activities and grow horizontally by a combination of these two. However, acquisitions also played an important defensive role in the company's policy, as is notable by the acquisition of Swire & Maclaine as a preemptive move on the market.

One of the most important approaches in the development of the company relied on e-commerce and the amplification of business via the Internet. Starting with the 1990s, the Internet basically offered limitless possibilities to any company to expand its business, attract new clients and grow its revenues, with minimal investments and costs. The first initiative in this sense promoted by the Group had an operational targeted and involved linking all the Group's offices and manufacturing sites around the world in a Group intranet that could streamline operations by making communication much more efficient. This intranet allowed for the orders and shipments to be tracked in real time, as well as for actual online inspection prior to shipping. Everything took less time and the responses could also be significantly faster.

From the intranet, the Group moved on to the secure extranet sites, which linked the Group with each of its key customers in a customized manner that allowed for a better working connection between the participating entities. There were 10 such extranets ready by 2000, each usually taking an average of 6-9 months to complete. The sites were designed to incorporate all operational details of a transaction, including sending copies of documents etc. The idea was again that the communication between the parties would be streamlined to the degree to which it became more efficient and, thus, less costly and more profitable for all parties involved.

Li & Fung wanted to apply the principle of bubbling in rather than bubbling out, which basically meant that the Internet operations and e-commerce needed to be integrated with the existing company and operations, rather than perceived as a spin-off that would gravitate on its own any be sold in a couple of years. The challenge was to bring technology throughout the company rather than just in the it division and to be able to streamline and make more efficient all operations because of this.

Perhaps one of the most important challenges of the it project, as any Internet venture, is the fact that moving fast is of essence. This is an area of economy that changes almost from day-to-day, because new technologies appear and because the entities participating in the online activities become more and more innovative in developing new solutions to improve the activities of their companies. This is why Li & Fung also needed to move fast in its approach.

The main target of the project, as the case study showed, were the small and medium enterprises (SME), clients that Li & Fung knew and that it had collaborated with over the last decades, but also potential clients the company's representatives had met at fairs and in the business world.

The effect of such a portal for a SME would be tremendous, mainly because these types of economic entities usually paid very high margins to importers, while Li & Fung charged significantly less. Additionally, SMEs would generally receive a comparatively poorer service and would have fewer options than other companies. As we can see, the target market for Li & Fung was carefully researched and the results best matched the portfolio the company offered: SMEs would be a perfect target because they would indeed be in need of the type of services that Li & Fung was offering and because such a segment would likely most benefit from the B2b services.

Due to the increased streamline and better and more efficient communication, SMEs would become viable customers for Li & Fung, despite not having dealt with them in the past. The online option, much cheaper and faster, would thus allow for customization and other services on the SME segment in the future.

The model could be successful, but there were several challenges involved. First of all, one needed to consider the fact that this was still a beta test and that there were no answers as to whether the system would actually work, whether the investment would prove viable and whether the forecasts for 1,000 SMEs and $2 billion in revenues from the portal would actually prove realistic enough.