Case Study: Li Fung Business

With the growing of the internet business, the existing business model of Li-Fung is being challenge as more and more B2B portals and online exchange starts to merge. A new way of conducting business is required. This case is to look into the Li-Fung traditional business model and analysis the new IT strategy that LI & Fung had implemented and what type of risk and recommendation can be given.

Li-Fung Background and its success

Li & Fung (following will present as LF) was able to outperform its competitors within the same industry for reasons that originated from its effective management, relationships with suppliers and customers, and operations. LF has a very long and solid experience into conducting sourcing business; the company was founded more than 100years. The company strategy is to source and manage the global supply chain for High volume and time sensitive consumer goods. By working in both Hard and Soft line, LF was able to avoid market risk associated with only concentrating on one category. Further, the Holistic Supply Chain Management was one of LF core strength as it provides value-added services across the entire supply chain process. Such supply chain customization provide shorter order turnaround time from 3 months to 5 weeks which in translate into less inventory cost for the customers. Further, LF existence also reduce the matching and credit risk and offering QA to its customer. The given economic of scale and global network that LF is equipped with, helped to offer a lower cost and more flexible sourcing than its rigid competitors. Further, LF has an extensive knowledge base globally through acquisitions of rival sourcing companies. Furthermore, Li & Fung provided up-to-date fashion and market trend information to its clients, which made the clients more flexible to changes in their industries

IT road of Li-Fung

As early as 1995, LF had launched an intranet to link the entire group offices and manufacturing sites to simplify and expedite the internal communication. Real time and digital image capabilities allowed online inspection and troubleshooting. In 1997, secure extranet sites were launched to link the customer with the company. Online product development and real time tracking are achievable. Customization on time is now not anymore a fantasy. LF staffed approx 60 people within the IT department and having the development of both the intranet and extranet outsourced.

Threats from the WEB

LF recognized the threats from the online companies as the followings: 1. Equipped with well of cash surplus, online companies can use those to damage the offline companies by acquiring them or their staff. 2. Off-line competitors partner with a dot-com and become a significant competitor in short time.

IT STRATEGY OF Li-Fung (E-commerce)

LF decided that an E-commerce strategy is necessary for LF. LF further decided the only way to be competitive is to implement the system in-house. LiFung.com was setup to form the in-house e-commerce incubation team by financing through Castle group. The Entire team was composed with both Castle and Li-Fung staff. The Business Strategy of Lifung.com was to target the SME market which is the small retailers/wholesalers. Further LF acknowledged that these SMEs had needs of diversification of products at a competitive price. They are also lack of up to date market information that would help them to make important decisions and they were currently served at the lowest priority in the old business model. These were due to that the traditional model wasn’t cost effective to do so. With new B2B Portal, LF would be able to group the SMEs small orders in order to provide this customer with limited amount of customization, small batch ordering, and differentiated product range with a competitive price. Further the Business is planned to charge 10-15% of the commission in which the SMEs used to pay much more. Li-Fung.com interacts with LF as being one of its Group’s key customers which linked the old business model with the new one. Further, internal training courses and daily exposure to new technology helped to demystify the fear of LF’s veterans. LF described such IT strategy that would defend their position against online threats while simultaneously extending operations into the SME (small-medium enterprise) market sector. Finally, plan was also made ahead that in the future the dot.com will be able to serve the supplier more efficiently by aggregating the suppliers to post their inventory surplus on the net as well.

RISK of E-commerce

Although many benefits are associated with going online, risks accompany the new strategy. The risks are differentiated into the following area: Competitor, industry, Customer, People, and Financial. Financially, the cost of setup is enormous and LF would go into major financial problem if the project is not a success. People wise, existing LF employees would have some resent against this dot.com venture which would lead to lower working moral and higher employee turnaround rate. Speaking of the competitor, this business model barrier is not high; competitors could develop a much similar one overnight. Industry standardization of the software and hardware will further lower the benchmark and making the system of Lifung.com obsolete. Further by linking the internal system to the web, LF is exposed to a higher rate of virus attacks/security breach that would disrupt the entire system that might tremendous cause damage to LF. Within the area of customer, existing offline key customer (major importers, wholesalers) fear of Lifung.com will damage their business by the motto of ” eliminating the middleman”. Finally the whole business model is formed under the assumption of able to aggregate small orders to allow customization and competitive price. If the orders are not sufficient to justify, LF could only choose between satisfying their customer at the cost of ruin their overall margin; or by rejecting the order on the risk of tarnishing LF long established reputation.

Recommendation

In view of all the benefits and risk that the e-commerce that are presented, I would suggest that a phase integration. Phase 1, Beta launch of the system to “test the water” of the new market. During this initial stage, dedicated marketing/sales team are grouped to target the US SME (whereas that market can adopt much easier). Phase 2, Integrate the E-commerce with their Key existing customers which allow the Key existing customer to benefit from the same process. Phase 3, integrate the entire E-commerce module within its infrastructure to further improve its outstanding supply chain management system. If at any stage that the management finds that the project is not anymore feasible, then it is recommended to cut the losses. In view of the possible complains of the existing customer, LF can offer certain exclusivity for the key customers on some design in which would help the key customer to maintain competitive. Also, some further discount on the commission scheme could be offered to key customer for larger bulk ordering. As the technology being developed, it is always an option to consider the use of a more standardized platform( off the shelf product) that can efficiently linked with LF intranet/extranet as the setup cost would be minimal and maintenance as well. To the end, LF should not loss its focus on what it is good at: the entire holistic supply chain management system that LF has implemented for the past decade that made its success. In view of the possible failure of the system, an option is to use Distributed DBMS. The Distributed database is several databases which relates to each other and they all have the same information. However, they can have different policies and different management on them. This is why, if one of them in anywhere faces failure, the others still keeps on working and no user gets error caused by that failure. These databases might be at different part of the globe with the least shared information.