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Seeking the future’s supply chain

Li & Fung CEO Spencer Fung has explicitly championed a digital transformation of one of the world’s most influential supply chain solutions platforms.

The Inside the Mind of the CEO interview series explores a wide range of critical decisions faced by chief executives around the world. For more insight, see PwC’s CEO Survey.

If you have bought clothing or other consumer goods recently, chances are they reached you through the network of manufacturers and distributors managed by Li & Fung. Since its founding in 1906 as an exporter of Chinese porcelain and silk, this Hong Kong–based company has been a pioneer in global supply chain management. Li & Fung, the largest component of the Fung Group, currently employs about 18,000 people working around the world in more than 50 territories. The company links global retail chains (its customers) with manufacturing sources in Asia and elsewhere. It provides solutions to help customers navigate today’s trade-related uncertainties.

Li & Fung is also a pioneer in digital transformation: It has staked its future on reinventing its operations with advanced technology. It began work on this project in 2017, after several years of decline and amid the rise of new online retailers that competed with Li & Fung’s customers. The plan, titled “Supply Chain of the Future,” was initiated and is led by CEO Spencer Fung, great-grandson of the company’s cofounder. Fung started his career as an accountant at PwC in Boston (PwC publishes strategy+business) and then cofounded a startup (HelloAsia.com, one of the first pan-Asian online marketing platforms, which has since gone out of business). He returned to Li & Fung in 2001 and was appointed group CEO in 2014.

In November 2019, Fung sat down with strategy+business in his company’s global headquarters in Hong Kong. We discussed the Supply Chain of the Future plan’s three key elements — speed, innovation, and digitization — and the trends affecting the future of global trade and logistics, in Asia and around the world.

S+B: You have been steering your company through a major transformation. How did it begin?
FUNG:
To put it in context, basically we’re attempting to transform both the company and our industry. We had the same problems and issues that many other large companies have: many years of growth, a culture that had become diluted, a little bit of complacency.

So in 2016, as we began to prepare for our next three-year plan, we began looking externally. We looked at the macroeconomics — where the world was heading. We looked at industry dynamics — where the consumer and retail industry were growing, globally. And we looked at technology. We looked at our company and basically concluded that the world was shifting very quickly to somewhere else, and we weren’t there. So we created the new three-year plan: to create the Supply Chain of the Future; to help our customers navigate the digital economy; and to help the lives of a billion people in the supply chain by focusing on speed, innovation, and digitization.

Three core priorities

S+B: What do you mean by speed?
FUNG:
Speed had two aspects. First, our internal operations were too bureaucratic and slow. We de-layered the hierarchy, put our top leaders close to one another so they could communicate more quickly, and generally instituted a new, faster way of working. Our goal was to marry the benefits of a large company with the speed of a startup — so that things that used to take us six to nine months would now be done in hours. And we have accomplished much of this.

S+B: How?
FUNG:
Let me give you one example. In our previous office layout, all the top managers had offices along one wall, and everybody else sat in cubicles that were bolted to the floor. If there was a change in business model or our customers shifted, and we needed to reconfigure the seating, it took more than six months. We would raise the request to central facilities; they would put out an RFP [request for proposal] for contractors. Today, we have an open office with furniture and walls on wheels. If we decide at 9 a.m. to make a move, it will be completed by 11 a.m.

Second, we set out to speed up our supply chain services for the benefit of our customers. Most of our customers are large, established apparel and consumer goods retailers and manufacturers. It can take them 40 weeks to design and produce a new concept and transport it to the retail shelf. In today’s world, that’s too long. Years ago, Inditex [with its Zara brand] figured out how to increase the speed of the supply chain 10-fold. The competitive impact is huge. So we are condensing the time for our customers: 30 weeks, 20 weeks, or faster.

S+B: How did you accomplish this? With digital capabilities?
FUNG:
Actually, mind-set shift was more important. The Inditex/Zara model is not a secret; everyone knows about it. Many companies have hired Inditex’s people, but nobody has copied them directly, because changing the culture of an established company is so difficult. In this industry, most people feel that a 40-week calendar [for delivering new designs] is OK. Thirty-five is awesome; 30 is transformational. But their consumers, especially young fashion consumers, are moving at lightning speed. They may be willing to wait a week or two for a trend they see on Instagram, but not 20 weeks.

The single most difficult thing for me as a CEO in this industry has been influencing a change of mind-set: first in our own management team, then in our employees, and then in our customers and suppliers.

S+B: And you’re all competing with startups that never had the older mind-set.
FUNG:
Exactly. When I cofounded HelloAsia.com in the early 2000s, we had a clean slate. We didn’t have a lot of money, but we could move very fast, and there was no internal history to hold us back. Many large companies are now trying to learn to innovate the same way. It’s not easy. You have to create a culture where you fail fast, learn quickly from your efforts, and move on to the next experiment.

S+B: You also mentioned innovation.
FUNG:
Innovation in our business model is very important. How do you disrupt your traditional revenue stream and find new revenue streams? In the past, we would tell customers, “These are the services we offer.” If they wanted something else: “Sorry, we can’t do it.” Now, we look together at their challenges. We routinely help customers identify trends, build software tools, and innovate products.

S+B: And digitization?
FUNG:
We know we have to digitize our business end to end. We are doing this one step at a time. We have made some errors, but some changes have worked better than expected.

For example, we [help customers by using] 3D sampling in apparel design: rotatable virtual images of a suit on a model, created with CGI [computer-generated imagery], the same quality you would see in a Hollywood animation. Retailers can look at the image and make redesign or purchasing decisions.

S+B: Instead of looking at prototype sample garments that were shipped to them?
FUNG:
Exactly. A large apparel retailer might have thousands of different products. In the past, they’d have them all shipped in and would construct a mockup store to see what it would all look like. All of that can now be done digitally. One single CGI 3D image can travel all the way through those processes to the end, where the customer sees it online.

S+B: What are the challenges in executing this?
FUNG:
The mind-set shift is the biggest challenge today facing any industry or business, including ours. And it’s not because we lack the solution.

I’ve noticed that the process of digitization is not about building or buying the next generation of technology. It’s about convincing people to actually use it. We have seen dozens of companies fail with their ERP implementation projects because of resistance from the people who use those systems. My biggest challenge in the next few years in terms of digitization is basically convincing people to start using these tools.

A culture of humility

S+B: If every consumer goods company uses the same supply chain platforms, such as the one offered by Li & Fung, where will they look for competitive advantage?
FUNG:
Enterprise leaders have always had to think about this question. And the answer is always the same: You have to come up with a unique selling proposition, something nobody else does — and then you have to continue to innovate. This applies to us and our platform as much as to our customers.

The single most difficult thing for me as a CEO in this industry has been influencing a change of mind-set: first in our own management team, then in our employees, and in our customers and suppliers.”

Right now, the consumer products industry is still in an early phase of its transformation. A few companies like Li & Fung are three or four years ahead of our competitors. But everybody is catching up furiously.

In our company, to keep improving, we are instilling a culture of humility. Most established companies get complacent. They try to milk what they already have. They stop looking for the next thing — and then they get disrupted. All we know about the disruptors is that they won’t be traditional competitors. But people keep looking for competitors at the same playgrounds where they already operate. “I know the people in my sector. I’m better than they are.” That’s the attitude you cannot have.

I don’t think Li & Fung’s current business will be around in 10 years in the same form. It will probably be a combination of physical and digital, with competition through data and analytics. What happened to taxis and hotels will probably happen to us. Our biggest future competitors may not even know themselves that they will enter this space; Amazon didn’t know in advance that it would get into the cloud computing business. But as these companies pivot, traditional competitors will get disrupted. So we’ve got to look way beyond our current industry for examples of how to respond.

S+B: And you can’t be sure how things will unfold.
FUNG:
When we started our Supply Chain of the Future initiative, one staff member asked me, “Can you tell us what’s going to happen five years from now?”

Instead of laying out my point of view about future trends, I chose to be honest. I said, “You know what? I have no idea.” As a CEO, I’m not expected to say that. But there’s no way anyone can predict what will happen over the next five years.

How, then, were we supposed to choose our investments? The solution I came up with had three parts. Being humble and looking for disruption outside the industry, which I mentioned earlier, are the first two, and the third is being extremely agile. When a problem comes to you as a business leader, you have to speed up your reaction. Right now, if a new technology like blockchain appears, it takes an established company a few years to analyze it, internalize it, and make it work. At a startup, it may take a few weeks to a few months. I’m configuring our company so that it moves like a startup.

S+B: As a platform provider, you work with a lot of other companies. How do you influence them to change their mind-sets as well?
FUNG:
It’s not easy, and we’re just learning how to do it. You have to give them quick wins that demonstrate that the new way actually works. For example, we started exploring 3D design many years ago. We told everybody to try it. Nothing happened, and within a year people lost interest, and lost faith that 3D design would work.

Then in 2017, we focused on it. Every week I talked about it and focused on it, going deeply into the details. Our people now believe in 3D design, and we have a leader’s position with it. We’re also moving upstream by building a trend prediction model and moving downstream by building [a model for the] raw material that feeds into 3D printing and design.

With our customers and suppliers, we don’t tell them that everything has to change at once. We pick one department, or product line, or brand, to start with. We help them go deep and move fast. We show quick wins, and we influence one person, then another, then another, until we get to a tipping point. It’s like agile teams in software development.

S+B: How do you bring this up to scale around the world?
FUNG:
We have people and export from more than 50 countries. And we sell to customers in more than 100 countries. Every country is different and you have to know the nuances. Having local staff and managers is very important, because they will tell you what these local nuances are. Of course, we try to standardize as much as we can. But you need to constantly strike a balance between standardization and customization. And the balance changes every year because of geopolitics, technology, innovation, and many other factors.

On being slightly pessimistic

S+B: As the head of a company that manages global supply chains, you have a strong interest in trade. How do you see the current situation evolving?
FUNG:
I think the most important story is not the immediate trade tensions, but the long-term changes. During the last 20 years, China has dominated the global supply chain because of its efficiency, cost, speed, and automation. It has taken an enormous market share. Because of the disruption in the China and U.S. trade corridor, we will see a massive dislocation and rearrangement of the global supply chain for most or all product categories.

Where production will spread to is uncertain. It depends on the level of investment that’s required. It depends on the capabilities of the territories that it’s being shifted to. Government policies. Wages. Currency. There’s a list of 20 variables that will determine where production will shift to.

It will be different for every product category. Even within apparel, a T-shirt, a shirt, a pair of denim pants, and a cashmere sweater will each have a different global supply chain. This will make global sourcing very complicated and costly, especially for retailers, which are already fighting a difficult battle against disruption.

S+B: When you look at the global economy as a whole, are you more optimistic or pessimistic?
FUNG:
With the trade uncertainty I’m slightly pessimistic. The uncertainty we see today is unprecedented, at least in the last 40 years. As a result, it’s taking growth out of the global economy.

One good example is Vietnam. Last spring, as the U.S.–Chinese trade disputes intensified, many U.S. companies considered moving their production from China to Vietnam. Then in June, President Trump offhandedly said [in an interview with the Fox Business Network] that Vietnam was “almost the single worst abuser of everybody.” Now would you, as a manufacturer, press the button to build a factory in Vietnam, or not? And if you put off the decision, until when? And even if the political leadership changes, the increased uncertainty remains.

But for the long run — or the middle term — I’m still optimistic, because I think it will sort itself out. There will be permanent change in global trade, but once people get certainty and know how to reconfigure the global supply chain, I think you will see optimism again.

In our space — consumer products and retail — in general, it’s actually not bad. Now the headlines that you see, especially in the very popular news outlets, are quite negative. But retail is still growing. The consumer market is still healthy overall. And then we also see a lot of companies that the news outlets don’t pick up. These are the small startups with direct-to-consumer brands. They probably started selling on Shopify and are now going offline to establish their first stores. They all have double-digit growth.

S+B: And you haven’t even mentioned the emerging middle class in Asia and elsewhere.
FUNG:
Yes, but what happens in the U.S. has a huge knock-on effect on the rest of the world. For example, when the U.S.–China trade corridor is disrupted, a lot of Chinese manufacturers face a slowdown. They’re no longer running at full capacity. This affects wages, income, and spending, and so on. It also affects suppliers of raw material to China from other emerging economies.

 
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Nonetheless, I’m also optimistic about China’s economy in the long run, because of its innovation in digital. If you look at the consumer goods B2C space, China is probably the most advanced country in the world today. It’s not the United States. It’s not Europe. Consumers run their everyday life with one phone and a few apps. Everything is done digitally. Every few months, you see a completely new innovation and rapid adoption by consumers. Because of that, China will continue to create new jobs and new growth in the economy.

In places including India, Vietnam, and Indonesia, there’s also a lot of innovation that will drive the next wave of growth. Other places have more challenges. In the U.K., for instance, we have seen more bankruptcies in retail than ever before. In the rest of Europe, the situation varies by country.

S+B: How are companies responding to these changes?
FUNG:
They have to rethink the way they deploy assets. For the next 20 years, there will be an advantage in being asset-light. Flexibility and speed of change are key. At the moment, it takes about two years to move a supply chain effectively. In the near future, if you see a signal of disruption, you need to be able to move within weeks, or you will lose to your faster competitors.

Tomorrow’s trends

S+B: As a platform provider, how do you think about interoperability, about keeping connections open between competing businesses or competing jurisdictions?
FUNG:
The platform that we’re establishing will be completely open, with multiple competitors connected, including our own. We have seen software companies that try to control everything end to end, and they become too rigid to keep up with innovation. Most innovations I see today are coming from small startups. You can’t buy them all; it would mean trying to integrate hundreds of small companies.

By being open, we give our customers their choice of what they want to use. They all have to be able to talk with one another seamlessly, with data exchange, electronic data interchange, APIs, and other standards and protocols. Many companies will construct platforms, but no one company will dominate it all. So platforms will have to work with other platforms seamlessly. They may compete and cooperate at the same time in different areas.

S+B: How does the issue of environmental sustainability affect your business and your customers?
FUNG:
This topic has been dear to our hearts since the 1990s. We have been one of the leaders of the industry, starting from social compliance, then moving to environmental compliance, then to general sustainability. We’re now going to take an approach in which we stay focused and do not try to cure all the problems of the world. We will look at what our major customers are doing and support their causes, because we handle their supply chain. So it could be organic cotton. It could be less usage of water. It could be reduction of greenhouse gases. We’ve been taking many actions to reduce things that are harmful to the environment, and we’ll report that every year.

There are new technologies coming up every year and new business models that enable us to actually improve all the metrics in the industry. For example, 3D sampling. Millions of samples are being made in thousands of factories. The more we can convert to 3D, the more material and time we can save. And we remove all the emissions generated when these samples crisscross the world by air freight.

There’s another area we focus on: Denim uses a lot of water. There’s a study about this. [In his book Your Water Footprint, Stephen Leahy writes that it takes 7,570 liters [2,000 gallons] of water to manufacture one pair of jeans.] You multiply that by a billion units of products.

So Li & Fung is now employing a laser technology to burn different patterns on the jeans and using an ozone material to wash the jeans, and trying other technologies to see how we can reduce the water usage.

S+B: What about new materials? You’re a sourcing company.
FUNG:
Right now, we’re looking at substitutes for plastic bags. Most garments are sent to retailers wrapped in plastic. That’s billions of bags per year. We’re also looking at using automation to reduce wasted materials or energy.

S+B: How do you think automation will affect the labor force?
FUNG:
Every industry will change, and the sooner you change your company, the better for you. We don’t see complete roles being automated. That hasn’t happened. There is no robot that replaces a person and does everything that the person does. Because every person does multiple roles and tasks every day. So we see certain tasks being automated. When that happens, we will encourage the affected individuals to shift to other parts of the company where they can learn a new set of skills, so they can become more multidimensional.

[Already,] we’re having more rotations among jobs. We’re having more rotations among countries. And in terms of our own workforce, we’re constantly looking at our skill set, starting with the senior management.

I believe that nobody today has what it will take to run and operate a company in three to five years’ time. Because the world is changing fast. There are new tools, new skill sets, new ways of doing business. So all individuals have to constantly reskill themselves. Learning has to be constant, daily, and multi-medium. It’s not just going back to school. It’s online. It’s learning from people. Learning from startups. It’s a constant journey.

We tell our employees that the company will have more and more bite-sized learning modules. But that’s not all. You have to take the initiative yourself to learn as well. I watch a lot of YouTube, just to learn about topics like blockchain. I cannot wait for the company to train me or enroll in a course to learn about blockchain. Continuous lifelong learning is definitely key.

S+B: How will automation affect the jobs themselves?
FUNG:
We don’t own any factories, but through our supply chain, we work directly with 10,000 factories and 5 million employees. Those people will be affected by robotics and software automation. It’s up to the governments in most places to do what is necessary to reskill their population. I would say that most governments are not on top of it. But they have to start thinking about it now.

In many locations, the economy will become more of a service economy, building on the new B2C platforms. For example, the food takeout industry. Because of new delivery apps, more people are ordering food to the home. We’ll see more people doing the delivery. There are many other examples of new service jobs being created all over the world.

S+B: What can you say about your own company’s progress toward the supply chain of the future? Are you moving fast enough?
FUNG:
I really enjoy the journey that we’re on today. We went from a company that had grown for 20 years at 23 percent CAGR, like an Internet company, to a company that experienced seven years of actual decline [to 2019]. And now, in 2020, after two and a half years of transformation, we’re seeing it turn around again. We’re gaining market share for the first time in seven years.

Our mind-set change is what makes us unique now. Our competitors can access similar technology. But within the first three minutes of a conversation with us, customers realize that our mind-set is different. You cannot fake your way through a conversation in this space, and our success in, for example, 3D design shows that we know what we’re talking about.

At the same time, we know we’re at the beginning of a long journey. The first step has been taken. There’s a lot more to come, there’s a lot more to do, and the world keeps changing, so we’ve got to keep changing as well.

Author Profiles:

  • Art Kleiner was formerly the editor-in-chief of strategy+business.
  • Michael Wy Cheng is PwC’s Asia-Pacific and Hong Kong/China consumer markets leader. He is a partner with PwC Hong Kong.
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