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  1. 1. Operations Management-II Dr. S.Venkataramanaiah Assistant Professor OM & QT Area IIM Indore, Pigdamber, Rau Indore- 453 331 Email : [email_address]
  2. 2. Global Sourcing, Logistics and Lean Suppliers Li and Fung Global sourcing
  3. 3. Li and Fung Case and Lean Suppliers
  4. 4. Objectives <ul><li>To understand various issues of </li></ul><ul><li>SCM </li></ul><ul><li>SCM in global companies </li></ul><ul><li>Role of IT and its implications </li></ul><ul><li>New business areas and branching </li></ul><ul><li>New business vs core sourcing business </li></ul>
  5. 5. Li and Fung Global Sourcing Early stages 1950s 1970s Pak-Liu and Toming Hon-Chu regime & British control 1937- Ltd Co & WW II and Pak-Liu passed away HK export hub Labour intensive products Competition (Taiwan Singapore), disintermediation 1973-Restructuring by HBS Professionals, public ltd, IPO – 113 times subscription
  6. 6. Li and Fung Global Sourcing 1990s Post 2000 Effective use of IT Global status (2000) and 95% rev from NA & Europe 1992- re-listed HKSE Expansion of sourcing US, Europe & Acquisitions Expansion of product lines & Customer network 2002 revenue increase 13% & 38% increase in NP US major clients like Disney etc Products- soft/garments (68%) and hard goods (32%) 1980s 1979-relocation of manf to S China, trading in developing Economies- Taiwan, S’pre, Korea Asia’s Major Trading 1989 drastic change- Pvt co Restructured-Export & Retail 68 offices in 40 Countries 4.5k employees and became Global player
  7. 7. Li and Fung Global Sourcing <ul><li>Evolution (Early stages to late 1930s) </li></ul><ul><li>Started in 1906 from South China, oldest Chinese Export companies ( Environment - trade in China was under the control of foreign commercial houses) </li></ul><ul><li>Originally exporting porcelain and silk to US and later included bamboo, jade, ivory, rattan ware, fireworks and handicrafts </li></ul><ul><li>Major bottleneck was language for trading and traders who speak both English and Mandarin became mediators/agents (L & F is one among them) and commissions were as high as 15% on each export </li></ul><ul><li>Li and Fung established as a ltd company in 1937 in HK </li></ul>
  8. 8. Li and Fung Global Sourcing <ul><li>Evolution (Mid 1950s second boom) </li></ul><ul><li>1940 (WW-II) trade was ceased and later sold to Pak-Liu’s family and Li & Fung became sole owner </li></ul><ul><li>Restart of Li & Fung in 1949 in HK which was under the control of British </li></ul><ul><li>Second wave of business boom (1950s) due to refugees and China as manufacturing hub for labour intensive consumer products </li></ul><ul><li>Li and Fung started exporting garments, electronics, plastic flowers and toys and HK became biggest exporter </li></ul>
  9. 9. Li and Fung Global Sourcing <ul><li>Evolution (1970s Competitive period) </li></ul><ul><li>1970s HK faced severe competition from developing economies (Taiwan& Singapore) and margins gone down to 3% due to disintermediation </li></ul><ul><li>Take over by third generation (HBS-Prof and MBA student) and restructuring at all levels </li></ul><ul><li>1973 went public and listed in HKSE and IPO was over subscribed by 113 times. </li></ul><ul><li>1979- opening of Chinese economy and relocation of manufacturers to south China due to cost effectiveness (low labour costs) </li></ul>
  10. 10. Li and Fung Global SC
  11. 11. Li and Fung Global SC
  12. 12. Li and Fung Global SC
  13. 13. Li & Fung Global SCM <ul><li>1970s- regional sourcing agent and exhaust of quotas in HK and look out for other areas and offering of complete product package </li></ul><ul><li>1979-82 expansion from sourcing to manager and deliver of production programmes including design, manf & delivery </li></ul><ul><li>1983 onwards- Developing economies and change of manf hub and movement of manf to S China – dispersed manf </li></ul>350 mostly in USA, Europe Li & Fung (35 offices 20 countries) 3PL 26 countries 7500 suppliers Other Suppliers Garment Manufacturers Logistics Retailers Design Cotton Suppliers Weavers Dyers Decipher trends
  14. 14. Li & Fung Global SCM <ul><li>Dispersed Manf and SC customisation- Transistor radios, baby dolls (front and back end of SC in HK and middle portion of SC was performed in China) </li></ul><ul><li>Movement to other parts of China (where costs were still lower) and SC optimisation </li></ul><ul><li>SCM focus on cost reduction (item cost at factory is $1 and at customer end it is $4) major cost due to distribution </li></ul>
  15. 15. Li and Fung Global SC <ul><li>Sourcing network evolution </li></ul>SC Consumer needs Prod Desgin RM sourcing Factory sourcing Local forwarding Wholesaler Manf control Forward Consolidation Custom clearance Shipping control Prod. Devel Consumer
  16. 16. Li & Fung Global SCM <ul><li>Global Sourcing Network: </li></ul><ul><li>North Asia – 21 </li></ul><ul><li>Europe and Mediterrian -12 </li></ul><ul><li>South Asia - 11 </li></ul><ul><li>US- 9 </li></ul><ul><li>SEA- 9 </li></ul><ul><li>South Africa- 3 </li></ul>
  17. 17. Li & Fung Global SCM <ul><li>Global Supply Network: Right manufacturer for product based on qlty, cost, environment, trade-barriers, transportation cost, environmental rules and stds, child labour etc in importing countries. </li></ul><ul><li>For Levis final garment ( need to supply in six weeks ) manf in Thailand from five factories, zippers & buttons from Japan, yarn purchase from Korea, woven and dyed in Taiwan </li></ul><ul><li>Reduction of obsolete inventories of FMCG items by minimising TA time and buying right things at right place at right cost and quality. </li></ul><ul><li>Tapping of wide network and shifting of production to low risk areas from high risk areas (9-11 experience) </li></ul>
  18. 18. Li & Fung- Supply Chain capabilities Dramatic reduction in LT Constant search for new & better sources of supply Better Inv. Mgmt. Lower mark-downs Going upstream & organising production Flip info between 350 customers/7500 suppliers Managing 1.5 m workers in 26 countries Participating in design, manage tiers of suppliers Developing capabilities in Logistics & Transportation Dissecting the value chain
  19. 19. Li & Fung Global SCM <ul><li>Major enabler IT </li></ul><ul><li>IT for communication, cost reduction, transparency, integrating suppliers, buyers and manufacturers, fine tune specifications, real time information on production to help manufacturers to accommodate the changes </li></ul><ul><li>IT helped in achieving many benefits associated with “ Postponement ” strategy of SCs. </li></ul><ul><li>Partnership with Levis, Pillowtex etc for design, manf and marketing of their products. </li></ul>
  20. 20. Lean Suppliers
  21. 21. Lean Suppliers <ul><li>Why lean suppliers? </li></ul><ul><li>Some experiences </li></ul><ul><li>How to go about it? </li></ul><ul><li>Issues and Conclusions </li></ul>
  22. 22. Lean suppliers <ul><li>Why lean suppliers? </li></ul><ul><li>Strength respect strength </li></ul><ul><li>Lean on shopfloor performed better and it needs to be integrated other areas (MRP and MRP-II) </li></ul><ul><li>For Japanese companies in US, suppliers from Japan were not able to supply from Japan </li></ul><ul><li>Political pressures to procure locally (Hyundai) </li></ul><ul><li>To bring organisational change and sustainability in suppliers’ capabilities </li></ul><ul><li>Economic incentives and customer support </li></ul><ul><li>Lean customer needs lean supplier (why lean?) </li></ul>
  23. 23. Lean suppliers <ul><li>Do it yourself </li></ul><ul><li>Vertical integration fallen due to good long-term relations and companies are able to benefit significantly </li></ul><ul><li>Customer help supplier in many areas </li></ul><ul><li>More focused on single product/line and more innovative, productivity gain sharing </li></ul><ul><li>Collaboration in value added activities and product development etc </li></ul>Why lean suppliers?
  24. 24. Lean suppliers <ul><li>Switch to a lean supplier </li></ul><ul><li>Trust between customer and supplier is essential to achieve benefits </li></ul><ul><li>Lean supplier will have prior commitments and can not supply to new customers </li></ul><ul><li>One can create a pool of lean suppliers in order to improve their performance </li></ul>Why lean suppliers?
  25. 25. Lean suppliers <ul><li>Steer your supplier to a good consultant or partner </li></ul><ul><li>Customer should encourage a supplier to develop lean capabilities </li></ul><ul><li>Motivate suppliers to learn lean </li></ul><ul><li>Learn from facts </li></ul>Why lean suppliers?
  26. 26. Lean suppliers <ul><li>Lean suppliers is driven by multiple concerns </li></ul><ul><li>To avoid diseconomies of vertical integration outside of core business </li></ul><ul><li>Helping suppliers to become lean potentially enlarges the pool available for sourcing choices </li></ul><ul><li>Customers may be more effective than outside parties in teaching suppliers to be lean </li></ul>Why lean suppliers?
  27. 27. Honda Experience <ul><li>Transition from motor cycle company (in 1948) to an automobile (car) manufacturer(in 1960) </li></ul><ul><li>Developed suppliers from scratch with three sources- suppliers of motor cycle parts who were familiar with Honda, small suppliers in local market and larger companies supplying to other auto companies </li></ul><ul><li>Make products where we sell and buy our parts where we make our products </li></ul><ul><li>Small suppliers have become more responsive than large suppliers whose customers are big three. </li></ul>
  28. 28. Honda Philosophy <ul><li>Honda suppliers need to be responsive for Honda’s needs </li></ul><ul><li>Management attitude is more important than technical expertise (right attitude-willingness to take risk, racing spirit) </li></ul><ul><li>Investment in new technology before competitors </li></ul><ul><li>Investment in people, technology, training, good governance etc </li></ul><ul><li>Life time supplier relation </li></ul><ul><li>Mutual responsibility and obligation </li></ul><ul><li>Honda is a philosophy driven company </li></ul><ul><li>Make suppliers to understand Honda thinking </li></ul>
  29. 29. 3 BPs and 3 As at Honda <ul><li>3 BPs </li></ul><ul><li>Best practices, best process and best performance </li></ul><ul><li>Supplier development group (from different areas) overseas supplier improvement activities and work at supplier’s facility and focus on work improvement </li></ul><ul><li>Productivity of Honda suppliers increase by 50% in 1994 </li></ul>
  30. 30. 3 BPs and 3 As at Honda <ul><li>Internal operations philosophy </li></ul><ul><ul><li>encourage fresh thoughts </li></ul></ul><ul><ul><li>fact based analysis </li></ul></ul><ul><ul><li>low cost solutions by 5 whys </li></ul></ul><ul><ul><li>know the context by examining the 3As (actual part, actual place, actual situation) </li></ul></ul><ul><ul><li>create smooth flow with no waste </li></ul></ul>
  31. 31. Lessons for customers <ul><li>Structure the learning process </li></ul><ul><li>Choose the knowledge recipient carefully, keeping in mind how the recipients capacity for knowledge transfer </li></ul><ul><li>Once suppliers have been selected, manage the relationship in a way that minimises long-term dependence and speeds the transition to self sufficiency. </li></ul><ul><li>Balance learning and monitoring behaviors </li></ul><ul><li>Don’t worry about knowledge spillover to competitors, do worry about impact of multiple customers on a supplier’s responsiveness </li></ul>
  32. 32. Lessons for suppliers <ul><li>Understand what skills will be taught, how long it will take to learn them and how applicable they will be to other customers </li></ul><ul><li>Make sure your customer is trustworthy </li></ul><ul><li>Provide incentives for all members of the firm to contribute their ideas </li></ul><ul><li>Grow your capabilities as fast as you grow your business- if not faster </li></ul>
  33. 33. Procurement Mechanisms Issues to consider Product Attributes System Attributes Single item, Single attribute Multi item, single attribute Single item, configurable attributes Business constraints Cost complementarities Capacity constraints Single item, multi attribute Multi item, multi attribute Multi item, configurable attributes Increasing complexity
  34. 34. Conclusions <ul><li>Global sourcing requires appropriate selection of customers and channel partners </li></ul><ul><li>Need to use proven tools and techniques including appropriate IT for achieving efficiency and effectiveness </li></ul><ul><li>Lean suppliers is one of the important enablers for achieving competitiveness in the complete value chain </li></ul><ul><li>Continuous improvement is also an important element </li></ul>