The case study focuses on Li & Fung Global from Shanghai receiving a trading license from the Chinese government, which provided this foreign-owned business with permission to import raw materials and export goods. The dispersed manufacturing approach developed by Li & Fung’s management allowed offering customers access to a broad supply chain and customization. This paper will analyze the outsourcing case study based on Li & Fung and discuss the rationale behaving the decision of Li & Fung’s management.
Rationale and Decision to Outsource
The decision to outsource must align with the company’s strategy. In the case of Li & Fung, the changes within the Chinese internal market and the development of trading relationships between the Chinese and American suppliers and buyers were the basis of a decision to change Li & Fung’s structure. Mainly, Li & Fung was established when there was a language barrier between the Chinese manufacturers and American buyers, and by 1970 this has changed. Hence, the management chooses to restructure Li & Fung and include outsourcing from different countries, not only China, as well as IT strategy as important elements of the businesses’ development. Arguably, if Li & Fung did not choose to restructure and outsource, the decreasing profit margins of the trading business would make it impossible for the organization to remain profitable. Therefore, Li & Fung’s decision to outsource was driven by the changes in the external environment, such as strengthening the relationships between manufacturers and buyers, manufacturers moving to southern China for lower labor costs and decreasing profit margins.
Factors, which impacted this decision are the changes within the market and the new needs of the customers who no longer needed assistance in purchasing from factories. Instead, they needed coordination of the supply chains for the best price and quality. The pros of outsourcing, based on Li & Fung’s case, are the vast network of potential suppliers since Li & Fung has access to 7,500 manufacturers. Additionally, these suppliers are located in different parts of the world, allowing Li & Fung to manage the regional import and export quotas.
The cons of outsourcing are potential communication problems since the customer does not have direct contact with the manufacturers (Patel, 2017; “Outsourcing,” n.d.). However, Li & Fung address this by developing prototypes, as was the case with Levi’s’ order, and ensuring that even if products are manufactured in different factories, they look the same (ICMR Center for Management Research, 2004). Another issue is quality control since the customer does not oversee the manufacturing directly, although Li & Fung addresses this by checking the final products either in Hong Kong or on-site (Riggis, 2017).
During the second stage of outsourcing, Li & Fung implemented an outsourcing strategy that allowed them to be “a manager and deliverer of production programs” (ICMR Center for Management Research, 2004, p. 5). Moreover, the company now performs value-added activities in Hong Kong, while labor-intensive tasks are completed at the location most suited for it. Since Li & Fung has a large number of offices across Asia, they can select the region where manufacturing a specific item will be the most cost-effective. Hence, the dispersed manufacturing technique that Li & Fung uses allows them to customize the supply chain for each customer and minimize the costs.
In contrast, a traditional approach to outsourcing would imply merely locating and delivering the goods that the buyers needed, which would require Li & Fung to only deal with logistics.
The timescale and resources required for the methodology selected by Li & Fung are more extensive when compared to other approaches. Moreover, Li & Fung’s strategy has undergone several changes while the business adopted to the changes in the external environment, and the main stages of changes are the following: from 1970 till 1978, from 1979 till 1982, and from the 1980s until now (ICMR Center for Management Research, 2004). The company works on developing a plan for manufacturing a specific set of goods their customer needs for a season and manages the process of supplying these items from different regions in Asia (ICMR Center for Management Research, 2004). With its current approach, Li & Fung needs little time to order, manufacturer, and deliver the final product since it can reserve raw materials and factory production space when anticipating an order to deliver the final products within weeks.
The transitioning phase is typically challenging for any company because managing change implies facing resistance. Kotter’s 8 step model explains that the already existing systems and processes being well known to the employees and consumers (“The 8 step process of leading change,” n.d.). This methodology made the transitioning phase more difficult since Li & Fung require more resources and cooperation between its offices to develop a supplying plan for each customer. However, since Li & Fung have used their new model for years and has been successful, their change management approach allowed them to implement outsourcing properly, and the most significant contributor to this is the company structure Li & Fung has. The creative processes and logistics are managed in Hong Kong, where the business’ headquarters are located, which ensures that all decisions are coordinated.
IT and ICT
The IT and ICT integration was an important success factor for Li & Fung’s new outsourcing model. For example, Li & Fung uses its intranet after receiving specifications from customers to choose the best suppliers for raw materials, which enhances coordination (ICMR Center for Management Research, 2004). ICT & SCM contribute to customer service since the company’s website allows for tracking the manufacturing process in real-time and making clast minute changes. Moreover, relationship management is improved through the use of communication technologies because Li & Fung uses the Internet to communicate with its customers, allowing for a faster response. Moreover, these technologies will allow Li & Fung to offer private label manufacturing for small businesses with all of the benefits of the economy of scale by bundling several small orders and allowing for some customization. Based on the case study, communication technology has always been important for Li & Fung because the company began to use fax and phone communication in early 2000 to connect with its global customers.
In summary, this paper analyzes the supply chain management case study of the Li & Fung company. This business was established in Hong Kong in the 1900s, and its business model was based on connecting the manufacturers from Asia with buyers from the United States and other regions. However, during the 1970s, many changes in how these two entities cooperate happened, prompting Li & Fung to develop a more complex model of its supply chain and offer an entire product supply strategy development service to its clients.
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Patel, D. (2017). The pros and cons of outsourcing. Forbes. Web.
Riggis, N. (2021). 20 advantages and disadvantages of outsourcing from your small business. Small Business Trends. Web.