Business Expansion and Risk Analysis of Li and Fung
K6305 Business Intelligence Group Assignment 1Business expansion and Risk analysis of Li and Fung Group Members: Janani Janardhanan Anand Krishna Om Guru Naresh Kannan Venkataramanujam
Flow of the presentation• Introduction• About Li and Fung• Risks associated & BI required – Buying agency – Sourcing – Borderless Manufacturing – Virtual Manufacturing• Risk Map• Summary• Illustration
Introduction• Every day is a new business day• Daily complexities and uncertainties have led to traditional methods being challenged• Companies trying to lure or woo the consumers/customers• Consumers/customers flirting with the company• Speed, agility, dynamism, responsiveness, and flexibility is the need of the hour• Decisions related to sourcing, manufacturing, logistics become critical as it can lead to a sustainable competitive advantage for organizations• Hence it is a war between the Supply Chain Management of organizations – Better inventory management – Minimize costs and maximise efficiency – Provide best quality products – PROCESS OF DELIVERING PRODUCTS AND SERVICES TO THE CUSTOMER
About Li and Fung• Supply chain management is the core business of Li and Fung.• Trading, Logistics and distribution are the three main specialisations of Li and Fung’s business.• Li and Fung is deemed to be the leading supply chain manager for the consumer goods market and it is listed in the Hong Kong stock exchange since 1992.• Li and Fung has expanded its business over a period of time. In 1906, it used to be a buying agency.• Expanded its services to sourcing, borderless manufacturing, virtual manufacturing and eventually became a supply chain management business, co-ordinating a supply chain network in 40 countries. Li and Fung expanded its business by adding value at every stage of expansion but faced considerable risks at every stage of expansion. Let us analyse the risks faced at every stage of expansion and also the business intelligence needed to overcome the risks.
Buying Agency Risk• Customers going directly to suppliers because of increase in the cost of raw materials• Lack of analysis and information about the customer (in terms of ownership, financial background) or the supplier (delivery cycle, lead time, logistics support etc.)• Attractive prices being offered by competitors to their clients• Suppliers are concentrated and hence have a higher bargaining power and have no or few substitutes
Buying Agency: Business Intelligence• What is the minimum order that needs to be placed with the supplier? What is the order placed by the client? Is it less or more?• At what pricing is the competition providing the same product or design?• What is the kind of volumes that the competition’s supplier enjoys? What are the economies of scale to get better prices?• How will the product be delivered and in what kind of packaging?• What is the specified lead times for each line of product?• Who are the competitor’s suppliers? What are their payment terms? What kind of products do they buy and in what volumes? What is the cost of buying to them? Who are their clients?
Sourcing: Risk• Scarcity of raw materials• Change in demand of a certain product leading to supply issues and non- availability and hence delay in procurement leading to longer lead time.• Forex fluctuations• Sourcing from and outsourcing to countries where infrastructure in terms of transportation and communication is poor• New Supplier• Backward integration- the customer can get into own in-house manufacturing/production of raw materials/inputs• Quality not meeting requirements since sourcing from many• Trade regulations making sourcing difficult- rising imports, duties, tax etc.• No tax incentives or trade incentives on certain important raw materials.
Sourcing: Business Intelligence• What are the alternate resources for every product and where is it available? What price points do they operate on? Does it conform to necessary quality guidelines? What is the stock availability? Who provides these inputs/raw materials?• When sourcing different kind of raw materials/inputs: – Does the supplier have the capacity to send the part directly to the manufacturer? – If not, how long will take it to reach the nearest Li & Fung outsourced warehouse? – How long will it take to move the material from the warehouse to the plant?• Intelligence on economic indicators leading to better cost- negotiations with the supplier.• Assessing the regulatory environment ( political, economical) of sourcing countries from trade reports and identifying alternative sourcing countries with liberal trade policies to optimise sourcing cost
Borderless Manufacturing: Risks• Poor production, planning, and control• Prioritization of manufacturing by the manufacturer and hence Li & Fung getting a back seat• Higher lead times and longer delivery schedules because of non- availability of raw materials (stock-out situation)• Delays at one manufacturing plant impacting the entire value-chain• Not having enough knowledge about the manufacturer (especially if new one) and hence no control or management on the manufacturing plant – Poor pipeline visibility – Poor information flow – IP theft – Skills & labor issue – Technical snag
Borderless Manufacturing: Business Intelligence• Are the products arriving just in time (JIT)?• What are the kind of bottlenecks that can be expected at the time of manufacturing?• Is the material/product from a single source of supply with no short-term alternative?• Are there are any non-value added processes that can be taken out?• How many lines are there in the plant? What is the cycle time? What is the level of automation and relying on labour? What is the waste/breakage percentage?• What are the various quality parameters for every product line?• Is Li and Fung the biggest client or the smallest client in terms of volume and value to the manufacturer?
Borderless Manufacturing: Business Intelligence• Evaluating the Manufacturer – Ownership- is it a professionally managed company or family owned setup or any other. – Financial background- what does their balance sheet look like. This could also be assessed by doing a recee of the plant and making a few judgment assumptions to ascertain their financial background. – Product Expertise- What kind of products do they manufacture? Which is their best selling or the most selling product? – Ability to supply geographically- Do these guys have the capabilities to freight products to any part of the world so that the next step of value-addition can take place. – Customer base- Who are their clients? What kind of orders do they place? Will Li & Fung be the largest buyer or the smallest buyer? – Quality or excellence awards- Do they have GOOD MANUFACTURING PRACTICE. Are they six sigma or TQM certified? – Samples or developed prototypes- Do they have the capabilities of developing a sample or prototype before going to actual production? – Warehousing facility- Can the inputs/raw materials to manufacture be stored at their existing warehouse or do they need to come JIT? – Customer testimonials- Any appreciation they have received from their customers for quality, speed of delivery etc. – Project managers for coordination- Do they have separate focus teams for each project? This is to ensure that Li & Fung gets a dedicated resource that is all the time coordinating with them through every stage of production. – Scale and Scope- What kind of volumes do they operate on? What is their minimum quantity/order? Do they have the capabilities to manufacture allied or related products as well? – After sale support & communication facilities- Do they have a sound communication infrastructure such that a minute-to-minute real time check can happen in terms of production and logistics? What are their policies on breakages and defective products? – Investment capacity- How open is the manufacturer to investment in new facilities or additional capacities? Is the owner progressive and looking to grow their business with Li & Fung?
Virtual manufacturing: Risk• Lack of understanding the client requirements (design team )• In terms of designing not understanding the local customer needs and also the offerings by the competition• Risk of Prototype not matching the final product outcome• IP theft of design prototype• Change in client preferences
Virtual manufacturing: Business Intelligence• How quick can the design changes be done? What is the turnaround time for creating a new design?• Feasibility of the raw materials being available for designing the products?• What is the turnaround time to create a prototype of the design with close to actual specs?• Do the manufacturers have their own independent design center? Are they in tune with the new & better raw materials available and also done some trial and error?• Skill sets in CAD/CAM? Latest softwares/tools available?• Can we set up a 3D virtual/simulated factory end-to-end (design development to production)? What will be the cost?
Risk Mapping Risk Mapping Risk Map Example Identifying, Mapping & Managing Business Risks Translating the Internationalization Risk Factors into events Likelihood 1. Customer risk: customers Activity Risk bypassing Li and Fung and going 6 10 1. Workforce Issues (e.g. hiring) directly to suppliers 3 2. Operational Issues (e.g. embezzlement) losing 2. Competitor risk: Li and Fung 1 3. _ customers to competition due to 4 8 pricing Moderate 4. _ 3. Stock out problems with suppliers 5 Co-Ordination Risk 4. Quality of raw materials sourced 5. Supplier issuesvarious suppliers from (e.g. quality problems) 2 6. Buyer 5. Trade regulations and policies of Issues (e.g. default in payment) 7 7. sourcing and manufacturing Channel Issues (e.g. shipping problems) 9 countries Low 8. _ 6. Delays at manufacturing plant Industry Risk 7. Delays at the final assembling plant 9. Pricing Issues 8. Quality of the final manufactured 10. Demand issues product 11. Regulatory Issuesof designs in virtual 9. IP theft (Regulations change) Low Medium High 12. _ manufacturing 10. Design prototype not matching the final manufactured product Severity of Impact to Profits 41
SUPPLY CHAIN MANAGEMENTGLOBAL CHAIN OF EVENTS COORDINATION INTEGRATION
Supply Chain Management Buying Sourcing Borderless Virtual Agency Manufacturing Manufacturing Well Integrated SCMSuppliers Raw Material Manufacturers Product Logistics Producers Designers
Summarize• Supply Chain Management becomes efficient when there is good integration among suppliers, manufacturers, wholesalers, distributors, warehouses, retailers and customers so that produced products are distributed in the right quantities, to the right locations and at the right time.• Li and Fung, over a period of time, has evolved from a buying agency to a seamless supply chain management organisation. In other words, it has used business intelligence at every stage of expansion to overcome the risks and this has added value to each stage of expansion.• By adding value, inventory movement gets optimised throughout the supply chain.• As a global supply chain manager, Li and Fung may face similar risks that it faced in the previous stages of its expansion, i.e customer risk, information risk, supplier risk and of all operational risk.
Illustration of product line expansion for Li and Fung• It is a natural extension for Li and Fung to venture in the Supply Chain of Beauty Products as this category compliments their strength in Fashion & Lifestyle products.• Li and Fung needs to leverage their internal and external resources to maximize their business when venturing into this new category.
Risk• Assuming that they would like to get into hair care products, which include shampoos, conditioners, hair brush, hair oil, hair dryer, hair dye, hair iron etc.• The biggest risk that this category carries is that of Quality Risk. The products need to have been tested so that there are no side-effects and damages to the human skin.• Hence sourcing high quality ingredients to high quality manufacturing to high quality packaging becomes imperative.• One complaint on quality can have major repercussions on the image and reputation of Li and Fung.
Business Intelligence• Need to know what the current price/cost in the market is so that they can source it cheaper and hence offer a better value to their client.• Advantage if they have any of their existing suppliers already sourcing hair care products so that they can leverage on the existing relationship and get a better cost.• In terms of borderless manufacturing, they need to identify manufacturers who have a history of manufacturing such products and have developed capabilities of formulation development, laboratory testing, designing, and packaging.• The manufacturer should also have the credibility and meet quality standards and necessary approvals from regulatory bodies if any.• The above intelligence, if right, can have a huge potential in terms of product diversification for their existing customers as well. – For example, Tommy Hilfiger which is high-end fashion/clothing brand can actually venture into hair styling because of the expertise and value that Li & Fung offers in that category. This means product extension for Tommy Hilfiger and it means more business from existing customers and hence a win-win for either parties.