Li & Fung – the Global Value Chain Configurator

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This case study explains both the philosophy behind supply-chain management and the specific practices that Li & Fung has developed to reduce costs and lead times, allowing its customers to buy "closer to the market." Li & Fung, Hong Kong's largest export trading company, has been an innovator in global supply-chain management. Li & Fung has also been a pioneer in "dispersed manufacturing." It performs the higher-value-added tasks such as design and quality control in Hong Kong, and outsources the lower-value-added tasks to the best possible locations around the world. The result is something new: a truly global product. To produce a garment, for example, the company might purchase yarn from Korea that will be woven and dyed in Taiwan, then shipped to Thailand for final assembly, where it will be matched with zippers from a Japanese company. For every order, the goal is to customize the value chain to meet the customer's specific needs. To be run effectively, the company maintains, trading companies have to be small and entrepreneurial. He describes the organizational approaches that keep the company that way despite its growing size and geographic scope: its organization around small, customer-focused units; its incentives and compensation structure; and its use of venture capital as a vehicle for business development. The Issues raised in the case study are:

•Understand how a regional trading company used its core advantage (its vast sourcing knowledge and network) to become a global value chain manager, providing global economies of scale and scope to its customers •Study the importance of efficient value chain management for a global company •Examine the role of IT and the Internet as major drivers of globalization •Study the importance of acquisitions and alliances in a company's globalization strategies •Understand how innovation, differentiation and customization can be used as strategic and competitive advantages by a company, to maintain its leadership in the domestic market, and emerge as a global player •Study the changes taking place in the retailing and trading industry with respect to customer requirements and examine the need for a customer-centric business model for an export trading company

a.According to John Mathews , A professor of management in Macquaire Graduate school of management, Sydney; and author of “Dragon Multinational: A new Model for Global Growth,” Li & Fung is one of the first truly global companies. How did Li & Fung use the value chain configuration in its globalization process?

Li & Fung’s major strategy was to become an intergraded global player in the Supply chain management. It focused on its value chain to achieve its objective. Li & Fung’s top management constantly examined the value chain to understand where the value lay and how it could be further increased. By the 1980s, Hong Kong had become a relatively expensive and uncompetitive manufacturing location, compared to other countries in south east Asia. For example, in the transistor radio business, Hong Kong faced intense competition from Taiwan and Korea. The situation prompted Li & Fung to improve efficiency and cut costs by reconfiguring its value chain. The company began to send kits containing components to China for the labour intensive assembly process. The assembled transistors were then brought back to Hong Kong for inspection and testing. Li & Fung replicated the strategy for Baby dolls. It did the design work and prepared the moulds in Hong Kong. The moulds were shipped to China, for plastic injection, painting and tailoring of the doll's clothing. The dolls came back to Hong Kong for inspection, testing and packing. Hong Kong's well-developed banking system facilitated efficient LC negotiation while its status as a regional shipping centre helped in the distribution of products around the world. By the late 1990s, Li & Fung's value chain configuration across countries had become even more...
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