Wednesday, May 20, 2009

Lessons in global sourcing skills from Li & Fung

There is still a lot of business to do out there in spite of the global economic challenges.

I have long admired the Hong Kong manufacturing sourcing giant, Li & Fung, for their ability to intermediate the needs of strong Western brands and, match the needs of the brands with the manufacturing prowess of China.

Li & Fung has suffered from the credit defaults of clients like Mervyns and KB Toys. There are suits from unpaid manufacturers. This is, to be sure, one of the hazards of intermediation.

But, this is a process that requires great skill and, loads of information. Information on the needs of the major brands. Information on the capabilities and quality of the manufacturers. Just look at this description of the leaders of Li & Fung in Businessweek:

Managing Director Fung, 60, is a Princeton graduate who controls the company along with his MIT-educated brother Victor, 63. Fung's strategy: Buy the entire sourcing operations of U.S. customers and restructure them to make them more profitable. Last year, Li & Fung made seven acquisitions that are likely to add $1 billion in revenue in 2009. On May 5 the company announced plans to raise $348 million in new shares, with the money going in part to fund further acquisitions. "They're the Cadillac of the business," says retail consultant Howard Davidowitz. "They offer retailers more value because of their efficiency."

And, notwithstanding the challenging economic times Li & Fung are still being courted by strong brands like Liz Clairborne to take over sourcing operations.

Their aspirations are indicative of the strength of their management leadership. Reports Businessweek:

The company doubled revenue to $11.9 billion between 2004 and 2007 and wants to reach $20 billion in sales next year.

Now that is very encouraging.


walla said...

I remember reading some fifteen years ago at the bookshop in an airport terminal on something called a holonic enterprise, or, a virtual switching network that creates a whole bigger than the sum of its parts.

This switching functionality mirrors the network orchestration that is the core competence of Li & Fung which delivers benefits of borderless demand-supply best-fits, just-in-time supply and mass customization of orders but in a more structured fashion than molecular e-bay's and directory e-marketplaces.

We have many SMEs, services as much products, which can come together to tap such business orchestrations. One of the less apparent benefits is that global best practices can be pumped into the network in a faster, more structured, and wider manner.

This is important in flat worlds where, depending on how the sourcing is matched and the deal constructed, competitors can be leveled so that time becomes the only major determinant of money.

I find these for all of you:

flyer168 said...

De minimis,

A very interesting article at these troubling times.

When the going gets tough, the tough gets going....

By Thinking out of the Box....

There are always "Opportunities" with every "Challenge" with Li & Fung still moving "Ahead".

16-Apr-09 1:00 AM AWST

Li & Fung, Posting 21% Net Drop, Sees No Growth for Retailers
Li & Fung Ltd., the biggest supplier of clothes and toys to Wal-Mart Stores Inc. and Target Corp., said customers will have no growth in 2009, as the Hong Kong company posted its first profit decline in seven years.

“We expect existing customers to have no growth,” Managing Director William Fung said after the company said 2008 net income fell 21 percent to HK$2.42 billion ($312 million), missing analyst estimates. “We are budgeting very conservatively.”

Li & Fung’s growth this year will be driven by acquisitions and outsourcing deals as clients report business is down as much as 20 percent, he said. The Hong Kong-based company has said sales may be boosted $1 billion by the purchase of Liz Claiborne Inc.’s sourcing business, whose brands include Kate Spade and Juicy Couture.

“With the U.S. economy getting worse, top-line growth will be worse this year,” Fiona Wong, Hong Kong-based analyst at Sun Hung Kai Securities Ltd, said by phone today. It may be “overly optimistic to say its customers will have no growth,” she added.

Li & Fung, the best performer on Hong Kong’s benchmark Hang Seng Index, is looking at “many” acquisitions this year, said Fung. “We haven’t seen so many opportunities before.”

“Acquisitions are among the brightest sides of the cloud’s silver lining,” said Fung, who’s battling consumer confidence near a 28-year-low in the U.S. “The deterioration of the economic situation gives us more outsourcing opportunities.”

Tommy Hilfiger

The company announced purchases worth more than $1.1 billion in the past two years. It has bought New York-based handbag importer Van Zeeland Inc. and Tommy Hilfiger Corp.’s Asia-based sourcing arm to expand its business in the U.S., where it made 62 percent of last year’s HK$110.7 billion sales.

Last year, Li & Fung signed outsourcing deals with companies including Toys ‘R’ Us Delaware Inc. and Japan’s Sanrio Co., owner of the Hello Kitty cartoon character.

“Although the U.S. economy isn’t good and the company’s performance is being affected by the slowing U.S. consumer demand, this will be offset by acquisitions,” said Kenny Tang, executive director of Redford Securities Co. in Hong Kong.

Li & Fung’s net income for the six months ended December fell 41.3 percent to HK$1.18 billion. The number was derived by subtracting first-half profit from 2008 earnings released today.

It’s the first time since 2001 that the company’s profit has declined, on both an annual and semi-annual basis. Li & Fung’s 2008 full-year net income was lower than the HK$3.1 billion average estimate of nine analysts surveyed by Bloomberg.

Restructuring Costs

Earnings were hurt by restructuring costs, said the company, which is trying to lower costs by moving employees from the U.S. to Asia. “Restructuring costs and new expenses from taking over sourcing businesses, resulted in HK$639 million in operating costs,” Fung said, without providing a year-ago figure.

BGY said...

great article