Li & Fung Must “Innovate or Die”
At 112 years old, and with its market capitalization down 80% from its 2011 peak, Li & Fung must “innovate or die” as a Financial Times article put it bluntly. During the 1980s-90s, Li & Fung used acquisition rollups to create a massive network of over 15,000 factory suppliers in 60 countries. However, as the retail industry modernized during the last decade, Li & Fung missed the boat on many digital innovation trends and lost its powerful position as the world leader in supply chain management.
At 112 years old, and with its market capitalization down 80% from its 2011 peak, Li & Fung must “innovate or die” as a Financial Times article put it bluntly.[1] During the 1980s-90s, Li & Fung used acquisition rollups to create a massive network of over 15,000 factory suppliers in 60 countries.[2] Li & Fung acted as the middle-man connecting some of the largest Western retailers and brands (Walmart, Kohl’s, Sears, Macy’s, JCPenney, Disney, Tommy Hilfiger, Abercrombie & Fitch, Gap, Kate Spade) to suppliers in Asia for low costs. However, as the retail industry modernized during the last decade, Li & Fung missed the boat on many digital innovation trends and lost its powerful position as the world leader in supply chain management.
Several factors have contributed to Li & Fung’s fall from grace. The rise of “fast-fashion” brands such as Zara and H&M set a new precedent to the speed of retail supply chains. These brands keep very tight supply chains with shorter lead times, manufacturing during the season rather than committing to all of their stock in advance of each season. This allows the brands to adapt rapidly to fashion changes, and they do not run into the problem of having to rid themselves of excess inventory. Working directly with the suppliers and relying on smaller order sizes, fast-fashion brands do not have as much use for sourcing agents such as Li & Fung. Second, several large retailers have moved toward an in-house supply chain model as information exchange advances allow retailers to communicate directly with their suppliers. In May 2015, Li & Fung lost business from two crucial accounts. On May 11th, Kate Spade announced it would bring sourcing for its accessories division in-house, a $300 million annual revenue loss for Li & Fung.[3] In a larger blow, on May 21st, Wal-Mart announced it would move to do more business directly with factories, erasing roughly $2 billion annual revenue for Li & Fung.[4] Third, internet retailers Amazon and Alibaba are undermining the foundations of the retail industry, making it faster and cheaper for retailers to source goods online. As CEO Spencer Fung (great-grandson of founder Fung Pak-liu) stated, “In the last 40 years, the whole supply chain was optimized for cost. Today, most customers are optimizing the supply chain for speed.”[5] These three forces, as well as the global financial crisis have contributed to Li & Fung’s downfall. In February 2017, Li & Fung was removed from the blue-chip Hang Seng index, a condemning action that no one would have predicted just six years ago.
In March 2017, Spencer Fung announced a company-wide three-year-plan spanning 2017-2019 to spend $150 million on technology to transform the company.[6] At the announcement, Spencer Fung stated, “Speed is the first thing our customers want from us to be competitive. To help them navigate today’s fast-changing world, we remain focused on strategic investments that leverage new technologies, optimize processes and connect the dots of our digital supply chain. We aim to decrease lead times and increase speed to market for the global brands and retailers we serve”. Given this context, I decided to take a summer internship at Li & Fung during the summer of 2017 in their digital innovation group. I believed that the context of a global giant such as Li & Fung being disrupted and having its market capitalization spiral from $26 billion to $3 billion in 6 years presented itself as an incredible learning experience for digital innovation. I was fortunate to sit-in on some high profile meetings with Spencer Fung discussing the future of the company including discussions around the three-year-plan.
Laid out in the three-year-plan unveiled in March 2017, Li & Fung is focusing on creating the “supply chain of the future” through reducing production lead time and improving speed-to-market. The Fung Academy was founded to assist Li & Fung to adapt to a more digital world. Employees are encouraged to be innovators and open innovation challenges have been set up to help Li & Fung crowdsource ideas. Specifically, I worked on a team to implement virtual design software into Li & Fung services. 3D virtual design and prototyping technology will allow Li & Fung to cut the time from concept to in-store products by nearly 50%, from 40 weeks to a goal of 21 weeks by 2019.[7] This speeding up of the supply chain will help retailers better adjust to customers’ changing preferences. Also, with shorter lead times, retailers will have the ability to place smaller orders, giving them more flexibility with inventory replenishment and less of a need for inventory markdowns. Virtual samples allow Li & Fung to interact with its retail customers to make real-time iterations to colors and patterns instantaneously rather than physically sending samples across the world. The integration of virtual sampling has sped up the product development cycle from 6 weeks to 4-6 days, and virtual fitting has sped up the cycle from 30 days to a matter of hours.[8] I believe Li & Fung’s efforts to speed up the supply chain will be pivotal in keeping the company relevant in the future.
As Li & Fung speeds up the supply chain and abruptly changes a business model that the empire was built on, the company will face several challenges. First, changing the mindset is a huge issue. While retailers want a faster supply chain, the industry has been set in its ways of touching and feeling physical samples. Getting retailers accustomed and trained to iterate virtual samples will take time. However, since virtual sampling and fitting is essential for Li & Fung to speed of the supply chain, the company must communicate the benefits the retailers will gain through this change. Second, getting buy-in from Li & Fung employees is also a challenge. This company has been set in its ways for 112 years, and this is an abrupt change to the business model. As Chief Communications Officer Lale Kesebi states, “You really have to communicate with human beings, not just through emails but actually eye-to-eye standing in front of them having conversations about the change you’re trying to make… Inspire the change, and lead with empathy.”[9] By communicating often with its 22,000 employees, the senior management will need to get buy-in from its employees that these changes are necessary for the company. Third, the company will face a challenge that as the factories themselves continue to be more advanced, there will be an ever-present force of retailers trying to cut out the middle-man and to straight to the factories. There is nothing Li & Fung can do about this industry trend, as it will continue to happen. However, Li & Fung can stay relevant if it continues to develop data-driven logistics services which retailers cannot reproduce themselves. As Spencer Fung states, “Beyond simply digitizing manual processes, our ambition is to reach a state where we deliver predictive analytics to enhance the business performance of our customers and partners. The digital supply chain, coupled with a better speed-to-market business model, will transform the supply-and-demand dynamics with our customers.”[10] If Li & Fung is able to create this “supply chain of the future” through innovative changes such as virtual sampling and fitting, the company will mitigate the industry trends of retailers taking their sourcing in-house.
[1] https://www.ft.com/content/a8ffc290-1b69-11e7-bcac-6d03d067f81f
[2] https://www.nytimes.com/2013/08/08/world/linking-factories-to-the-malls-middleman-pushes-low-costs.html
[3] https://www.reuters.com/article/us-wal-mart-stores-li-fung/wal-mart-to-bring-in-house-some-sourcing-handled-by-li-fung-idUSKBN0O700120150522
[4] https://www.wsj.com/articles/SB10000872396390443890304578008152475554028
[5] https://www.ft.com/content/a8ffc290-1b69-11e7-bcac-6d03d067f81f
[6] http://www.scmp.com/business/article/2083861/li-fungs-latest-attempt-reinvention-latches-technology
[7] https://www.just-style.com/analysis/li-fung-looks-to-speed-innovation-and-digitalisation_id130341.aspx
[8] https://sourcingjournal.com/topics/business-news/li-fungs-robert-sinclair-speed-new-currency-73501/
[9] https://www.forbes.com/sites/robertbtucker/2017/07/06/cultivating-a-risk-taking-culture-inside-li-fungs-innovation-journey/#50dd0e40a7e1
[10] https://www.just-style.com/analysis/li-fung-looks-to-speed-innovation-and-digitalisation_id130341.aspx
Great post – it sounds like you had a very interesting internship with Li & Fung! The shift in retail supply chains from optimizing for cost to optimizing for speed is fascinating. We talked in class about knowing what you’re solving for by setting a clear objective function within your optimization framework. But clearly the objective function doesn’t always remain fixed forever! Ideally, it seems companies need to think about how the objectives of their customers/suppliers could change over time and consider not just how well they’ve optimized for current objectives but also how flexible they are to achieve alternative objectives.
The ability to shift mindsets internally and externally will certainly play a significant role in determining whether Li & Fung can turn things around. While 112-year habits are certainly hard to break, I would hope that the precipitous drop in the company’s market cap serves as evidence to employees that transformation is necessary. It would be hard to believe that anyone still thinks they can be successful without serious changes!
To stop retailers and factories from continuing to disintermediate, Li & Fung must prove that they offer specialized expertise that would be too expensive for the retailers to develop internally. Ultimately, people only seek to “cut out the middle man” when the intermediary’s value is easily replaceable. In theory, there are efficiencies to be gained if Li & Fung can create great internal processes and analytics and spread those development costs across a large customer base rather than each retailer trying to develop those capabilities themselves.