Case Analysis: Li & Fung Trading Co.
Herbie Smedlap
Kennesaw State University
IS 8700
October 5, 2009
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Background
Li & Fung, one of the oldest trading companies, now operates as the largest operating Supply
Chain Management Company in Hong Kong. Founded in 1906, Li & Fung was originally
established in Guangzhou, China as an export trading company selling to overseas merchants. Li
& Fung began their export trading business by partnering with the U.S. to export porcelain and
silk. From the 1920’s to 1930’s Li & Fung expanded into manufacturing and warehousing. In
1973, due to the insistence of Fung’s son, Li & Fung transformed from a family business to a
publically traded company on the Hong Kong Stock Exchange. The goal was clear; transform the
company to a modern corporation. Family members who weren’t directly involved in the day to
day business were now able to extract value from their share holdings. Decision making was
voted upon by leadership versus established over dinner. The next step after becoming public
was to revolutionize the company from a trading company to a global supply chain management
company. Li & Fung is a worldwide company with over 13,000 employees in over 80 offices. Li
& Fung’s strategy has paid off in growth. In 2000 they were a $2 Billion global export trading
company and in 2005 Li & Fung posted revenues of $8.5 billion.
Business Strategy
Li & Fung uses the holistic supply chain management (SCM) strategy to benefit their clients by
shortening order fulfillment from months to weeks which allows clients to reduce the amount of
inventory they hold. In addition they remained as the middle man, which allowed them to reduce
matching and credit risks.
Business Model
Li & Fung’s supply chain management services offer 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. The
company determines which supplier manufactures which element at the lowest cost possible to
shorten order fulfillment and provide competitive prices to their customers.
Problem
Li & Fung need to expand their holistic supply change management strategy to an online venture
to avoid disintermediation.
SWOT Analysis
Strengths
(1) Conduct business in hard and soft market
(2) Integration with client base
(3) Decentralized corporate structure
(4) Managers followed entrepreneurial structure
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(5) Acquisition strategy
(6) No physical inventory
(7) Customer with private labeling
Weaknesses
(1) Lack of B2B knowledge
(2) Lack of B2B SME’s
(3) The unknown effect of an online portal
Opportunities
(1) Streamline supply chain management orders faster
(2) Online inspections
(3) Customer become part of the design process
(4) eSO- Electronic Stock offer-suppliers can post surplus inventory on the internet for sale
Threats
(1) When businesses started utilizing the internet, the challenge that Li & Fung faced was to
avoid being disintermediated. The internet had the possibility of placing customers
directly with manufacturers and bypassing middle man companies like Li & Fung.
(2) Internet companies hiring the key people of their competitors.
(3) Online companies acquiring old trading companies and teaming up with a dot-com
company to become an overnight competitor.
Porter’s 5 Competitive Forces Analysis
Li & Fung saw its future from a combination of organic growth, expansion and acquisition.
(1) Rival- Most rival companies were acquired, thereby gaining new client accounts,
integrating operations and bringing the operating margins up tie Li & Fung’s level.
(2) Threat of substitutes- Li & Fung remained competitive in this area by continuing in the
hard and soft market then expanding to selling raw materials to suppliers.
(3) Buyer Power(4) Supplier Power
(5) Barriers to Entry/Threat of Entry
Alternatives
With the ever increasing business over the internet, Li & Fung had a few choices. They could
continue with their current strategy and bypass getting into the online arena. The second
alternative is to completely have the supply chain management company function online which
will give more customers input into the design phase. An alternate solution was to target specific
markets with the online portal. The do-nothing approach doesn’t coincide with Li & Fung’s
current strategy of growth. Their three-year planning system ensured that they would continue to
take an introspective look at the company’s strategy. The benefit of adding a B2B portal would
ensure they’ve positioned the company to continue to be the largest SCM company in a
competitive market. The downfall may require reduction in staff as well as risking the
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decentralization of the corporate structure. The third alternative allows Li & Fung to focus on the
same market customer while giving allowing the targeted market customers to leverage some of
their business. But for the markets that don’t move to B2B, they may partner with Li & Fung’s
competitors.
Recommendations
Li & Fung should continue using their B2B, refining it to be a user- friendly interface. Since
75% of its customers are large retailers in the US, a portal from the retailer to Li & Fung should
be established so retailers can manage their internal inventory in real-time in conjunction with
the ordering process of Li & Fung. For example, if Kohl’s is selling a particular shirt which
appears to be very popular. Kohl’s would predetermine at what minimum to reorder. When the
inventory system confirms that the specific number has been met, there is an automatic order
placed with Li & Fung through their partnering portal.
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