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Li & Fung founded in 1906 by Fung Pak-Liu

and Li Toming in Guangzhou, China.

1920s & 1930s expanded to warehousing and

handicrafts manufacturing

1945 Li sold his shares to Fung Family 1973 listed on HKSE

1988 privatized, streamlined and

incorporated in Bermuda

1995 acquiring Inchcape Buying Group

2000 2 billion dollar global trading

company

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It operates in 40 economies and employs

26,000 employees worldwide.

Li & Fung sources and manages the global

supply chain for and successful companies such

as The Limited, Warner Brothers, Avon, Bed,

Bath & Beyond, etc.

Li & Fung joined with the technologicallysavvy company Castling, to form lifung.com.

The intranet and extranet technologies were

successfully implemented at Li & Fung in 1995

and 1997 respectively.

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Value Chain Analysis model

The Value chain concept identifies activities,

functions, businessprocesses that have to be

performed in designing, production, marketing,

delivering, and supporting a product or service.

Value chain model - views the organization as

a chain, or series of processes and activities

each of which adds value to the product or

service for the customer

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Comprised of a global network of partners and

clients.

69% of total sales from the U.S.

Products include a mix of hard goods (quality

controlled products such as toys and sporting

goods) and soft goods (clothing and apparel).

y Profit margin for soft goods was between 6%- 8%.

y Profit margin for hard goods was between

10% - 30%.

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Porter's Generic Value ChainPorter's Generic Value Chain

M

InboundLogistics

>

Operations

>

Outbound

Logistics

>

Marketing &

Sales

>

Service

>

A

R

G

I

N

Firm Infrastructure

HR Management

Technology Development

Procurement

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The Value chain concept considers two main

types of activities:

PRIMARY Activities that creates value to

customers

SUPPORT Activities that support and facilitate

the primary ones

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The primary value chain activities

are: Inbound Logistics: the receiving and

warehousing of raw materials, and their

distribution to manufacturing as they arerequired.

Operations: the processes of transforminginputs into finished products and services.

Outbound Logistics: the warehousing anddistribution of finished goods.

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Marketing & Sales: the identification of

customer needs and the generation of sales.

Service: the support of customers after the

products and services are sold to them.

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These primary activities are

supported by: The infrastructure of the firm: organizational

structure, control systems, company culture,etc.

Human resource management: employeerecruiting, hiring, training, development, andcompensation.

Technology development: technologies to

support value-creating activities. Procurement: purchasing inputs such as

materials, supplies, and equipment.

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We can use the value chain model to:

plan for a better way of meeting customer

demands;

identify processes that add value;

identify processes that reduce cost.

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VALUE CHAIN IN LI & FUNG

For Li & Fung, the primary activities included:

receiving an order from the customer

Li & Fung utilized its global sourcing network

to place an order for raw material and send theraw material to the production center to plan

and design the product as per the customer

requirements.

After product planning, the order wasoutsourced to manufacturing factories.

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Contd

Manufacturing factories were chosen from itsworld wide system of factories so as to benefitfrom labor costs, quotas, laws, transportation

costs etc. Li & Fung generated revenues by charging a

commission to the factories it supplied rawmaterials to.

Through the new information systems and B2Bplatforms, customers could also make lastminute changes to their order requirements..

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Contd

This flexibility served to increase customer

satisfaction.

Further quality and order control was

maintained by keeping one central office in

Hong Kong to oversee this process.

Dedicated and professional teams also managed

the shipping and export of the products to

ensure that the finished products were delivered

in an efficient and timely manner

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Support activities play an important role of

making the delivery of the products possible.

For Li & Fung, an important support activity

included

the technology department in New York,

the 60 employees involved in managing the

IS/IT systems

the financial and administrative support

departments in Hong Kong

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VALUE CHAIN PROCESS OF LI &

FUNG

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The strong historical experience of Li & Fung, its

brand name, its well established reputation for

high quality low cost products and its continued

implementation of information systems andtechnologies, helped it achieve significant

competitive advantages through this efficient

value chain process.

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BENEFITS OF THIS VALUE

CHAIN To Li&Fung:

higher profits

lower risks

economies of scale.

To clients:

Timely

high quality differentiated products

low cost products

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Li & Fung Trading

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Li & Fung Trading Li & Fung RetailingIDS Group

Li & Fung Group

Export Sourcing Integrated-Distribution

ServicesRetailing

Li & Fung Group

USD14 billion in 2008

Soft & Hard goods

40 countries, 70 offices

(HKSE#494)

USD1.7 billion in 2008

Asian Distribution

Global Logistics

(HKSE#2387) (Privately held)

USD900 million in 2008

Toys R Us, Trinity, BLS

Circle K (HK GEM)

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Our China Advantage

Central Hub atChina inventoryholding,consolidation,labelling,

packaging andpalletization

Destination DCcross-dockingand bypass

Distribute in

China via 34IDSDCs/depots

ChinaGlobal Hub

International freight

Vendor delivery

Retail delivery

US hubEurope hub

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Sourcing Trend In 2008

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- A true Asian multinational

The IDS Group is a member of the Li & Fungfamilyy Founded 1906y First Chinese-owned company to engage in foreign tradey Turnover in excess of US$5 billion. 13,000 employees

y Recognised as a leader in supply chain management

Li & FungTrading

Sourcing and export-trading in soft and hardgoods. A supply chainmanagement company

serving Fortune 500 clients

Li & FungRetailing

Retail operator andlicense holder of

Toys'R'Us in Asean +Circle K convenience

stores in Greater China

IDS Group

Distribution services inmanufacturing, logisticsand marketing. A Value-Chain Logistics companyoperating in Asean and

Greater China

IDS Group

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ROLE PLAYED BY ALLIANCE AND

ACQUISITIONS IN LI FUNGS

GLOBALIZATION STRATEGY The company devised an accqisition strategy

to strengthen its position in the global trading

market.The strategy amied at expanding thesourcing network, product lines andcustomer base.

In 1995 it accquired INCHCAPE BuyingServices (also know as Dodwell)

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CONTI

In december 1999 it accquired SWIRE &MACLAINC and CAMBERLEY Enterprises.

In november 2000 it accquired Colby

Group Holdings Limited. In mid 2002 it accquired JANCO Overseas.

In OCT2003 it entered into alliance withNichimen for Japanese retailer.

In december 2003 accquired the sourcingbusiness of Hong Kong based FirstworldGarments Limited.

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USE OF ACCQUISITION

Creating a plug-and-play enterprise

This requires the appropriate technology

and the modular structure This approach has led to a very high

retention rates of managers afteracquisition and best practices ofacquisitions are absorbed to improve theoverall business

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USE OF I.T TO ENHANCE GLOBAL

COMPETITIVENESS

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Information Pipeline ViTAL

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What are the benefits of

knowledge management? Profitable growth through higher efficiency and innovation

y Preventing the waste of valuable resources - avoidreinventing the wheel

y Ensuring the use of leading-edge technology and thinkingacross the firm

y Increasing customer satisfaction through shorter lead-times and consistent behavior

y Creating a competitive cost structure

y Facilitating breakthrough and incremental innovationsthrough combination of technologies and ideas from

across and outside the firm An attractive workplace that encourages cross-functional co-

operation across the globe

y Attracting and retaining key individuals

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Organization Structure

Unlike many trading companies, which weredivided on the basis of geographic regions, Li& Fung was divided into divisions that werefocused on a single customer or a group of

customers. Victor Fung explainedwhy Li & Fung did not follow a geographicdivision.

"...It is hard for them (such companies) tooptimize the value chain. Their country unitsare competing against one another for business.

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On the other hand, Li & Fung believed itsdivisions were sufficiently small,entrepreneurial and empowered to take all therelevant merchandising divisions that were into

coordinating a production program for acustomer. When Li & Fung acquired a largecustomer, it often created a separate divisionto serve the customer . For a smaller customer, an existing division was assignedthe responsibility, but usually with a dedicatedteam. The divisional system aimed at meetingefficiently the customers design, quality,shipping and invoicing needs.

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Victor Fung, believed that trading companies could be runeffectively only when they were small. He felt that as thecompany grew in size, the challenge was to retain thespirit of a small company.

By making small, units the heart of our company, wehave been able to grow rapidly without becomingbureaucratic.... As the market changes, our organizationcan adjust immediately."

Li & Fung had made each product group executive

responsible for one country, to make him or her sensitiveto local needs.

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According to a Li & Fung executive,

Most customers dont want to deal with a

big company they want personalservice. With big trading companies,

customers have to go through lots of

bureaucracy. The division set up means

that the customers staff interact with Li&Fung staff directly at every level. Day to

day, it is like theyre dealing with a small

company or even their own buying office.

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Li & Fung believed that autonomy had tobe backed by discipline. While allowing thedivisions to operate with a great deal of

autonomy, Li & Fung had tightly centralizedsome functions. A standardized and fullycomputerized information system allowedheadquarters to keep track of orders and

their execution. Financial controls werestringent, especially in the case of workingcapital.The Hong Kong headquartersmanaged cash flows tightly.

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Li & Fung's day to day activities were handledby group product managers.Together with thetop management, they constituted the policycommittee of 30 people. The committeetypically met every 5-6 weeks and discussedvarious important issues such as ethicalpractices of suppliers and country of originregulations.The committee not only formulatedpolicies, but also prescribed operatingprocedures to implement them.

William Fung believed that the companysorganizational structure gave customers asmall companys efficiency with a largecompanys support.

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QUESTIONS???

1. Which one of the three growthstrategies did L&F follow in its earlierdays. Can you think of some Indian

Cos. which follow the same strategy

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2. Please use flow diagram charts todepict the value chain of some productsin the case. How did L&F optimize the

supply chains of its clients. Show a fewexamples on the slide throughappropriate process flow diagrams

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3. What kind of privileges andresponsibilities does a licensing rightcarry

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4.What are the 5 biggest export trading Cos ofthe world

1.Sogo shosha

2. Hong kong Dexi(xuzhou) import and export

company

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5. What are the biggest 5 export trading Cos ofIndia, China and Hongkong respectively

currently

INDIA

1.Bello jewels pvt ltd.

2. Prakash enterprises( alloys and steels)

3.Rishikesh Electronics ltd.(textile labs, chemicla

labs, knitting machines)

4. Aura Trading(generic drug)5. Bhawal Steel Agency

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6. If you can, please show how L&Fcreated a customer centric organizationto handle multiple clients at the same

time. You can use something that bringsout the flexible organizational system ofL&F

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7. Do the divisions so created above,related to the SBU concept studied inthe class. How? ( Hint: How do we

define an SBU and what are thecharacteristics)

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8. To pursue global expansion which oneof the three growth strategies did L&Fuse

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9. Please explain what are private labelsand how L& F help create them.This isavailable in chapter 16 of Kotler

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10. Use appropriate content about globalmarketing from Chapter 21

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11. Some Information about structure of anorganization is to be used from first fewpages of Kotler chapter 22. You can

show a comparative slide of the variousstructures companies typically use andthe one L& F used