Industry Analysis And Competitive Strategy

Li & Fung is a global trading group sourcing and managing the supply chain for high volume, time sensitive consume goods. The group is associated with strong brands such as The Limited, Gymboree, American Eagle, Warner Brothers, Bed, Beth & Beyond, Levi-Strauss. With the rise of the internet, and the thrive of the B2B intermediaries, this memo will discuss the Li & Fung's E-Commerce strategy and how to use internet to facilitate supply chain management.

Competitive advantages

Li & Fung's product mix includes hard and soft goods. Soft goods refer to apparel. Hard goods include fashion accessories, festive or holiday products, furnishings, giftware, handicrafts, home products, fireworks, sporting goods, toys and travel goods. Hard goods provide higher margins than soft goods because they require higher value added services. Hard goods items such as watches, shoes, suitcases, kitchenware, or teddy bears require an inspector for quality control evaluation for even the smallest batch order, thereby greatly increasing what Li & Fung could charge. Margins for soft goods are roughly 6% to 8%, while margins on hard goods ranged anywhere from 10% to 30%. Li & Fung attempts to expand its sales of hard goods.

The group has extensive global network of over 48 offices covering about 32 countries and territories around the world. The group's network extends outside Asia and into other markets like North America, Europe and South Africa. The group sources from around 10,000 internal supplies. Global network enables the group to source its goods from various locations and distribute it in different countries mitigating its exposure to any particular economy.

Its clients benefited in several ways: supply chain customization could shorten order fulfillment from three months to five weeks, and this fast turn around allowed clients to reduce inventory costs. Moreover, in its role as a middleman, Li & Fung reduces matching and credit risks, and also offers quality assurance to its customers. Furthermore, with a global sourcing network and economies of scale, Li & Fung could offer lower cost and more flexible sourcing than its competitors. In addition, through acquisitions and global expansion, Li & Fung extends this knowledge base to Africa, Eastern Europe, and the Caribbean. Finally, Li & Fung provides up-to-date fashion and market trend information to clients. As a result of its Camberley acquisition in 1999, it started offering clients virtual manufacturing, or product design services.

Li & Fung has shown strong financial performance in recent years. During 1998 - 2000, the group's revenue increased at 27% from HK$20.9 Billion in 1999 to 26.6Billion in 2000. In the same period, operating profit increased as 35%. Robust revenue growth will strength the financial position of the group, and high returns indicates good performance of the management that in turn will boost investor's confidence.

Value Creation

Li & Fung creates value by providing an array of supply chain management services. It takes on responsibility for sourcing, product design, shipment, warehousing, and letters of credit. As a trusted intermediary, it helps suppliers with marketing and buyers with procurement. A growing part of the company's value proposition comes from ensuring that customers "get the quality they desire at a price that they can afford". Li & Fung has invested huge resources over a long period of time to develop trust based relationship with nearly 6000 suppliers.

The group does not own any of the boxes in the supply chain. The creation of the value is based on a holistic conception of the value chain. Li & Fung had begun to improve operations by controlling or owning strategic links in the chain. In some cases, Li & Fung offered raw material sourcing. Li & Fung understands its client's needs better than its manufacturing plants did, so by offering raw materials to its suppliers, the company both ensures greater quality control and bought larger and thus more cost effective amounts of raw materials, thereby producing cost savings for each manufacturer. In such cases, Li & Fung also earns revenue by charging its factories a commission on each raw material purchased.

The Internet will not disintermediate Li & Fung

Several new internet ventures doing similar intermediate business with Li & Fung, such as Sparkice (www.sparkice.com) and ChinaTradeWorld (www.chinatradeworld.com), have relied almost exclusively on the internet as a means to link buyers and sellers. Perhaps the new competitor with the highest profile is Alibaba (www.alibaba.com). Jack Ma, the founder of Alibaba, views his Web site as an electronic alternative to the trade fair. Business people can meet prospective partners in nearly 30 different virtual meeting rooms-each one specializing in a particular type of product or service. Although the site provides some information services, such as credit checks and shipping quotations, it does not have any online transaction capabilities. Therefore, Alibaba is an online meeting space rather than a market space.

Although the online upstarts in the trade industry provide matchmaking services and, in some cases, online transaction capabilities, disintermediation by the internet does not appear to be a serious threat to the business of Li & Fung. It would be very difficult for a dot-com venture to replicate the customized and personal services that this traditional intermediary provides. Li & Fung has the old economy know-how and yet open to new economy ideas. The internet will facilitate supply chain management, Li & Fung is not going to be disintermediated.

The internet B2B exchanges do not constitute a tangible threat since they only offer a trading platform matching buyers and sellers. They could not add value in the same way that Li & Fung could through back-end logistics infrastructure, reliable procurement, market knowledge, and brand reputation, nor could they provide product differentiation.

Li & Fung's online plans fit with existing skills, capabilities and skill

As the foremost of the traditional B2B intermediaries, Li & Fung has used IT selectively to improve its business activities. Much of the focus has been on increasing the efficiency of its internal operations and managerial processes that span the small, customer-oriented units within the company. For example, an intranet was introduced in 1995 to link the company's facilities and offices across the world. This internal IT application has