{"id":8297,"date":"2018-04-29T10:58:47","date_gmt":"2018-04-29T14:58:47","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-digit\/submission\/li-fung-must-innovate-or-die\/"},"modified":"2018-04-29T10:58:47","modified_gmt":"2018-04-29T14:58:47","slug":"li-fung-must-innovate-or-die","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-digit\/submission\/li-fung-must-innovate-or-die\/","title":{"rendered":"Li & Fung Must \u201cInnovate or Die\u201d"},"content":{"rendered":"

At 112 years old, and with its market capitalization down 80% from its 2011 peak, Li & Fung must \u201cinnovate or die\u201d as a Financial Times article put it bluntly.[1]<\/a>\u00a0 During the 1980s-90s, Li & Fung used acquisition rollups to create a massive network of over 15,000 factory suppliers in 60 countries.[2]<\/a>\u00a0 Li & Fung acted as the middle-man connecting some of the largest Western retailers and brands (Walmart, Kohl\u2019s, Sears, Macy\u2019s, JCPenney, Disney, Tommy Hilfiger, Abercrombie & Fitch, Gap, Kate Spade) to suppliers in Asia for low costs.\u00a0 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.<\/p>\n

Several factors have contributed to Li & Fung\u2019s fall from grace.\u00a0 The rise of \u201cfast-fashion\u201d brands such as Zara and H&M set a new precedent to the speed of retail supply chains.\u00a0 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.\u00a0 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.\u00a0 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.\u00a0 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.\u00a0 On May 11th<\/sup>, Kate Spade announced it would bring sourcing for its accessories division in-house, a $300 million annual revenue loss for Li & Fung.[3]<\/a>\u00a0 In a larger blow, on May 21st<\/sup>, Wal-Mart announced it would move to do more business directly with factories, erasing roughly $2 billion annual revenue for Li & Fung.[4]<\/a>\u00a0 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.\u00a0 As CEO Spencer Fung (great-grandson of founder Fung Pak-liu) stated, \u201cIn the last 40 years, the whole supply chain was optimized for cost. Today, most customers are optimizing the supply chain for speed.\u201d[5]<\/a> These three forces, as well as the global financial crisis have contributed to Li & Fung\u2019s downfall.\u00a0 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.<\/p>\n

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]<\/a>\u00a0 At the announcement, Spencer Fung stated, \u201cSpeed is the first thing our customers want from us to be competitive. To help them navigate today\u2019s 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\u201d. \u00a0\u00a0Given this context, I decided to take a summer internship at Li & Fung during the summer of 2017 in their digital innovation group.\u00a0 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. \u00a0I 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.<\/p>\n

Laid out in the three-year-plan unveiled in March 2017, Li & Fung is focusing on creating the \u201csupply chain of the future\u201d through reducing production lead time and improving speed-to-market.\u00a0 The Fung Academy was founded to assist Li & Fung to adapt to a more digital world.\u00a0 Employees are encouraged to be innovators and open innovation challenges have been set up to help Li & Fung crowdsource ideas.\u00a0 Specifically, I worked on a team to implement virtual design software into Li & Fung services.\u00a0 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]<\/a> This speeding up of the supply chain will help retailers better adjust to customers\u2019 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.\u00a0 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.\u00a0 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]<\/a> \u00a0I believe Li & Fung\u2019s efforts to speed up the supply chain will be pivotal in keeping the company relevant in the future.<\/p>\n

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.\u00a0 First, changing the mindset is a huge issue.\u00a0 While retailers want a faster supply chain, the industry has been set in its ways of touching and feeling physical samples.\u00a0 Getting retailers accustomed and trained to iterate virtual samples will take time.\u00a0 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.\u00a0 Second, getting buy-in from Li & Fung employees is also a challenge.\u00a0 This company has been set in its ways for 112 years, and this is an abrupt change to the business model.\u00a0 As Chief Communications Officer Lale Kesebi states, \u201cYou 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\u2019re trying to make\u2026 Inspire the change, and lead with empathy.\u201d[9]<\/a>\u00a0 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.\u00a0 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.\u00a0 There is nothing Li & Fung can do about this industry trend, as it will continue to happen.\u00a0 However, Li & Fung can stay relevant if it continues to develop data-driven logistics services which retailers cannot reproduce themselves.\u00a0 As Spencer Fung states, \u201cBeyond 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.\u201d[10]<\/a>\u00a0 If Li & Fung is able to create this \u201csupply chain of the future\u201d through innovative changes such as virtual sampling and fitting, the company will mitigate the industry trends of retailers taking their sourcing in-house.<\/p>\n

[1]<\/a> https:\/\/www.ft.com\/content\/a8ffc290-1b69-11e7-bcac-6d03d067f81f<\/a><\/p>\n

[2]<\/a> https:\/\/www.nytimes.com\/2013\/08\/08\/world\/linking-factories-to-the-malls-middleman-pushes-low-costs.html<\/a><\/p>\n

[3]<\/a> https:\/\/www.reuters.com\/article\/us-wal-mart-stores-li-fung\/wal-mart-to-bring-in-house-some-sourcing-handled-by-li-fung-idUSKBN0O700120150522<\/a><\/p>\n

[4]<\/a> https:\/\/www.wsj.com\/articles\/SB10000872396390443890304578008152475554028<\/p>\n

[5]<\/a> https:\/\/www.ft.com\/content\/a8ffc290-1b69-11e7-bcac-6d03d067f81f<\/a><\/p>\n

[6]<\/a> http:\/\/www.scmp.com\/business\/article\/2083861\/li-fungs-latest-attempt-reinvention-latches-technology<\/a><\/p>\n

[7]<\/a> https:\/\/www.just-style.com\/analysis\/li-fung-looks-to-speed-innovation-and-digitalisation_id130341.aspx<\/a><\/p>\n

[8]<\/a> https:\/\/sourcingjournal.com\/topics\/business-news\/li-fungs-robert-sinclair-speed-new-currency-73501\/<\/a><\/p>\n

[9]<\/a>\u00a0 https:\/\/www.forbes.com\/sites\/robertbtucker\/2017\/07\/06\/cultivating-a-risk-taking-culture-inside-li-fungs-innovation-journey\/#50dd0e40a7e1<\/a><\/p>\n

[10]<\/a> https:\/\/www.just-style.com\/analysis\/li-fung-looks-to-speed-innovation-and-digitalisation_id130341.aspx<\/a><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

At 112 years old, and with its market capitalization down 80% from its 2011 peak, Li & Fung must \u201cinnovate or die\u201d 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.\u00a0<\/p>\n","protected":false},"author":2517,"featured_media":8298,"comment_status":"open","ping_status":"closed","template":"","categories":[],"class_list":["post-8297","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-digit\/assignment\/driving-digital-transformation\/","yoast_head":"\nLi & Fung Must \u201cInnovate or Die\u201d - Digital Innovation and Transformation<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-digit\/submission\/li-fung-must-innovate-or-die\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Li & Fung Must \u201cInnovate or Die\u201d - Digital Innovation and Transformation\" \/>\n<meta property=\"og:description\" content=\"At 112 years old, and with its market capitalization down 80% from its 2011 peak, Li & Fung must \u201cinnovate or die\u201d as a Financial Times article put it bluntly. 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