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The supply chain may start with an idea, but it’s the specialty of Hong Kong–based Li & Fung Ltd. to take that idea from raw concept to store floor.
Group managing director William K. Fung said that issues of efficiency, quotas and China are the three areas that have and will continue to impact the operations of the 96-year-old corporate sourcing giant. With 5,000 employees worldwide and 67 offices in 40 countries, annual revenues last year were more than $4.2 billion.
“We’re in an industry that is over-retailed and over-supplied, with tremendous price deflation,” Fung said. “To every extent that you feel that the U.S. market is over-retailed, multiply that by 10 times in terms of over-supply within the market we’re in. How many factories in China do you think can make a garment, a pair of shoes or a toy? Literally tens of thousands, if not hundreds of thousands. Because of that, there has been tremendous price deflation.”
He noted that in 1975, when he first worked with Gap stores, the retailer was retailing jeans for $28 a pair. Thirty years later, the company is still selling jeans for $28 a pair, and just $17.50 at its Old Navy stores.
“In the last few years, this trend has been reinforced. The trend to what is value retailing has really forced prices down quite substantially. I think that if I were to give an estimate, we’re facing about a 5 to 6 percent price deflation a year in the last two or three years, and maybe even more,” he told attendees, producing a ripple of gasps.
At one point, Fung joked about his company’s image as it pertains to the least-developed parts of the world. “The icon of a Li & Fung guy is a guy in a pith helmet that we parachuted in some jungle. On his right hand he has a machete, cutting his way to the next cheapest factory, and on his left hand he’s got this Nokia device that downloads POS information so he knows what to do.”
He told the audience that the company’s business model is based purely on the management of the supply chain. “You’ve got to look at your sourcing base as a whole. We have actually integrated our supply base, and the idea is to be able to move from place to place. A lot of times you go look at the supply of the raw materials or the components separately from making [the goods]. If you don’t have control of that part of it, you cannot move goods. If you don’t control the upstream supply of raw materials and components, there’s no way — if there’s a problem of political upheaval or for whatever reason — you can divert that and do it somewhere else.”
A trend highlighted by Fung is the concept of borderless manufacturing. According to Fung, no firm can afford the idea of going to just one country and doing everything there. “You’ve got to really pick the best. Where is the best source of fabric and the best source of yarn? You take into account production costs, speed of delivery, quick response, quotas and other government regulations.”
One example of borderless manufacturing is Li & Fung’s approach to making a polo shirt: “The best way we know is to use American cotton, knitted and dyed in China and assembled in Bangladesh.”
Fung also described his company’s concept of supply chain management, knocking down the old inefficiencies that used to involve long lead times. “The adage in the old times of importing was you buy deep, you buy cheap and, if it’s a problem, you discount it until it went away. That no longer applies. Everybody now is on a very tight budget. They have to buy the right goods, get the goods and get them in a very short lead time.”
He explained that Li & Fung builds flexibility by opening windows within the production time frame to maximize efficiencies. Until a fabric is woven, one can cancel the order without repercussions, and until the fabric is dyed, the color can be changed. In one example, a U.S. customer during last year’s recession had planned on making parachute pants incorporating a fashion style through zippers on a leg. “Until that pattern is put on the table and cut, you can change the styling….We decided at the last moment on basic slacks so [our customer] could sell them and blow them out.”
Because the apparel and textiles industries are very heavily protected through quantitative restrictions on trading, quotas have the effect of distorting the supply market. “Certain countries are artificially kept at levels that are much lower than what their potential is. We develop new markets in order to get around the quota problem. That is the major reason that led to the proliferation of our network. The implication now is what [will] happen in 2005 when quotas supposedly go away,” Fung said.
According to Fung, there is much discussion about how the change will impact sourcing around the world, with intense interest focused on one nation in particular. “There’s a lot of talk about how it will fundamentally change the way people buy with China, which can suck up all the business because China is so efficient. I think the general consensus now is that while quotas officially go away…there is another mechanism within the World Trade Organization rules, an antisurge mechanism, that could be invoked in 2005 to slow down the import of Chinese textiles and garments to the U.S.,” he observed.
The bet in China is that it will probably be invoked by America, Fung said. The stated level of surge for the trigger mechanism is only a 7.5 percent increase for apparel products — a relatively low number — and 6 percent for all products, Fung said.
European countries have a much more liberal attitude. Quotas, Fung predicts, will go away because the feeling is that there is enough alternative supply sources in Eastern Europe and Turkey so that China would not completely flood the marketplace.
China itself is a major issue, Fung noted. “China is the world’s largest supplier of any kind. There are two sides of China. It is the world factory but it is also one of the world’s largest consumer markets. There are very few companies that I work with on the export side who have not asked me, ‘What’s happening with China and is China going to be so important that we better be there?’”
Fung explained that China is a huge export market, one of many zones because the country is divided into regions with different economic operations and supply-chain needs. “I think it would be a mistake for you to just say ‘China.’ To have one office in Shanghai is not sourcing in China. There are so many parts of China that you have to be in and within that, it is almost like dealing with different countries. China is very provincial in the way it is organized. Each province controls its own borders. China’s largest retailer is Shanghai Department Stores. Until recently, the number-one retailer in China could only operate in Shanghai and nowhere else,” he said.