Industry Analysis and Competitive Strategy

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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...
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