Year 2007 - Critical Success Factors

and quantities were what they prefer, and then ask us to come up with a production program. Based on the design concept from customers, we searched for the right type of yarn and dye swatches to match the colors. We realized customer’s product concept in prototypes. After a buyer had picked a sample of his choice, we would create an entire supply chain of the season. We contracted out all manufacturing. In order to ensure quality and on-time delivery, we worked very closely with factories to plan and monitor the whole production process. Entering the 1990s, a new challenge drove Li & Fung to the next level of development.With the emergence of the other Asian Tigers, Hong Kong became an increasingly expensive and less competitive place to manufacture. As a result, Hong Kong’s low-end transistor-radio business, for example, had to migrate en masse toTaiwan and Korea. However, as Chinese Mainland launched her open-door policy to foreign investment in special economic zones in the south, Hong Kong manufacturers were able to reduce cost by moving the labor-intensive portion of their production across the border. Riding on this opportunity, manufacturers created little kits such as plastic bags filled with all the components needed to make, for instance, a transistor radio and shipped them to Chinese Mainland for assembly. After the labor-intensive work had been completed, the finished goods came back to Hong Kong for testing and inspection. In this case, the labor-intensive middle portion of the value chain was done in southern China whereas Hong Kong was responsible for front-end and back–end support. Using this model, Li & Fung was able to dissect the value chain and rationalize where production functions were done. We call it “dispersed manufacturing” where low-skilled, labor-intensive tasks might be performed in one country, testing and packaging in another, and distribution in a third that could offer a highly-developed banking and transportation infrastructure. Under this model, the supply chain manager must be knowledgeable not only in logistics, but also how one could orchestrate the sourcing of production throughout an entire global supply chain. The concept of “Soft $3” Li & Fung builds up a new concept of value added and think about supply chain management as “tackling the soft $3” in the cost structure. Let’s say a typical consumer product leaves the factory at price of $1, and it ends up on the retail shelves at $4. Nowadays, it is very hard to even squeeze the cost of production down 10 cents or 20 cents per product. Instead of lowering the cost of production, Li & Fung looks at the cost that is spread throughout the supply chain, e.g. product design, procurement, logistics, wholesale and information collection, so as to gain more margins from the soft $3 in the cost structure. Five Principles of Supply Chain Management Be customer-centric and respond accordingly to the market demand In the old industrial age, manufacturing was mostly based on a “supplier centric” model. Under this “push” model, manufacturers often encountered the problems of undersupply or excess inventory, as a result of inaccurate estimation of actual market demand and consumer needs. In the new customer age, the supply chain has to be customer-centric. Therefore, manufacturers should create and deploy inventory based on “pull” from actual demand and customer needs, rather than pushing inventory down the supply chain based on large manufacturing runs and the need to meet production and shipping quotas. Focus on one’s core competency and outsource non-core activities, and develop a positioning in the supply chain The key to compete successfully in the world market is to carve out and focus on a niche that one can extend globally. Nowadays, companies whose core competencies are spread too thinly across a multitude of different businesses often lack the depth of knowledge and managerial capabilities to compete in tough market conditions. Companies should therefore identify and concentrate on their core businesses, and outsource the rest in the supply chain. Companies should adopt an extended-enterprise model and rely on partners to handle the non-core businesses. Under the extended-enterprise model, 11 HONG KONG CHAMBER OF INSURANCE INTERMEDIARIES 2007 YEARBOOK 香港保險中介人商會二○○七年年刊