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CASE STUDY ( Li & Fung

)
Company Perspectives:
Global Supply Chain Management is our business. Working in partnership with our customers,
we cater for their needs of competitive pricing, quality, on-time delivery, as well as ethical
sourcing. We manage the logistics of producing and exporting goods across many producers and
countries.
A one-stop-shop service--Small, dedicated teams of product specialists focus on the needs of
particular customers and organize for them. We provide the convenience of a one-stop shop from
product development, through production management, to customs clearance and delivery when
required.

Key Dates:
1906: Fung Pak-liu and Li To-ming begin exporting jade and porcelain in Guangzhou, China.
1937: Li & Fung Limited is formally established in Hong Kong.
1949: When China turns Communist, Pak-liu's son Fung Hon-chu reinvents the company to
export goods manufactured in Hong Kong.
1973: Hon-chu's sons William and Victor persuade him to list Li & Fung on the Hong Kong
Stock Exchange; the Fung brothers institute a more modern management style.
1979: China opens up for trade, and Li & Fung develops a trading network throughout East Asia.

1989: The Fung brothers buy out family shares and take Li & Fung private in a management
buyout.
1992: After being reorganized to focus on trade, the export division of Li & Fung is relisted.
1995: Li & Fung acquires the British trading company Inchcape Buying Services.
2001: The "dispersed manufacturing" approach has helped Li & Fung double profits twice over
the previous six years.

Company History:

During the course of its nearly 100-year history, Hong Kong-based Li & Fung Limited has
grown from a simple exporter to an expert in "global supply chain management." The company
coordinates product design, raw material and factory sourcing, production management, and
quality assurance for clients that have included The Limited, The Gap, Coca-Cola, and Kohl's
Corporation. Li & Fung deals primarily with garments but is increasing its focus on promotional
items, toys, sporting goods, and housewares.

When one of its clients needs a product, Li & Fung does much more than just find the lowest-
price source. The company breaks apart the manufacturing process to find the best supplier for
each stage of production. For example, if a client orders a polo shirt, Li & Fung might buy
American cotton, have it knitted and dyed in China, and send it to Bangladesh for sewing. The
company's 65 sourcing offices in 38 countries give it the global connections it needs to pull off
this "borderless" manufacturing process.

Fung Hon-chu reinvented Li & Fung as an exporter of the labor-intensive consumer goods that began being produced in Hong Kong during the postwar period.D. The new product produced less dust and. the third generation of the Fung family to deal in exports. 1937. More recently. toys. and fireworks. who had been a silent partner. and eventual reopening of China for trade. Basic Exporting: Early 20th Century Through World War II In 1906 Fung Pak-liu and Li To-ming founded an exporting company in the southern Chinese city of Guangzhou. Li & Fung has survived World War II. China's move to Communism.S. The company is now led by Victor and William Fung. the company has adapted to the transition from a manufacturing to a service-based economy in Hong Kong and the emergence of the Internet. saved tariff costs since the U. using a paper rather than a mud seal. Li & Fung grew with it. Li & Fung's flexibility and its expertise in East Asian and global manufacturing have allowed it to move beyond the role of a simple trading intermediary and develop a range of services that are still in demand in the 21st century.B." their friends in the United States warned them. On December 28. Li & Fung was formally established as a limited company in Hong Kong. the two were hesitant to go back to a traditional family-owned enterprise. Having been exposed to Western business practices. The company was the first Chinese-owned exporter in a field controlled by foreign merchants. then got a Ph. import duty was based on weight. Its primary customers were retailers in the United States. Fung Pak-liu was able to act as an intermediary between Chinese-speaking factories and English-speaking buyers.Founded in 1906 as an exporter in Guangzhou. He received a 15 percent commission for his interpreting services. China became a Communist country and a flood of refugees came to Hong Kong. Because the river port in Guangzhou was too shallow for oceangoing clippers. The company dealt in garments.A. sold his shares to the Fung family in 1946. In the first few years. Li To-ming. The older son Victor attended the Massachusetts Institute of Technology. China. ivory. The Third Generation: Modernization in the 1970s Fung Hon-chu's sons Victor and William attended universities in the United States. Li & Fung was now cut off from its factory sources in China and needed to find a new way of doing business. Li & Fung dealt primarily in porcelain and silk. As Hong Kong's manufacturing economy grew. the British colony of Hong Kong served as the deep water port for South China. but in 1972 their mother called and pleaded with them to come home and help their father so he would not have to work so hard. electronics. in applied mathematics from Harvard. After the war. So Fung Pak-liu's son Fung Hon- chu went to Hong Kong and established a branch to handle the shipping of goods. at Harvard Business School. because it was lighter. The design became the industry standard. As a former teacher of English. World War II put a halt to trading for several years. The two might have pursued careers in the United States. The company came up with a new way to make fireworks in 1907. plastic flowers. and later moved into bamboo and rattan ware. jade. and wigs. But their father suggested that . while his younger brother William studied computer science at Princeton and got his M. "Trading is a sunset industry. handicrafts. Fung Pak-liu died in 1943 and control of the firm moved to the second generation.

The company's trade margins were squeezed throughout the 1980s. In 1973 Li & Fung was listed on the Hong Kong Stock Exchange in an issue that was oversubscribed 113 times. the company would have trouble surviving. For example. regional familiarity was a basic service without much potential to lift Li & Fung's profit margins out of the single digits." William Fung told the Far Eastern Economic Review in 1992. As more and more East Asian countries industrialized. Li & Fung was also well-practiced at negotiating the system of quotas that governed world textile trade and knew how to move orders between countries as quotas filled up. Li & Fung was offering a broader range of services. Now that the roles of ownership and management were separated. The brothers established offices in Taiwan. Li & Fung developed a buying network throughout the region. By the 1970s. though. the company knew that Taiwan did better work with synthetic fabrics but Hong Kong was the best choice for cottons. William returned in 1972 and Victor in 1974. or even 3. By the late 1980s. If Li & Fung had nothing to offer beyond the ability to connect buyers with factories in Hong Kong. Many Hong Kong manufacturers relocated to China. With expanded knowledge and resources. Once a company had an idea of the product it needed. buyers were more inclined to bypass the middleman and deal directly with the manufacturer. competitive pressure was pushing Li & Fung's profit margins down to 5. "It was the only way to get a lot of disgruntled relatives off our backs and attract professionals into management. Taiwan and Singapore had cheaper labor and were developing enough manufacturing capacity to vie with Hong Kong.they come back and show him how to run the business better. they were hanging on to management positions in order to retain shareholder benefits. So William and Victor's first initiative was to convince their father to take the firm public. it was easier to make changes at the firm. but they encountered a difficult environment for making drastic changes. Li & Fung acquired broader regional expertise and a more substantial base of manufacturing contacts. and China once again became a key sourcing point for Li & Fung as it had been in the first decades of the company's existence. By expanding geographically. Li & Fung was still run like a traditional patriarchal Chinese family conglomerate on the idea that the purpose of the company was to serve as the family's livelihood. The answer was to become more involved in the entire production planning process. the company could expertly source large orders by putting together a package from the entire region. it would send design sketches to Li & Fung. Li & Fung would find the . Meanwhile. The Fung brothers of the third generation brought a new perspective on the company's future. More than 30 cousins had stakes in the company and. percent. Hong Kong as a whole was moving from a manufacturing to a predominantly service economy. The traditional way of operating was that a customer requested a specific product and Li & Fung found the best supplier. and thus was able to offer its clients a more valuable service. exposing the need for a more sophisticated business strategy. From Middleman to Manager in the 1980s Still. and Li & Fung's best prospect was to find a way to make that transition itself. even if they were not particularly skilled at business. and Singapore in order to diversify their manufacturing sources. Korea. In 1979 China opened up for trade as well.

when net revenue grew 56 percent to HK$2. He organized the company into two divisions: export trading and retail. In addition. set up contacts for each step of the supply process and develop a production schedule that covered the entire fashion season. It acquired 50 percent shares in Circle K convenience stores and Toys 'R' Us chains in Hong Kong. Li & Fung relisted its export trading division in 1992. William and Victor formed a holding company. and privatized Li & Fung in a management buyout in 1989. As a private company. Thailand. an entire division at Li & Fung would devote itself to the product line and sourcing needs of one company. There were disagreements with the older generation. In 1981 Victor Fung succeeded his father as managing director. Victor Fung . The company issued 25 percent of its equity. he organized services by customer. Li & Fung's services evolved further toward truly borderless supply chain management. the investment company's purpose was to identify companies that had good design ideas but could benefit from Li & Fung's experience in sourcing materials. and real estate enterprises. Retail clothing stores in the United States continued to be its major customers. By the beginning of the 1990s. remained a wholly owned subsidiary of the Li & Fung Group. Li & Fung established a venture capital enterprise in the United States in 1984. with the profitable Toys 'R' Us and Circle K branch stores. LF International made modest investments in about four to five enterprises a year. while the retail division. Inc. and China. Li & Fung was gradually making the transition from middleman to program manager.9 million. in part out of chagrin for not having taken advantage of an early chance to invest in its successful client The Gap. Li & Fung was well established with 900 suppliers in the East Asia region in countries that included Indonesia. William Fung took over as managing director and Victor continued to guide the company as a nonexecutive chairman. The company began a period of exceptionally rapid growth in 1991. create prototypes for the customer. William Fung saw the need for more changes at the firm but was hampered by the fact that 75 percent of Li & Fung was still held by a family trust. Taiwan. over whether Li & Fung should trust Communist China. The company also branched out into the area of retail in the mid-1980s. selling off unrelated shipping.right type of yarn and fabrics. Borderless Manufacturing in the 1990s After the public listing. For large clients like The Limited or Gymboree. To resolve the impasse. who remembered the difficult postwar transition. Each division was free to cross borders to find the best way to serve its client. Instead of assigning responsibilities by country. South Korea. but in 1986 he left the executive position to set up an investment bank. Singapore. insurance. William Fung refocused the company on its core trading business. Li & Fung had the flexibility to make drastic structural changes. acquired the outstanding family shares. The now public trading division became known simply as Li & Fung Limited. Known as LF International. the Fung brothers' changes were bearing fruit. raising HK$275 million.8 billion and net profit reached HK$86. In a 1998 interview with the Harvard Business Journal. In order to acquire funds for further expansion.

Net profit in 1993 reached HK$185 million on revenues of HK$5. We're not asking which country can do the best job overall. In the following years Li & Fung continued to diversify geographically. despite some instability caused by the Asian financial crisis. Now that growth had taken off. depending on each country's particular industrial strengths. compared with HK$242 million and HK$9. and European customer base. Pakistan. Eventually the whole East Asian region was pulled into the manufacturing process. kept their business relevant in the digital age. In areas with less developed telecommunications. Li & Fung became expert at finding the best solution for each step in the manufacturing process.21 billion in 1995.. The acquisition of Inchcape. and Morocco. Net profit reached HK$470 million on revenues of HK$14." This global array of services supported rapid growth and acquisitions at Li & Fung throughout the 1990s. and faxes were still necessary to ensure that manufacturers delivered the product on time.S. With the rise of the Internet in the late 1990s came predictions of a "frictionless economy" where companies would bypass middlemen like Li & Fung and buy all their parts online. we're pulling apart the value chain and optimizing each step--and we're doing it globally. respectively.explained how Li & Fung reached the stage of "dispersed manufacturing. with its European customer base and sourcing points across the Indian subcontinent. William Fung began using three-year plans to set ambitious growth targets. the company achieved its goal of doubling profits from the 1995 level. the Caribbean. sewn at five different factories in Thailand. packaging. In 1998. Inchcape was a British trading company with a network of offices in India. Instead. Li & Fung. Li & Fung's decades- long personal relationships with suppliers. Then the firm nearly tripled its size with the HK$475 million acquisition of Inchcape Buying Services (also known as Dodwell) in 1995. he said. and other technically advanced manufacturing techniques were still done in Hong Kong. Bangladesh. and fitted with zippers made in China by a Japanese company. balanced Li & Fung's American customer base and East Asian sourcing network. A garment labeled "Made in Thailand" might contain Korean yarn that was woven and dyed in Taiwan. adding to their U. "This is a new type of value added. almost all labor-intensive work moved across the border to China. Fung told the Journal. In 1999 Li & Fung acquired the export trading firms Swire & Maclaine Limited and Camberley Enterprises Limited. and Turkey. phones. By 2000. while design. personal visits. its main competitor. moving into emerging centers of production in northern Africa such as Egypt.. in a deal valued at . as well as their practical expertise in things like textile quotas and quality assurance. a truly global product that has never been seen before . Although the Fung brothers still took pride in their company's Chinese heritage.3 billion. Tunisia.38 billion. and Sri Lanka. however. capitalized on the Internet to strengthen communications with customers and branch offices. Li & Fung was becoming a multinational company with a workforce based in dozens of countries." As manufacturing in Hong Kong became increasingly expensive. Li & Fung also was courting new end markets with forays into Japan and Australia. The following year the company acquired Colby Group Holdings Limited. the company was making an effort to move production closer to its North American and European end markets and began sourcing from factories in Central America.

Maclaine Limited. Principal Subsidiaries: Basic & More Fashion Limited. with North American customers contributing 76 percent of turnover. The year 2001 marked the end of another three-year plan. Toy Island Manufacturing Company Limited. Although Li & Fung was posting strong results. 2001. William E. The company was set up in February of that year to let smaller enterprises build their own brands on a web site without having to place large orders.. Dodwell (Mauritius) Limited. In 2002 Li & Fung landed a deal to make promotional items for Coca-Cola. Yet whether or not the company was able to sustain the rapid growth of the 1990s. Ltd. the company was vulnerable because nearly 80 percent of its revenue came from U. . CS International Limited.A. Ltd. Li & Fung (Exports) Limited. Connor & Associates. In 2002 hard goods accounted for 32 percent of Li & Fung's turnover. Principal Competitors: APL Logistics. The company announced that it had met its goal of doubling continuing operating profits over the period and reported 2001 net profits of HK$667 million on revenues of HK$33 billion. but 2001 net profit was hurt by the closing of an e-commerce venture in the United States known as StudioDirect. it had shown it had the flexibility to continue playing a key role in the global market of the 21st century. Li & Fung got off to a slow start on the 2002-04 three-year plan due to an economic slowdown and the terrorist attacks of September 11. in the United States. Revenue continued to grow. Camberley Enterprises Limited. Janco Overseas Limited. The company began pursuing customers in the hard goods sector in order to develop a more balanced clientele. That year it also acquired Janco Overseas Limited. clothing retailers. The company remained heavily focused on the United States. Lloyd Textile Trading Limited.S.almost HK$282 million.S.). The company was about half a year behind on its goal but was still optimistic that it would once again double continuing operating profits over the three-year period. Shiu Fung Fireworks Limited. (U. Verity Enterprises Limited. a Hong-Kong based company that supplied nonfood hard goods to supermarkets in the United States and Canada. LF International Inc. Colby International Limited. Such feats were more difficult now that Li & Fung had grown to be a relatively large company. But the site failed to catch on. and Li & Fung shut down the venture after less than a year.