Excerpts from Supply Chain Management Hong Kong Style

1. Tackling the Soft 3 dollars

In a typical consumer product, which leaves the factory at $1, it invariably ends up at the
shop shelf at $4. Now you can try to squeeze the cost of production down by 10 or 20 cents
per product. But today, you have to be a genius to do that because everybody has been
working on it for years and there is not much left there. It is better to look at the costs
spread throughout the distribution channel – the soft $3. It offers a bigger target and if you
take out 50c no body will even know it. It is a much better place to look for savings.

How about an example: Here it is –

Let us say you want to distribute an assortment 10 different products, each manufactured by
a different factory, to ten distribution centres. The standard practice would be for each
factory to ship full containers of their product. These containers would go to a consolidator
who will unpack and repack all these 10 containers and send the assortment to different
distribution centres.
Now suppose that you move one container from factory to factory and get each factory to
fill just one tenth of the container. Then ship the container with the assortment directly to
the customer – the shipping cost will be greater, BUT the overall cost would be lower since
you have completely eliminated the Consolidator.
 2. Looking at Suppliers’ Supplier.
The 7500 factories are run by small entrepreneurs who were buying yarn and cloth for
processing. They needed a lot of time and Li & Fung had to plan 3 months ahead. They also
found that these small buyers did not have “Purchasing power”. Seeing all this, Li & Fung
decided to book yarn and cloth in large quantities ahead of time with their own money.

The colours, patterns, quantities of various garments were decided by the ultimate buyers in
US and Europe. Now that the yarn and white cloth are now available, the buyers could
decide much later – just 6 weeks before the season – this enabled them to forecast better.

Li & Fung supplied the yarn and cloth to factories (suppliers). Now the factories were very
happy – no working capital lock up. Also, they do not have to worry about placing small
orders and following up. If there is a delay in these supplies their work also was getting
delayed. They were able to offer better prices and faster delivery now. Thus, by looking at
the entire value chain, Li & Fung created many Win Win arrangements.

3.Be Creative about alternative approaches.

Case of S2M Global and Rubicon Aerosols:

S2M Global was a low-cost perfume manufacturer. They wanted large volumes of low-
priced perfumes in Aerosol Bottles. S2M did not want to set up Aerosol filling capacity since
it was a specialized job. It involved investment and training in safety since large volumes of
LPG will have to be handled carefully.
S2M approached Rubicon, a contract Aerosol filler. Rubicon was doing job work for a
number of well-known customers like Hindustan Unilever, Bayer, Colgate and others. S2M
had two problems – 1) Rubicon’s charges were high, which a low-priced product like the one
that S2M was handling cannot afford 2) S2M also wanted continuous supply of products
without interruption (S2M suspected that Rubicon will stop their orders and give preference
to others’ product, since they would be paying more per bottle).
S2M thought that they may not be able to get low cost and service they were looking at.
But they had large volumes, being low priced products.
S2M team thought through the problem and arrived at a creative solution. They offered the
following to Rubicon:
1) S2M will pay for machinery for setting up a new line. Rubicon had space for it.
Rubicon will appoint people for running this line.
2) S2M will pay a certain amount whether they use the capacity or not.
3) This line capacity will be used only for S2M orders and hence will be always available
for S2M.
Thus, S2M got low prices, Rubicon got the business and were assured a certain
revenue PLUS they did not have to invest their money for machines.

If you are creative, then many possibilities open out.