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(originally published by Booz & Company)


The Supply Chain Is Flat

William Fung, the head of an old and very large Hong Kong trading company, on making and selling products in a vastly altered global landscape.

You’d think that in a recession, the middleman would be the first to go. It turns out that’s not quite true — at least, not if the middleman is so efficient and streamlined that it delivers more than enough savings to earn its keep. As an illustration, consider Li & Fung Ltd., a century-old Hong Kong–based sourcing company. Since the downturn began, Li & Fung — which manages a 40-economy sourcing network covering clothing, home furnishings, household products, sporting goods, and more — has attracted more than its share of new customers. Such brand names as Liz Claiborne and Talbots have joined Tommy Hilfiger in choosing to eliminate their in-house procurement programs and instead trust Li & Fung’s expertise in supply chain management.

William Fung, Li & Fung’s managing director, calls his company’s recent record “flat-world success”: the old-fashioned infrastructure is gone, replaced by fluid networks that can design, manufacture, and distribute almost anything, anywhere, and on any timetable. That strategy has transformed a company that began life in 1906 as a trading outfit for Chinese silks, porcelain, and tea in Canton (now Guangzhou) into a US$14 billion organization, the focus of seven Harvard Business School case studies. Fung and his brother, Victor (who is chairman of Li & Fung), coauthored Competing in a Flat World: Building Enterprises for a Borderless World (Wharton School Publishing, 2007). Recently, William Fung discussed with strategy+business his ideas about new rules of supply chain management and the impact on global sourcing of Chinese factories, consumers, and currency policies.

S+B: How radically is the nature of global supply chains changing?
FUNG: Supply chains don’t stand still anymore, the way they used to. You could say it all began in Hong Kong after World War II. A million refugees from China provided the labor to make garments, shoes, wigs, plastic goods, toys, things like that, and ship them around the world. But after two or three decades, Hong Kong priced itself out of the market. Labor costs got too high; the standard of living kept rising. So there was a migration of manufacturing to Taiwan. I remember in 1972 setting up our Taiwan operation, and after six months my staff said, “Mr. Fung, we don’t know why you came to Taiwan, because we’re finished here. Everything’s gone to Korea.”

So we set up in Korea. And pretty soon the Thais, the Indonesians, the Filipinos were all getting into this game. Production wasn’t just jumping from market to market. There was a much more subtle process than that, more like an amoeba. Labor was cheaper in Taiwan, so the Hong Kong factories decided to send their sewing there, while Hong Kong still manufactured and shipped the final products. What we had to do as a trading company then was to secure the fabric and the yarn in Hong Kong and ship it to Taiwan. Soon we were also getting fabric from Japan and the U.S., such as denim, and sending it to Taiwan as well. We were building a system of dispersed manufacturing in which different parts were being produced in different places. That’s the norm now, but it was very new in those days — and that system needed fairly complex supply chains.

And the supply chain continues to become more mobile all the time. Today, a supply chain that produces an item in November may look completely different from one that produces it four months later. Price and speed and raw materials all have an impact. The cheapest way I know to produce a men’s shirt now is to get fabric from certain parts of China, ship it to Bangladesh, and make the shirt there; it may be ready for the fall season. But if that style really started to sell well and you wanted to reorder in January for February or March delivery, I would take the same fabric and make it in Shanghai, more expensively but more quickly and reliably.

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