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SCM and Network OrchestrationThe Li & Fung Experience
Chang Ka Mun
Managing Director
Li & Fung Development (China) Limited
Li & Fung Research Centre
9 November 2010
APEC e-Trade and Supply Chain Management Training Course
Li & Fung Group
• Founded in Canton (now Guangzhou) in 1906
• Global multinational headquartered in Hong Kong
• World’s leading supply chain manager in the consumer goods market
• 2009 Total Revenue: US$16 billion
• Staff Population: 35,000
• Geographic Spread: Across 40 economies worldwide
Li & Fung Group
• Ranked number 888 in Forbes’ “The World’s 2,000 Largest Public Companies” in April 2009
• One of Hong Kong’s top 10 companies in the Wall Street Journal Asia’s “Asia’s 200 Most-Admired companies” in September 2009 and one of the top 40 companies in BusinessWeek’s “The World’s Best Companies” in October 2009
• Financial Times’ “FT Global 500” in September 2009 and Forbes Asia’s “Fabulous 50” from 2007 to 2009
• Dr. Victor Fung & Dr. William Fung have been inaugurated to the World Retail Hall of Fame by World Retail Congress in 2009
Our Chairman & Group Managing Director
Victor K. FungGroup Chairman
William K. FungGroup Managing Director
Group Structure
EXPORT SOURCINGThe Group’s export trading arm is
Li & Fung Limited – one of the
largest global supply chain
management companies that
manages the supply chain of high-
volume, time-sensitive consumer
goods through its office network in
more than 40 economics
Listed on HKSE
RETAILINGThe Group’s retailing businesses include
the publicly listed Convenience Retail Asia
Ltd, the Trinity Group and privately held
Toys “R” Us, with store networks extending
from the China markets to Singapore,
Malaysia, Thailand, Indonesia, south Korea
and the Philippines
Listed on HKSE
DISTRIBUTIONThe Group’s distribution
businesses are housed under the
integrated Distribution Services
Group which provides its
customers with a menu of
integrated Distribution Services in
three core businesses across Asia:
Manufacturing, Logistics and
Distribution
Listed on HKSEPrivately Held
entity
Li & Fung (1937) Ltd.Li & Fung (1937) Ltd.A privately held entity and controllingA privately held entity and controllingshareholder of the Li & Fung Groupshareholder of the Li & Fung Group
Li & Fung Trading
Li & Fung Trading
• 100 years of trading history since 1906
• Export trading arm handles the supply chain of high volume, time-sensitive consumer goods through its worldwide office network
• Around 14,000 staff
• Orchestrates nearly 15,000 international suppliers in over 40 economies to service approximately 2,000 customers
• Member of Hang Seng Index, MSCI Index and FTSE4Good Index
• 2009 Revenue: US$13.4 billion
Li & Fung Trading
• Li & Fung specializes in orchestrating a highly-customized path through the supply chain in order to deliver high-quality, low-cost products to its customers reliably and quickly.
Suppliers Manufacturers Distribution
Global Network
Over 80 offices in over 40 economies with about 14,000 employees and a sourcing network of nearly 15,000 international suppliers
The Americas : 8Guatemala CityManaguaSanto Domingo
Marketing OfficesGaffney Mexico CityNew York CitySan FranciscoSan Pedro Sula
Europe & The Mediterranean : 29Bucharest Cairo CasablancaDenizli Istanbul IzmirKahramanmaras Keighley LuccaMilan Moscow Oporto Sofia St.Albans Trowbridge Vilnius
Marketing OfficesAmersfoort Amsterdam Barcelona Bremerhaven Druillat DusseldorfHamburg Huddersfield LondonParis St.Gallen Vienna Warsaw
East Asia : 24Beihai Beijing ChangshaChengdu Dalian Dongguan Guangzhou Hangzhou Hong KongLiuyang Longhua MacauNanjing Ningbo PanyuQingdao Seoul ShanghaiShantou Shenzhen TaipeiXiamen Zhanjiang
Marketing OfficesTokyo
South Asia : 12Amman BangaloreChennai ColomboDelhi DhakaFaisalabad KarachiLahore MumbaiSharjah Tirupur
South Africa : 3AntananarivoDurbanMoka
Southeast Asia : 9BangkokHanoiHo Chi Minh CityJakartaJohorMakatiPhnom PenhSaipanSingapore
Global and Diversified Customer Base
Approximately 2,000 customers in major developed markets
North America Customers European Customers
Others
Li & Fung Retailing
Li & Fung Retailing
• Focused on convenience retailing, toy retailing, international designer brands and lifestyle brands
• Around 13,000 staff
• 2009 Revenue: US$0.8 billion
• Over 1,000 retailing outlets in Greater China, SE Asia and South Korea
Li & Fung Retailing
Li & Fung Retailing
114 Stores
493 Stores
398 Stores
Li & Fung Retailing Outlets
(as of 31 Dec 2009)
Total : Over 1,000 outlets
Li & Fung Retailing
South Korea
28 Stores
Taiwan
60 Stores
The Philippines
36 Stores
Mainland China
379 Stores
Hong Kong and Macau
457 Stores
Thailand
14 Stores
Malaysia
21 StoresSingapore
10 Stores
Li & Fung Retailing Outlets
(as of 31 Dec 2009)
Total : Over 1,000 outlets
• Established in 1986 as a joint-venture with Toys “R” Us, USA
• In May 2002, Li & Fung Retailing acquired 100% ownership as a licensee of Toys “R” Us International
• Operates over 114 outlets across the region in Mainland China, in Hong Kong, Macau, Taiwan, Singapore, Malaysia, Thailand and the Philippines
• Established the Circle K Convenience Store chain in Hong Kong in 1985
• Listed on the Hong Kong Stock Exchange in January 2001
• Over 392 company owned and managed stores in Hong Kong, Macau, Guangzhou, Zhuhai and Shenzhen
• The Saint Honore Cake shop in Hong Kong was established in 1973
• Acquired by Convenience Retail Asia, the holding company of Circle K in February 2007
• 101 company owned and managed stores
• Established in Hong Kong in 1971 as an apparel export manufacturer
• On 29 April 2006, Li & Fung (1937) Limited, with funds managed by LF Asia Investments Limited, acquired 100% of the Trinity Group of companies from the owner operators
• Currently one of the largest high-end menswear retailers in the Greater China region
• A fully integrated business model with in-house capabilities for product design, buying, sourcing, assembly and finishing plus a wholly controlled retail network
• Operates a portfolio of 7 menswear brands through over 390 mono-brand outlets in major high-end malls and department stores
• Successfully listed on the main board of the Hong Kong Stock Exchange in November 2009
Trinity Group
Trinity has full control over the value chain, from design and sourcing, to sales and marketing allowing it to swiftly respond to changes in customer needs whilst maintaining the highest standards of quality
In-House Design
Fabric Sourcing
Outsourced ManufacturingCritical Assembly /
Finishing
Marketing and Pricing
Self-Managed Retail network
Strong Customer Service
6
54
3
2
17
Trinity Group
Trinity PortfolioTrinity Group
Li & Fung Retailing
Chinese Mainland 278
Cerruti 1881/ Blue 69
Kent & Curwen 78
Durban 47
Gieves & Hawkes 64
Intermezzo 15
Altea 5 Hong Kong and Macau 38
Kent & Curwen 13
Intermezzo 2
Durban 7
Cerruti 1881 8
Gieves & Hawkes 6
Altea 2
Taiwan 44
Durban 12
Cerruti 1881 12
Gieves & Hawkes 10
Kent & Curwen 10
Malaysia 3
Ferragamo 3
Thailand 3
Ferragamo 3
South Korea 28
Ferragamo 28
Singapore 4
Ferragamo 4
398 Stores
Trinity Group
IDS
IDS stands for ....
Integrated
Distribution
Services
• Provides a menu of Integrated-Distribution Services in three core businesses across Asia: Marketing, Logistics and Manufacturing
• 2009 Revenue: US$1.8 billion
• Around 8,000 staff
Marketing
• Provide comprehensive distribution services specializing in Consumer and Healthcare products• National coverage of over 150 cities• Distribution coverage reached 15,000 retail points (Abbott’s distribution is over 11,000)• Operating in 6 regions supported by 18 branch offices and over 500 staff across China
Logistics
• Logistics services managed by IDS Logistics (23 facilities, 1100 staff, 1.6M ft² of warehouse space in China)
• Investment on technology to support operation & provide information visibility
4,000 staff 100 DCs & depots cover
ing over 10m sq ft with deep & extensive logistics network in ASEAN, Greater China, USA & UK
Transportation Management Services
2,500 staff Asian-wide distribution
network for FMCG and Healthcare products covering modern trade and traditional trade, hospitals & clinics
Asian wholesaling of apparel & accessories
1,200 staff, 4 centers of excellence
Home & personal care, health & beauty, food & beverage, and pharmaceuticals with growing export volume
Diverse production lines with full GMP & ISO compliance – TetraPak, Hot PET, aerosol, jars, tubes, sachets etc
Distribution LogisticsManufacturing
US
UK
Regional and global SCM services with hubbing and end-to-end logistics capabilities
Freight Forwarding services to facilitate International Trade
Offices in HK, SG, US & UK
International
Our Business Network
Philippines
China
Hong Kong
Singapore
Taiwan
Brunei
Indonesia
Thailand
Malaysia
CambodiaBangladesh
Pakistan
400 local, regional and global brands partner with IDS, throughout Asia and across our core businesses
Our Business Partners
I. Basic concepts
1. Supply Chain Management
A supply chain encompasses all activities from obtaining the raw materials, through production, wholesale, retail, warehousing and transportation, to the delivery of the final goods or services to the end-customers.
“Four Flows”
(1) Work flow (2) Physical flow (3) Information flow (4) Funds flow
Supply Chain
Supply chain optimization
Deliver the right product at the lowest price, in the shortest time, and in the right place to the end user
Advantage： Overall cost reduction with maximum efficiency
Supply Chain Management (SCM)
Orchestrator of the Supply Chain
Li & Fung (Trading)
Supply Chain Management Supply Chain Financing Supply Chain
Consumer Needs
Product Design
Product Development
Optimize the Supply Chain
Factory & Raw Material Sourcing
Manufacturing Control
Forwarder Consolidation
Customs Clearance
Local Forwarding Consolidation
Distribution Services
Inventory Management
Factories
Importers, Wholesalers
Shipping / Airlines
Raw Material MillsFinancing
Financing
Financing
Retailers
Consumers
Globalization effect: Competition is no longer between companies but between companies’ supply chains
Definition of SCM is yet being compromised
5 fundamental principles are identified
Principles of SCM
(1) Be customer-centric and respond accordingly to the market demand
5 Principles of SCM
Supplier-centric/ the “Push” model
ManufacturersDistribution/ retail
ConsumersDemand Demand
Quick response, zero-inventory
Customer-centric/ the “Pull” model
Manufacturers Distribution/ retail
ConsumersSell Sell
InventoryInventory
(2) Focus on one’s core competency and outsource non-core activities, and develop a positioning in the supply chain
5 Principles of SCM
Can consider outsourcing
M & ADevelop with
outside consultant
Low High
The enterprise’s capability
High
Low
The uniqueness of the capability
Outsourcing
Self-established
(3) In contrast to the traditional adversial relationship, modern SCM emphases a close, risk- and profit-sharing relationship with business partners
A collaborative environment that is flexible and adaptable to the changing customer needs
Working with critical entities along the supply chain as a team to eliminate non value-added processes, and leveraging the capabilities of each team member to maximize value.
Avoid wasting time in matching the right partners, improve product quality, shorten production lead-time and lower costs.
5 Principles of SCM
5 Principles of SCM
(4) Adopt IT to optimize the operation of the supply chain
Facilitating information sharing, reducing lead times, increasing accuracy in planning and enabling business partners to engage in instantaneous worldwide communication, analysis of complex decision rules, and real-time visibility in most business processes.
“Business drives IT” not “IT drives business”
(5) Design, implement, evaluate and adjust the work flow, physical flow, information flow and fund flow in the supply chain
Shorten product lead time and delivery cycles
Lower costs in sourcing, warehousing and transportation
5 Principles of SCM
2. Network orchestration and supply chains
Networks and supply chains
Three roles of Network Orchestration
(1) Design and manage networks
The best supply chain is drawn from a robust universe of suppliers
The orchestrator creates, develops, and expands the network, and then draw supply chain from it
Three roles of Network Orchestration
(2) Control through empowerment
In contrast to rigid control system, a combination of empowerment, training and certification is adopted to manage a network
Actors along the supply chains can act entrepreneurially
Three roles of Network Orchestration
(3) Create value through integration
Identify new opportunities by leveraging the competence of actors across the network
3. Process orchestration —Dispersed and virtual manufacturing
Process orchestration
It is more than sourcing products or components It involves:
(1) Breaking up the processes/ stages of the supply chain
(2) Farming them out to different companies in different locations
(3) Managing these dispersed processes It requires designing the entire supply chain, drawing players
from the networks, optimizing and managing the whole process
Dispersed Manufacturing /Borderless Manufacturing
AssemblyChinese Mainland
ShellKorea
LiningTaiwan
FillerChinese Mainland
ZipperJapan
Label, elastic,studs, toggle
and stringHong Kong
Made BY Hong Kong
Performing ‘production slicing’ to identify the best location/ country to undertake each stage of process, adding value along the way & integrating the entire supply chain
DesignUSA
Virtual Manufacturing
Benefits from owning 12,000+ “smokeless factories” without investing huge sums of money to acquire the production and associated logistics facilities
Leverages the assets of our partners and mobilizes them to reach our growth initiatives, instead of owning them
Reduces the risks associated with the burden of asset ownership
Enjoys high degree of flexibility More responsive to potential market shifts and technological
changes
4. The 10 flatteners –
Competing in a flat world
The 10 flatteners
End of the Cold War Computer technology development – personal computer a
nd internet Available resources on the Net
– Free tools and workflow software– Search for free information
Changing ways of production– Offshoring– Outsourcing– Insourcing – Supply Chain
II. Competing in a flat world—The Li & Fung Story
1. Take a holistic view of the supply chain
Compete network against network Don’t optimize just one section of the supply chain Cases:
– Overtime payment and airfreight are expensive, but they can boost efficiency and thus avoid a huge markdown cost
– Improve forecasts by delaying ordering and sourcing decision to avoid markdown
– Baby Talk Doll– accessing best in class capabilities– 9/11 and SARS– building resilience– 2 million Christmas trees– boosting speed
2. Orchestrate & discover value along the supply chain
$1 $4
Product Design
Sourcing Logistics WholesaleRetail
Information Management
The cost that is spread throughout the distribution channels – the “Soft $3”
2. Orchestrate & discover value along the supply chain
Consumer Needs
ProductDesign
Product Development
Raw MaterialSourcing
FactorySourcing
ManufacturingControlShipping
Consolidation
ForwarderConsolidation
CustomsClearance
Local ForwardingConsolidation
Wholesaler
Consumer
Li & Fung’s Supply Chain
The Evolution of SCM
2. Orchestrate & discover value along the supply chain
Capture the “Soft $3” by looking beyond the factory For example:
– Boosting efficiency: containers and flawless execution– Improving coordination: minimizing markdowns– Onshore business of the Trading Group– Selling to the source: synergy of companies within the
Li & Fung Group
3. Redesigning the whole chain for optimization
Process mapping to enhance efficiency Formation of middle office Cases: IDS
Postponement Strategy For Diageo
• Final market specific labeling & packaging on bespoke, high-speed, semi-automated production lines
• Throughput of 3.5 million cases in Year 1 increasing to 6 million in Year 2 initially servicing 11 countries in Asia
• Lead time to market cut from 10 weeks to 2 weeks
• Regional markets can now also arrange for special promotions/packing for other than main line brands
• Increase market sales with reduction in overall stock position
Improve Diageo’s Asia-Pacific supply chain through a “Postponement” strategy at IDS bonded ASRS facility
Regional Hubbing & SCM For Timberland
Reduced Inventory by over 30% and warehousing costs by over 20%
Shortened order leadtime and improved responsiveness & fulfillment
More efficient supply chain, leading to improved profitability
Visibility of inventory and orders tracking leading to better control and decision making
Taiwan
Hong Kong
Japan
Singapore
Indonesia
Thailand
India
Europe / USA
Asia Asia Pacific Hub Pacific Hub
- HK- HK
China
Malaysia
Australia / NZ
Korea
Orders
China Offshore DC For Pacific Brands
Moving distribution centre operations to China reduce inventory holding, and warehousing & transportation costs
Pick and pack operations in China, cross-dock in Australia for direct delivery to retailers
Estimated pilot program cost savings from warehousing, transportation and inventory reduction estimated US$1.5M p.a.
Increased sales due to more efficient and responsive supply chain
Offshore DC
Domestic cross-dock depot
4. Organization & management – control & empowerment
(1) Take responsibility for the whole chain
(whether you own it or not)
Addressing the root cause: control without ownership Creating a code of conduct Monitoring rigorously Anticipating Ensuring accountability Creating the context
4. Organization & management – control & empowerment
(2) Building the company around the customer
Customers evoking supply chains– Build network around the potential needs of future customer
s– Evoke a specific supply chain from this network based on th
e needs of specific customers Cosourcing with customers Understanding and anticipating customers
– Increasing customization– Engaging in Co-Development
The need for thick connections – a combination of human relationships, business processes, and technology
4. Organization & management – control & empowerment
(3) Think like a big company, act like a small one
Nimble Organization Design
a. Customer-Centric Divisions
Designed around customers
Creates a customized value chain for each of the customer’s orders
Encourages Entrepreneurship – Little John Wayne
Optimizes the supply chain by better fulfilling customers’ needs, maximizing performance & maintaining high quality level
b. Operation Support Group (OSG)
Centralizes and maintains tight control over the financial control & operating procedures
Set up an OSG to serve as the back-office hub administering 3 functions: IT, finance & human resources
Marries the strengths of being both small and big at the same time: being flexible and responsive, and having rich & powerful resources
4. Organization & management – control & empowerment
(4) Manage a loosely coupled network A network of 12,000+ active suppliers
80 offices in 40 countriesEurope/Mediterranean
(12 Locations)
Africa(3 Locations)
South Asia(10 Locations)
East Asia(24 Locations)
Southeast Asia(9 Locations)
Americas(5 Locations)
4. Organization & management – control & empowerment
(4) Manage a loosely coupled network
Follow the 30/70 rule to create loose-tight organizations
Becomes the orchestrator of the entire production process
Share responsibilities with suppliers
4. Organization & management – control & empowerment
5. Asset light model
One of the best embodiments: – Virtual Manufacturing
Maintains minimal financial leverage. Almost no debt on the balance sheet
Minimum fixed assets: Sales and lease back office buildings and warehouses
Li & Fung continues to deliver a return on equity of more than 20%
Employee productivity: close to US$1 million in sales per employee
6. Business drives IT
1995 – Intranet
1997 – Extranet
Li & Fung has established sophisticated & Internet-based systems to link up all its business partners, including customers, producers, distributors, logistics service providers, etc.
Lead time is reduced from 3 months to 5 weeks
7. Three-year plan
Trade off between “salability” and “responsiveness” 3 years – stable and can be measured After 3 years – zero-based The power of stretch A new organization every three years
8. Use of acquisitions
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 after acquisition and best practices of acquisitions are absorbed to improve the overall business
Acquire new talents and new capabilities – product range, technology, customers
“100-Days Acquisition” 50+ acquisitions since 1992 with 100% successful rate of
integration
9. Corporate Social Responsibility
Interest of the stakeholders Vendor compliance Corporate governance Sustainability
Thank you!
