SUPPLY CHAIN

MANAGEMENT
The Case Study: Li & Fung Ltd.

PHAN THI MINH THU

Phan Thi Minh Thu – s3299548 Individual Paper -Global Business Context

EXECUTIVE SUMMARY

Li & Fung is one of the largest multinational trading companies in the 21 st century, which has been
operated in supply chain management rather than the traditional trading form. Although being established
in Hong Kong, Li & Fung has a number of representatives dispersed over 40 countries. The purpose of
this paper is to identify the philosophies and concepts on out sourcing, supply chain management, and
logistics from different authors’ perspectives. These concepts, then, will be applied in the case of Li &
Fung to figure out the benefits of being Li & Fung’ s client, how the organization works to create value for
its customers while it does no manufacturing, and what Li & Fung have done to attract the consumers.
Moreover, the paper will give some explanations on how it chooses the most appropriate suppliers, which
will be different from time to time and from client to client. Finally, it is pointed out that the information
system play an extremely important role in supply chain model.

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Phan Thi Minh Thu – s3299548 Individual Paper -Global Business Context

Table of Contents
I. INTRODUCTION...................................................................................................................................4
II. LITERATURE REVIEW............................................................................................................................4
III. ANALYSIS.........................................................................................................................................6
Q1. What are the benefits to Li & Fung’s customers of working with the company? Why do the
companies like The Limited outsource the coordination of manufacturing to Li & Fung, rather than do
it themselves?.........................................................................................................................................6
Q2. Li & Fung does no manufacturing itself. What then its role? How does the company create value?
.................................................................................................................................................................6
Q3. What do you think drives the choices that Li & Fung makes about who should produce what for its
clients?....................................................................................................................................................7
Q4. What is the source of Li & Fung’s competitive advantage in the global economy?..........................7
IV. CONCLUSION...................................................................................................................................8
References...................................................................................................................................................8

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Phan Thi Minh Thu – s3299548 Individual Paper -Global Business Context

I. INTRODUCTION

In the international business, the concept of supply chain management is applied by many multinational
companies because of its advantages in reducing cost and value creation. Working through the case
study, this paper figure out the nature of supply chain and logistics by applying the concepts to answer
the following questions:

1. What are the benefits to Li & Fung’s customers of working with the company? Why do the
companies like The Limited outsource the coordination of manufacturing to Li & Fung, rather
than do it themselves?
2. Li & Fung does no manufacturing itself. What then 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?

II. LITERATURE REVIEW

Ashley (2008) defined outsourcing is a process of allocating risks and responsibilities for performing a
function or service to another organization (Ed Ashley, 2008). The companies’ purpose of outsourcing
various activities to different producers around the world is to share risks, cut costs, and increase the
sales (Hill, 2009). Nonetheless, the partners are chosen carefully to be charge of a number of value
creation activities, including production and logistics, marketing, R&D, human resources, and information
system (Hill,2009).

The question issue is to choose “where to produce what” in order to create high value-added product. Hill
stated that some countries have more advantages than other in producing certain products (Hill et al)
regarding to internal factors such as labor cost, politics, the economy, culture and location externalities,
trade barrier, and currency appreciation. Secondly, companies should take account in the geophysical
element because it effects directly on the transportation cost and the price of the final product. Although
one may weigh out another, it highly depends on the industry that company is engaged in a particular
period.

Supply chain management is described as coordinating and integrating all of the activities performed by
supply chain members into a process from the raw material to consumption. The philosophy is maximize
strengths and efficiencies at each level of the process, create highly competitive, customer-driven system
that is able to respond immediately to changes in supply and demand (McDaniel, Lamb, Hair, 2008)

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Phan Thi Minh Thu – s3299548 Individual Paper -Global Business Context

Basically, a supply chain management company may be involved in six stages:

1. Sourcing and procurement: negotiation between supplier and manufacturer

2. Production scheduling: Just-in-Time model, mass-customization
3. Order processing
4. Inventory control
5. Ware housing and materials- handling.
6. Transportation

(Source: McDaniel et al, 2008)

Just-in-time inventory (JIT) systems is to economize on inventory holding costs by having materials
arrive at a manufacturing plant just in time to enter the production process and not before. The major cost
saving comes from speeding up inventory turnover. This reduce inventory holding cost , reduce working
capital, boost the company’s profitability. Secondly, improve product quality, problem will be traced .
drawback, inventory help response quickly when the demand increase. To reduce risks, several source of
input from different countries, prevent country-specific supply disruptions.

In addition, information technology and internet help the international suppliers, Li & Fung and the
customer contact closely during the process, until products are shipped in the destination.

In short, two reasons that the multinational companies outsource their producing activities around the
globe are to lower the cost of value creation and to add value by better serving customer needs (Hill,
2009). In order to cut cost, logistician will try to find the best match of supply and demand, increase
inventory turnover, and boost the profitability. In addition, an improvement of product quality not only
helps save capital investment by reducing production and after-sale service cost, it can add more value
on the final product and satisfy customers.

III. ANALYSIS

Q1.
When outsourcing some or all manufacturing to Li & Fung, the customers will have acceptable quality
products with lower cost. Under a pressure of competition, it will put effort on gaining the competitive
advantage and reliability. With its wide range network of 70 offices and 7500 independent suppliers over
40 countries, Li & Fung is more able to match types of activity with countries at the attractive combination
of cost and quality. Then, the finished product is received by the customer only if it meets the standards in
the signed contract between two agents. Therefore, companies like The Limited can save capital from
storing stages expenses, managerial cost, and building investment. The cost saving from these
spendings will offset the higher speed of obsolescence in clothing industries. Moreover, the risks in

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Phan Thi Minh Thu – s3299548 Individual Paper -Global Business Context

production and logistics belong to Li & Fung until the finished products arrive at the shelves of The
Limited, which is considered one of the biggest benefits of being Li & Fung’s client.

Conversely, if The Limited was engaged in all stages of production, it might suffer higher fixed cost
without utilizing the advantages of lower labor cost and high-technique from other countries, which push
up its opportunity cost. Another reason is problems in controlling the great number of subunits in an
organization, especially when operating in international environment. In case the Limited corporate with
the internal enterprises, it may get in troubles when there are changes in political issues, trade barrier,
import-export policy, and exchange rates. Any of these may lead to severe effects on company
performance. Furthermore, The Limited will lose its bargaining power if it solely depends on some
domestic suppliers. As a result, company ties up itself in response to external changes, and makes high
cost but low value products.

Q2.
Like other supply chain companies, Li & Fung does not take part in manufacturing operation itself. Rather,
it plays role of a coordinator who integrates all of the activities (design, technical support, merchandising,
raw material purchasing, quality assurance, and shipping) in to the process. Basically, it can be divided
into four segments:
1. Sourcing and procurement: after receiving the design from the Limited, it goes through the
network of suppliers to find out the most promising manufacturers. This is also a stage that Li &
Fung negotiates price and services to cut down the cost as much as possible.
2. Production scheduling: in order to reduce the inventory cost and working capital, Li & Fung
arrange the activities manufacturing in Just-in-Time strategy.
3. Transportation: the logistician of Li & Fung will decide what means of transportation should be
used in consideration between the shipper’s needs and six criteria (relative cost, transit time,
reliability, capability, accessibility, traceability)
4. Besides, Li & Fung provides customer services which figure out customers’ need and
requirement in order to create the best match. The specialized teams coordinate the foreign
subsidiaries through information system to control the production and shipping process in the
most efficient time and cost saving method.

In short, although not participate directly in manufacturing process, Li & Fung generates considerable
value to customer in many forms including cost saving, quality improvement, and others value added
through its superior customer care.

Q3.
Li & Fung basically does not participate in manufacturing activities but choosing providers with low cost
and high quality product for its clients. Therefore, it looks for a country with low salary and appropriate

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skilled labor in a particular area. For example, yarn will be bought from Korea, but woven and dyed in
Taiwan. Similarly, Li & Fung orders zipper and button which are produced by Japanese companies
located in China (Hill, 2009). In addition to the human factor, China has established factories with high
technology which was transferred from Japan. With these supports, China becomes an attractive location
to clothing companies like Li & Fung.

However, in some countries, trade barrier and regulations related to FDI can make outsourcing production
more costly, which cannot be offset by its labor cost or other local externality. In this case, Li & Fung
balanced between constraints imposed by export quotas and labor spending to choose Thailand as the
best place to assembly the finished product (Hill, 2009). Finally, exchange rate also causes a very quick
movement of investment from a low-cost location to a high-cost location. With its large network over 40
countries, Li & Fung is very flexible in the uncertainty of the international floating exchange rate.

Q4.
Mainly there are three sources of its competitive advantage.
Firstly, with its wide range network of 7500 independent suppliers scattered 40 countries, Li & Fung has
more opportunities to create value for its customer by finding a good match of supply and demand at a
very competitive price. The second advantage is through its efficient cost management. The well-built
logistic system helps Li & Fung speed up the inventory turnover and improve product quality, thereby
lower the costs of value creation. The final competitive source of Li & Fung is its superior customer
service that is divided into a number of small customer-oriented divisions. Thereby, customers will work
closely with every single member in a team to meet their needs in an array of areas like design, technical
support, merchandising, raw material purchasing, quality insurance and shipping. Consequently,
customers’ satisfaction will increase, which generate another value for the product (Armstrong and Kotler,
2009)

IV. CONCLUSION
Although the companies like Li & Fung do not participate in any producing activities, they can still create
value to the product, and increase the profits. Yet, it requires to being engaged in a large network of
worldwide manufacturers, and taking risk is unavoidable.

In generally, when being managed efficiently, supply chain will generate competitive advantages for the
suppliers and create more value to customers. Therefore, it has been widely developed among the MNEs
in the current enhancement of global trading.

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References

1. Behnam N. Tabrizi, Mitchell M. Tseng, 2007, Transformation Through Global Value Chains:
Taking Advantage of Business Synergies in The United States and China, Stanford University
Press, Chapter 3: Supply Chain Management and Logistics
2. Charles W. L. Hill, 2005, International Business: Competing in The Global Marketplace, 5th ed,
McGraw-Hill, Chapter 16: Global Manufacturing and Material Management
3. Charles W. L. Hill, 2009, Global Business Today, sixth edition, McGraw-Hill, “Chapter 14: Global
Production, Outsourcing, and Logistics.”
4. Ed Ashley (2008), Determine the Value of Outsourcing for Any Business Process: Outsourcing for
Dummies, Wiley Publishing, Inc.
5. Handfield and Monczka and Patterson (2009), Sourcing and Supply Chain Management, 4 th ed.,
South-Western Cengage Learning.
6. Hannarong Shamsub, Y 2010, “Who wins in offshoring”, lecture notes distributed in BUSM-
Global Business Context, 22nd October, RMIT University, Vietnam
7. Hill and Cronk and Wickramasekera (2008), 1 st ed., Global Business Today: An Asia-acific
Perspective, McGraw-Hill
8. Johnson and Marshall (2010), Relationship Selling, 3rd ed., McGraw-Hill International Edition,
Chapter 3: Value-creation in Buyer-Seller Relationships, Chapter 9: “Self-Management: Time and
Territory”
9. Manning and Reece (2006), Selling Today: Creating Customer Value, 10th ed., Pearson
International Edition.
10. McDaniel and Lamb and Hair (2008), Introduction to Marketing, 9th ed., Thomson South-Western,
chapter 12: “Marketing Channel and Supply Chain Management.”
11. Richardson et al (2004), Computing for Business Success, 2nd ed., Pearson SprintPrint,

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