Li & Fung is looking to create the supply chain of the future

Li & Fung is looking to create the supply chain of the future

As global sourcing specialist Li & Fung works to differentiate itself from traditional buying agencies, the Hong Kong company is confident the traction it is gaining since the start of its current three-year plan is already enabling smarter, faster and more effective decisions.

Unveiled in March, Li & Fung's new strategy runs from 2017 to 2019 and focuses on speed, innovation and digitalisation. At the heart of its vision is building a fully integrated digital platform that connects every stakeholder and process in its global supply chain network so that real-time data can be captured and shared to enable smarter, faster and more effective decisions.

The goal is to ultimately help its customers by stripping out inefficiencies in the production cycle, adopting automation, tracking data to streamline processes, de-layering decision-making, improving traceability, and developing new business models to improve margins and productivity along the supply chain.

Speed

"Speed really is at the heart of what we do," Spencer Fung, group CEO of Li & Fung, told analysts at its earnings call last week. "If you talk to 100 retailers today, 99.5% of them will talk about speed. This dominates the boardroom and executive meetings. In the old days, the supply chain was really optimised by cost. Every year our customers would come to Asia and say they want a cheaper product. That conversation has almost stopped completely. Cost is almost a given. But the conversation now really revolves around speed – to increase the velocity of our customers' supply chains, and to meet the growing, changing consumer expectation driven by e-commerce and disruption."

The aim is to improve the speed of the supply chain by 50% for all of its customers – a goal Fung says the company has already far exceeded with a number of its customers.

In the pre-production process, for example, which involves many manual processes and relatively time-consuming steps such as costing and sampling, Li & Fung is introducing digital sampling and virtual fitting. Other new tools include value stream mapping, which tracks critical paths in the design and production processes, identifying overlaps and duplications.

Customer dashboards are another tool that can better track customers' businesses to offer greater transparency. The aim is to shorten pre-production processes and improve design conversion rates, as well as redirect resources to higher-value-added activities.

"Internally we are also talking about speed and we want to aspire to move as fast as a start-up," Fung explains. "Like many large companies we don't move very fast. Two years ago we started using rapid prototyping. What used to take six months to prototype now takes hours. This is what we mean by speed internally. By 2019 we hope the whole company across the board can move as fast as a start-up."

Innovation

Accelerated changes in technology have fundamentally changed consumer behaviour and expectations, in turn requiring brands and retailers to look at new ways of fulfilling demand. As a result, innovation has become a key ingredient for the company.

"We are building a culture of innovation within our companies so our customers can improve their topline, as well as producing innovative models like value-added services to really expand our service offering," Fung says.

On example of this is 'The Kitchen', a digital platform that can tap into all 22,000 of Li & Fung's employees, and is sometimes extended to its partners to co-create new ideas and products.

"At first it was a platform and now it is regularly turning out ideas and turning these into actual orders." 

Digitalisation

Technologies are increasingly disrupting and transforming traditional supply chains from weaving raw material at the fabric mill to tracking end-consumer behaviour at retail. Li & Fung's answer to this is the creation of a platform that digitalises the entire global supply chain and allows data and information to flow seamlessly from end to end.

"Digitalisation is at the heart of our three-year plan," Fung says. "If you look at the whole value chain, on one end you have the consumers. The consumer has been digitalised for a long time. It's almost fully digitalised across the world. And if you look at the retailers and the brands, they are becoming digital fast. But if you look at the entire supply chain, the rest of the supply chain is still very analogue. So we see this as a big opportunity for us to be the first company in this space to digitalise the supply chain on a large scale."

The first step for Li & Fung is digitalising the design, sampling and fitting processes because they are "one of the largest low hanging fruits" that generate the greatest benefits in terms of speed, cost and data

It also helps solve customers' biggest pain points: greater speed to market, increased sales, innovative products to drive gross margin, reduced inventory, and reduced markdown.

In the design phase Li & Fung is starting a new value-added service called the 'Virtual Design', aimed at drastically reducing the need for physical samples. It increases the speed from weeks to hours and reduces cost along the supply chain. Virtual samples can also be used online for selling.

"Very likely we will have the largest library of digital samples in two or three years time," Fung says. "Already we have one of the largest. We already have more than 100 people [working] in this digital centre of excellence…and using a dozen software packages.

"In the future we will likely be the largest scale, the lowest cost and the most advanced in this area."

While Li & Fung traditionally works with customers that have 50-week-long supply chains, the company is also now experimenting with supply chains that are only a few days long.

"You make a digital sample, you put it on the web, you start crowd-selling it and you look at the click-through rate in the first few hours. With that, and analytics, you predict how many pieces will be sold and then you start producing it, even before the order process is finished. Throughout the next few days people will continue to order it but you are already making a prediction of how many pieces will be sold. By day four or five production is done in a small batch and sent directly to the consumer.

"This is what is already possible today, and this is what we're experimenting with. The knowledge we learn from this experiment brings it back to all the traditional guys who need to speed up the supply chain."

Building top and bottom line

The company has managed to maintain a strong balance sheet and flexibility in its capital structure, thanks to strategic divestitures such as its Asia consumer and healthcare distribution business, raising US$1bn to fund future growth – of which $150m will be used to fund digitalisation efforts over the next three years.

The company's financial target is to stabilise its topline and to have low double digit growth by 2019. From results for the first half of 2017, the outlook is positive.

New Li & Fung supply chain model gaining traction

Turnover stabilised with a slight drop of 2.1% to $7.26bn, and total margin increased from 11.4% to 11.5%. The initiative has also helped lift core operating profit by 11.9% to $170m in the six months to 30 June, while profit attributable to shareholders soared 51.3% to $101m.

"Global business development really is to try to grow the top line and also combine a lot of our services together to package them together for our customers," Fung explains. "We don't see any player in the market that has our suite of products. This is really taking it to the next step and offering integrated services for individual customers.

"The last six months we've moved with lightening speed. Our new supply chain model is really gaining traction and our customer is really embracing what we're doing. This is shown in the results in our first-half, so it's a good solid start for the new three-year plan."