Its Impact On Supply Chain Management

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The Li & Fung Group is a Hong Kong-based multinational company consisting of three core businesses: export trading, distribution and retailing. Founded in Guangzhou in 1906, Li & Fung Group, with an annual turnover of around US$5.8 billion, operates in some 40 countries and regions and employs over 10,000 people worldwide. Its core competency is supply chain management.

Export trading

The export trading business is operated by Li & Fung Limited (referred to as Li & Fung hereafter). It is the most important segment of Li & Fung with an annual turnover of over US$4.7 billion. Through a network of 68 sourcing offices in 38 countries, Li & Fung sources high-volume, time-sensitive consumer goods on behalf of customers worldwide. Garments make up a large part of the trading business, which also covers the sourcing of fashion accessories, furnishings, gifts, handicrafts, home products, promotional merchandise, toys, sporting goods and travel goods.

As a supply chain manager for many producers and countries, Li & Fung provides the convenience of a one-stop shop for customers through a total value-added package: from product design and development, through raw material and factory sourcing, production planning and management, quality assurance and export documentation, to shipping consolidation.

Instead of owning production facilities, Li & Fung manages over 7,500 quality-conscious, cost-effective producers who deliver to a short deadline for its customers.

Distribution

The privately held Li & Fung (Distribution) Limited ("Li & Fung Distribution") operates a distribution network covering nine ASEAN countries as well as Greater China. It distributes fast-moving consumer and healthcare products on behalf of 300 multinational principals.

Li & Fung Distribution specializes in manufacturing, marketing and logistics, which are integrated to create optimized supply chains for its principals.

Retailing

The Li & Fung (Retailing) Group ("Li & Fung Retailing") operates two specialty chain stores in the ASEAN region and Greater China, namely, Circle K Convenience Stores and Toys 'R' Us. The two chains deliver customer satisfaction by offering product diversity in a friendly and appealing environment. There are over 190 outlets across the whole region with an average total customer count of over 400,000 per day.

Holistic supply chain management

Managing dispersed manufacturing was a real breakthrough for Li & Fung. The company then search for new and better sources of supply and extended our geographic scope globally, hence further developing our model of "borderless manufacturing". Under this model, Li & Fung dissected the value chain, looked for the best solution at each step, and organized production in the most cost-effective places. This was achieved by bringing together the lowest-cost, highest-quality final product components from various sources throughout the regions for manufacturing. Regional coordination is key to this model.

If the company have an order from a European retailer to produce 10,000 garments. It is not just a simple matter of our Korean office sourcing Korean products or our Thailand office sourcing Thailand products. For this customer, the company might decide to buy yarn from a Korean producer but have it woven and dyed in Taiwan. Since the Japanese have the best zippers and buttons, they would go to YKK, a big Japanese zipper manufacturer and order the right zippers from their Chinese plants. Having considered the factors of quota and labor, they might decide after all that the best place to make the garments was Thailand, therefore, ship everything there. The Supply Chain Managers might also divide the order among five different factories in Thailand to ensure quick delivery. Five weeks after receiveing the order, 10,000 garments arrived on the shelves in Europe, all looking as if they came from one single factory, with colors and everything else perfectly matched. In this case, Li & Fung produced a truly global product by pulling apart the value chain and optimizing each step.

Today, Li & Fung is a global supply chain manager for labour intensive consumer goods, a multi-faceted service organization managing customers' worldwide production programs. In short, supply chain management is about buying the right thing and shortening the delivery cycle. In addition to acting as an agent, Li & Fung also works with customers as a principal. It is able to handle all the works along the supply chain, including research on consumer demand, product development, raw material sourcing, production planning, factory sourcing, manufacturing control, quality assurance, export documentation, shipping consolidation, distribution and logistic management and marketing, sales and customer service.

Macroeconomic background

Consumers nowadays demand products to be produced at the lowest cost with the fastest turnaround time possible. To achieve this, Li & Fung needs to break down the supply chain into smaller components, select the most efficient producer(s) at each stage of the production process, and run things in parallel rather than in sequence. With efficient supply chain management, Li & Fung succeeds in lowering the overall cost even after paying the extra freight and handling charges.

The advancement in information and communications technologies (ICT) in recent years implies that the ability of firms to profit from information lacking has been fast disappearing. As a result, Li & Fung could no long cling to its traditional business as a 'trading agent'. The opportunities of using new information technology infrastructure to exploit the cross-border synergies available to restore profit Margins. Cross-border distributed manufacturing is a typical example. Besides, we find it important to make use of information technology to enhance the efficiency of supply chain management. For example, Li & Fung has developed, especially for clients in hard goods, an e-commerce platform called Import Direct, which will be discussed later.

Information Technology

Li & Fung is a company that does not own a stitch when it comes to making garments. It owns no factories, no sewing machines, and so on. They call themselves an "information company", relying on a far-flung network of suppliers to do the work.

Back in 1997 when B2B exchanges and other forms of B2B websites started to appear, people were wondering whether Li & Fung be disintermediated from the middleman role. The answer to this question is that the Internet is simply another communication tool just like the fax machine, which provides more value-added services and bridge communication gaps with the customers.

Li & Fung has established a sophisticated, hybrid Internet-based system to communicate with its customers. For large customers, it has created an extranet called Export Trading System (or XTS, version 5) that allows them to browse products and place orders online.

For example, as a garment moves through the production process, clients can make last-minute changes to their orders via Import Direct (a software interface that links to XTS-5), which tracks the entire production process. Back in the days when Li & Fung was solely run by phone and fax, an order of say, 60,000 polo shirts, would take no less than four months to deliver due to numerous back-and-forth readjustments. Now, until the fabric is dyed, the customer can change the color online; until it is cut, the customer can change the size and design online; and until the material is woven, the customer can cancel the order online. With faster communication, they are able to minimize mistakes and better fulfill customers' needs and adjustments.

The XTS-5 system is largely designed and written in-house by Li & Fung, but it also uses Hewlett-Packard and Compaq computers and Oracle database software to manage information and store data. Altogether, the XTS-5 system currently holds a remarkable 1.5 terabytes of data, which is equivalent to 1.5 million books. The system is linked to the offices where staff can supervise the manufacturing of customer products.

The level of communication between country offices and the Hong Kong headquarters varies, depending on the country's telecommunication system. For instance, in more advanced markets, the local branch offices can be linked directly to Hong Kong. Staff at those offices can link up with the central databases and send digital photos of fabrics or products back and forth. Staff at Li & Fung calls this "thick connection". In countries where telecommunication systems are relatively primitive, the branch offices will use Lotus Notes to communicate via emails and email attachments. This is called "thin connection".

In the old days when most staff at Li & Fung still relied on paperwork, much of the information received from customers would be manually input into the central database. For instance, when staff received a purchase order from a customer via email or fax, the order information would be manually typed into the central database and transmitted to the respective suppliers. At the supplier end, they would have to again type in the information received from Li & Fung, and then forward to their own suppliers. The mechanism was not only time-consuming but also prone to mistakes because data had to be re-typed several times. The use of Electronic Data Interchange was a big step in more effective data transmission between business partners. However, EDI is not only costly but a lot of its programming codes for an order could not be reused for other customers.

Li & Fung is also fully alert to the need to improve the transparency of the supply chain. Take traditional supply chain for a garment as an example. Without knowing the shipment dates, the parts supplier will not be able to secure sufficient supplies, and without knowing what the final product looks like and the complete picture of the customer's order, the supplier cannot offer the best choice and make any cross-selling for the order. Communication gaps are likely to slow the flow of products along the supply chain, causing delays in delivery.

In July 2002, Li & Fung worked with Microsoft's Biztalk to improve its supply chain efficiency by better connecting front-end orders from its customers with the back-end order processing system. The solution includes two major components: the Li & Fung Trade Gateway that is the central document exchange hub, and the Supplier SCMTalk solution that ensures smooth and efficient data transmission between Li & Fung's and suppliers' systems. Customers can submit purchase orders, requisitions and other trade documents in any formats such as fax, EDI, Microsoft Excel or Word files to Li & Fung. The Gateway will convert the documents into XML format and integrate the data into Li & Fung's order processing system.

This does not mean that with this new technology, every step in the supply chain will become mechanical. They still retain and depend on human expertise at every crucial point in the supply chain, such as the designing of products, and the choice and allocation of a big order to different factories to get the job done quickly. Staff is also relied on to ensure the arrival of materials to suppliers and that production and shipment arrangements are being scheduled. To make sure that manufacturers comply with the customer's requirements and know how they treat local labor. And these things cannot be left to the computer and must require human judgment and experience. For these reasons, the Internet is unlikely to take control of the whole supply chain, nor can it orchestrate the supply chain. Rather it helped upon as an enabler to help make the supply chain more effective communication for participants.

Since the customers are increasingly demanding customized services to better their supply chain, Li & Fung have started to design and build customized extranet sites for customers to manage their ordering and tracking online. One of Li & Fung's successful cases is the Coca-Cola extranet site. A few years ago, Coca-Cola and its many independent bottlers around the world were increasingly relying on premium merchandise tied to sporting (Football, Cricket and Rugby etc) events to promote the brand. But Coca-Cola, being a beverage company and not a premium product manufacturer, found it expensive to manage all the manufacturing activities and the process too slow to keep up-to-date with the sporting and other entertainment events.

In March 2002, Coca-Cola commissioned Li & Fung to design and build a customized extranet site. The site allows Coke executives and bottlers to order products they design along with Li & Fung's designers, or to review what other bottlers have ordered. If a Coke's branch office selects a product that is useful in its market, it can ask on other existing orders. This can achieve economies of scale in production and also help individual offices of Coca-Cola to reduce cost. The new website has received an enthusiastic response since we have the ability to deliver products within a short time frame.

Apart from Coca-Cola, Li & Fung has also developed customized extranet sites for other customers as well. The number of extranet sites has grown from six to 15 during 2001-2002.

Innovative information technology

In today's highly competitive global market, companies are forced to re-evaluate the way they do business. Customers are no longer taking buying decisions based solely on price and product quality, but are also demanding speed with high level of service quality and added values. One way to meet these challenges is by turning the traditional supply chain that is focused on product and efficiency into one that is innovative and customer-focused. At Li & Fung, information technology is seen as a liasaion in the company's extensive supply chain network and as instrumental to providing customized, quality support for customers and their time-sensitive needs. They therefore, continue to invest in new Information Technologies for greater efficiencies across all aspects of the supply chain and improve the product design capabilities in order to further strengthen our leadership position in global supply chain management.

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