Innovation leads to long-term sustainability

15 December 2008

Edwin Sim, Human Capital Alliance, Managing Director: Many of our clients often talk to us about the importance of innovation. We are happy to feature brief descriptions from several leading thinkers and practitioners of innovative practices.

Human Capital Alliance Senior Advisor K I Woo recounts how a 75-year-old Hong Kong company rejuvenated itself with innovative “adjacency” moves

Some of Asia’s best companies have fuelled sustained growth during the past decade through carefully planned innovative “adjacency moves” – expansion away-from, but related to their core businesses.

Harvard and MIT educated Victor Fung and his brother William – also Harvard educated – began in the 1970s to rejuvenate and transform their 75-year-old Hong Kong trading company, Li & Fung that was founded by their grandfather into a global conglomerate that now accounts for $US8 billion in garments and consumer goods for some of the world’s major brands.

Li & Fung now produces more than two billion pieces of apparel, toys and other consumer items every year and most surprisingly, it doesn’t own a single factory.

“The two brothers redefined the firm’s core businesses and became fabulously successful by moving into adjacencies,” said Chris Zook in his best-selling book “Beyond the Core, Expand your Market”.

With University of Pennsylvania, Wharton School professor, Jerry Wind, the two brothers published the best selling  “Competing in a Flat World, Building Enterprise for a Borderless World”.

The book explains how through brilliantly–conceived business innovations, Li and Fung successfully transformed their company in today’s “flat-borderless” world.

The company changed the clothing manufacturing distribution-chain for many major retailers including The Limited in the US.

Network orchestration

The Fungs successfully replaced old-fashioned infrastructure and huge employee bases with a fluid, ever-changing network that can design, manufacture and deliver almost anything anywhere. They have literally perfected a set of operating principles that they call “network orchestration” for their business.

For example, Li & Fung is able to deliver shirts within 30 days after an order is placed to hundreds of “The Limited” stores scattered throughout the US. The shirts are all tagged with prices by Li & Fung’s manufacturers and the staff unpacks each box and displays the shirts for sale.

An amazing element of Li & Fung’s network orchestration process is that the company sources the shirt’s components and its manufacturing processes from the best available suppliers that are often located in different countries.  The buttons may come from Pakistan, the collars may be made Indonesia and the cloth may be made in Thailand. The shirt is then assembled elsewhere and prepared for shipping overseas.

Managed via the internet

 

The whole network orchestration process is managed via the internet by Li & Fung. Network orchestration, the authors said takes a broad view of the overall supply chain.  The network orchestrator, they said designs the overall supply chain, drawing multiple factories in different regions to collaborate on a single product.

Without orchestration, many of the gains of networks and global collaboration, they said are lost because the resulting supply chains are sub-optimized. “What the discipline of management was to the old vertically integrated, hierarchal firm, network orchestration is to the company working in the flat world,” they said.

The visible drivers, of today’s globalized supply chains, the brother said are the proliferation of personal computers and the internet. People they said can be connected to each other from anywhere and the rise of work-flow software has allowed individuals to collaborate on projects anywhere in the world

With a lean infrastructure, each of Li & Fung’s own employees generates more than $US1 million in sales. The company has earned a return on equity of more than 38 per cent for many years.

Li & Fung’s mission today, they said is to be the premier consumer products trading company delivering the right product, to the right place at the right time at the right price.

How The Limited and Li & Fung changed distribution chains

 

Through network orchestration, Li & Fung helped The Limited implement new processes and procedures that reduced inventories and delivery times. These important cost-saving processes were passed on to the consumers.

Because of these cost-saving processes, the company was able to frequently used air-freight to transport finished-goods to the stores.

Instead of picking and packing the products at The Limited’s Columbus, Ohio regional distribution center, Li & Fung arranged for the assortments to be done at Asian factories. Bar-coding and Radio Frequency Identification Tags (RFID) and even retail price tags for the individual stores were also done at the factory.

All these processes meant that instead of taking two weeks to be picked and packed at the distribution center, boxes loaded with inventory for specific stores would be delivered by small tricks directly to them on a daily basis if necessary.

By shaving weeks off the distribution process, Li & Fung created huge business implications for The Limited. “A specific The Limited store could adjust orders on the fly – in cold weather they could order sweaters that can be delivered from Asia almost immediately,” they said.

The Limited – not competing against  suppliers

Leslie Wexner, The Limited’s owner, the writers said had the ability to see the big picture. “He wasn’t concerned about giving away the retail pricing information because he saw that giving Li & Fung the price tags created opportunities to make the entire chain more efficient for everyone,” they said.

Wexner, they said was not competing against his suppliers. “He was competing against other retailers with their own networks,” they said.

Principles now used everywhere

Li & Fung’s network orchestration principles are now used by major industries throughout the world. As global logistics and coordination have improved, suppliers can now be virtually anywhere.

Today’s suppliers don’t have to be outside the factory gates. “In fact,  right outside the factory gates now means anywhere on the planet,” they said.

Boeing’s new 777 jet is assembled from three million parts from more than 900 suppliers in 17 countries around the world. The company primarily produces the wings and fuselage and assembles the aircraft. “Most of the planes components are outsourced around the world,” they said.

According to the authors, everything changes in a flat world, above all what it takes to run a winning company. “Success is less about what a company can do itself and more about what it can connect to,” they said.

Old-fashioned infrastructure and huge employee bases are now being replaced by a fluid ever-changing network that can design, manufacture and deliver almost anything anywhere.