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Global Product Solutions

Reinventing The Compass

There’s always space for niche players. But what if a niche is just the tip of the iceberg? After 16 years working for the world’s leading supply-chain manager, a top executive’s life was turned upside down. He took the chance to use his learnings and start afresh. But how

ambitious should the new company be? And how to succeed with fewer resources?

Keywords: Strategy, entrepreneurship, supply-chain, market segmentation, retail, brief cases,

business models, technological disruption, core capabilities.

LOOKING FOR DIRECTION

It was a quiet summer afternoon in Maia. David Schneider contemplated the warm sunset from

the balcony of his brand-new office - strategically located less than 10 minutes away from Porto’s

airport and less than one hour away by car of Portugal’s major industrial cities.

Just eight months ago, in January 2019, David was finishing his eight-year as Executive Vice

President of Li & Fung. He had joined the Hong-Kong based supply-chain orchestrator back in

2002, following the acquisition of his family’s business - a home textiles export trading firm.

Now, the seasoned executive had become an entrepreneur again and had to navigate the rough

waters of international trade in a much smaller and poorly equipped ship, at least when compared

to global corporations. His core crew remained the same, but he could no longer rely on the

multibillion-dollar supply-chain company that he used to call home. Why?

In 2014, a series of restructurings driven by the fight against middleman, hit Li & Fung. It started

with the spin-off of a business unit that accounted for nearly half of its sales, and got more

menacing by 2017, with the divestment strategy of its furniture, beauty and sweaters businesses

(Exhibit 1). In 2018, the time came for Li & Fung’s Portugal office to be closed.

Although market conditions were tough for the retail and logistics industry, the units tied to the

Portuguese office had been growing for the past decade. However, in September 2018,

headquarters informed the local company would have to close doors in the beginning of 2019.

With the support of his previous superiors, David decided to re-establish his family’s business to

continue serving the segments Li & Fung was no longer interested in. His new enterprise - Global

Product Solutions - clearly had potential. But what was the cost of reinventing the compass?

This case study was prepared by Hugo Volz Oliveira and Vasco Amoroso.

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THE LI & FUNG ERA

Li & Fung is best described as a global supply chain orchestrator. It was founded 1906 in Canton,

now Guangzhou. Fung Pak-liu - grandfather of the current Chairman, and Li To-ming - who

eventually retired - wanted to leverage their English and commercial skills to trade porcelain, silk,

and other goods. But it was only in in the 1950s that it began to resemble what is today.

After acquiring, operating, and selling some factories in Hong Kong after the second World War,

the Fung family decided the opportunity lied not in producing, but in coordinating production and

importing and exporting its output - be it toys, electronics, or ball point pens [1].

In the 1970s, Victor and William Fung - grandsons of the founder - were completing a PhD and

a MBA, respectively, at Harvard Business School. They were asked to return home and apply

their education to professionalise the business and transform it into an exporting powerhouse.

Then, in 1978, following the political and economic reforms implemented by Deng Xiaoping, the

landscape changed. China opened-up and Li & Fung was able to connect its growing number

of western customers to new factories across the border - the beginning of its platform.

The company, which in 1973 had been listed by the brothers on the Hong Kong Stock Exchange,

was re-privatized between 1989 and 1992 for restructuring reasons. Between 1990 and 2011,

Li & Fung grew from $230 million to more than $20 billion USD - a CAGR of 22.5% (Exhibit 2).

How? Their network of factories pioneered a business model that later became famous when

Uber, Facebook, Amazon, or Airbnb were hailed the West’s most popular taxi, media, shopping,

or accommodation providers - without owning the underlying cars, content, goods or real estate.

In Li & Fung’s case, it was clear they could become the world’s largest factory without owning

any shop floor. But, for that, they needed to grow quickly. M&A was the only way to go. It all

started in 1995, when it gobbled up a company practically its size - Inchcape Buying Services.

From then until 2010, Li & Fung acquired 70 businesses across the world and onboarded its

management (Exhibit 3). It was even hailed by Strategy&, a consulting firm, as a M&A leader [2].

But this strategy eventually backlashed as growth halted and cultural issues surfaced [3].

So, between 2013 and 2018, Li & Fung repositioned itself to develop the fashion supply-chain of

the future [4]. This meant it would stop focusing on product development and trading to dedicate

itself sourcing services and logistics in a digitalised and agile manner (Exhibit 4 to 8). But for how

long will a middleman find profitable space in an ever more decentralised world?

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DEVELOPING GLOBAL PRODUCT SOLUTIONS

After closing the Porto office, David Schneider hired several members of his former Li & Fung

team to replicate the more complex business model the supply-chain giant was no longer

interested in – that is, the one focused on product development for key retailers and brands.

The team started working in February in an hotel conference room. A couple of months after,

once the new office was ready, the team grew to 15 people. Organization was made simple to

reflect the agile approach this initiative demanded: everyone reported to the founder and the

structure was composed of commercial, quality control, and operations teams (Exhibit 9).

The commercial teams were composed of front office and product development staff – including

designers, engineers, and merchandisers - who coordinated the external manufacturing

elements - as well as the in-house photography, packaging, and marketing materials production.

Processes had to be simple to enable a fast reaction to customer needs. These were distributed

between the Americas, Australasia, and Europe. All production was finished in Portugal, but raw

materials and some semi-finished products came from Pakistan, China, and India.

As Exhibit 9 evidences, the business model has two main areas: the agency business and the

trading as principal business. The former serves clients who want to source products from

Portugal but don’t have a buying office or an agent, meaning margins are quite low – around 5%.

In the latter, GPS develops the whole product – instead of just buying it – for retailers’ private

labels and for brands. Whenever GPS owns the license of the brand, it can have up to full control

over the creative and commercial process – a larger risk that also commands larger rewards.

In cases in which GPS is only offering a design service without having the license, it just acts in

behalf of the brand as if it was a design studio. Obviously, due to the increased complexity of this

business, margins are higher – 20% on average, depending on the complexity of the project.

This is in line with the industry’s margins, made clear in Exhibit 8. In GPS’s case, agency

customers account for nearly 20% of sales. The goal is to end 2019 with nearly €5 million. And

David Schneider is positive the business can grow to €20 million with the existing team.

However, it’s not clear whether it’s possible to achieve that level while guaranteeing the same

agility and speed required by the customers. A company like this can be digitally transformed,

but the service still needs to be human – both to the customers and to the suppliers. After all,

without such service, any technological startup can disrupt the industry’s development process.

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LATITUDE AND LONGITUDE

Navigators were never much troubled with the computation of their latitude. Despite an increase

in accuracy since the quadrant and astrolabe were invented in the Roman Empire, one’s location

between the poles was easily assessed with the help of the sun or of the stars [5].

But calculating longitude was a different problem. It was only in the XVIII century that a reliable

chronographer that worked at sea was developed [6]. This method, which eventually trumped

alternative solutions, allowed sailors to know whether they were east or west of Greenwich.

In corporate strategy, it seems business leaders enjoy repeating history. It’s fairly easy to decide

where an organisation should be positioned north or south of a market’s equator. But it’s far

more complex to know how to get – and successfully stay – there through the course of time.

Note GPS has been serving a select group of clients. It produced Ralph Lauren, Sonia Rykiel,

and Hugo Boss via Fremaux-Delorme – which owns the license for those brands. Directly, it

developed Hackett, Andrew Martin, and Emily Bond. These home goods were destined to

Harrods, John Lewis, Crate & Barrel, Falabella, TJ Maxx. But were these the right clients?

Could bigger brands and retailers be interested in GPS’s flexible level of product development

and service? Or could GPS chase the growing trend for customised products by serving the long

tail of individual end consumers? If so, should that be done alone or through partnerships?

In the short-term, are the current trade wars enough to push customers out of Asia back into

sourcing from European vendors? And, even it if is, can GPS compete against Li & Fung and

other major supply-chain players, e.g. Connor or Junaman, that can offer lower prices?

To mitigate that risk, is it wise to open foreign offices to tap into that opportunity before

developing more sophisticated IT systems and processes? Or can GPS fulfil its global ambitions

using its current Portuguese-based model and just meeting its customers in tradeshows?

Lastly, should it expand beyond home textiles into other home goods? Should it explore other

customer segments in the home – e.g. the hospitality business? If so, should GPS develop the

business directly or through distributors? And which brands should it target (Exhibit 10 to 13)?

As the first anniversary of Global Product Solutions approached, David Schneider decided it

would be important to engage his team to plan the voyage ahead. After all, as Saint-Exupéry

wrote in Citadelle, an unfinished book, “building a boat is not about weaving sails, forging nails,

nor reading stars; but about giving a taste of the singular sea”. So, what should that taste be?

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References

[1] Fung Group, “Fung Group - Our Journey,” 2019. [Online]. Available: https://www.funggroup.com/en/about/our_journey/.

[2] Strategy&, “The Capabilities Premium in M&A,” 22 February 2012. [Online]. Available: https://www.strategy-business.com/article/12105?gko=05907.

[3] Financial Times, “Li & Fung faces guidance questions,” Financial Times, 14 January 2014.

[4] Li & Fung, “Annual Report 2018,” 2018.

[5] Smithsonian Mag, “The Story of the Astrolabe, the Original Smartphone,” January 2017. [Online]. Available: https://www.smithsonianmag.com/innovation/astrolabe-original-smartphone-180961981/.

[6] The Longitude Prize, “History of the Longitude Prize,” 2014. [Online]. Available: https://longitudeprize.org/about-us/history.

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Exhibits

EXHIBIT 1 – LI & FUNG’S BUSINESS DIVESTMENTS

Source: Li & Fung, Investor Day 2019 and 2016 Results Presentation

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EXHIBIT 2 – LI & FUNG’S METEORIC RISE AND FALL

$0

$5,000

$10,000

$15,000

$20,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Li & Fung Revenues between 1990 to 2018in '000 USD

Source: Li & Fung public data, compiled by the authors

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EXHIBIT 3 – LI & FUNG ACQUISITIONS BETWEEN 1995 AND 2010

Year Led by Hong Kong office Led by LF USA Led by LF Europe Led by IDS (now LF

Asia & LF Logistics)

1995 - Inchcape Buying Services

1996 - Macneil - Perfect Trading

1998 - Standard Fireworks Livring

1999

- International Buying Services Swire & Maclaine - Camberley

2000 - Europe Sourcing Colby

2002 - Janco - Holport / Texnorte

2003

- Civati Momentum Kariya - International Sourcing Group - International Porcelain / Firstworld Garment

2004 - Comet - BMB Apparel Zeeking - Ralsey

2005 - Promocean - Tropicanusa - Briefly Stated

2006 - KQIS Global Sourcing

- Youngstuff - Homestead - Oxford Industries (men’s wear) - Rosetti

- Impac SittTatt

2007

- Tommy Hilfiger Global Sourcing - CGroup - Alliance Merchandising - Liz Claiborne (Project Astro) - Star Profit

- Regatta - American Marketing - Enterprises Inc.

- Peter Black - PB Logistics - Sebor Sarawa - Sebor Sabah

2008

- Imagine - Silvereed - Wilson Textile - RT Sourcing - Mexx

- Giant - Van Zeeland - Miles

- Shanghai Healthcare - WTI - Universal Pharmaceutical

2009

- JMI - Liz Claiborne - Talbot - Hudson's Bay

- Wear Me Apparel LLC (Kids Headquarters) - Shubiz

- Roots - PT Westside - AGI

2010

- HTP - Jackel - Kenas - IDS - Fenix

- Cipriani - Oxford Industries (women’s) - Jimlar - Kenneth Cole - Production Inc.

- Heusel - Just Jamie

Source: Li & Fung public data, compiled by the authors

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EXHIBIT 4 – LI & FUNG’S RESTRUCTURING PLAN

EXHIBIT 5 – LI & FUNG’S GLOBAL FOOTPRINT AS OF 2018

Source: Li & Fung, Investor Day 2019

Source: Li & Fung, Investor Day 2019

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EXHIBIT 6 – LI & FUNG’S PLAN TO OUTCOMPETE ANALOG BUYING OFFICES

Source: Li & Fung, Investor Day 2019 and 2016 Results Presentation

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EXHIBIT 7 – LI & FUNG’S NEW DIGITAL PLATFORM

EXHIBIT 8 – LI & FUNG’S SIMPLIFIED P&L FOR COMPARABLE BUSINESS UNITS

Source: Li & Fung, 2017 Analyst Presentation

Source: Li & Fung, 2018 Annual Report

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EXHIBIT 9 – GLOBAL PRODUCT SOLUTIONS ORGANISATIONAL STRUCTURE

CEO

Agency Business Principal Busines

Own Brands Third-party Brands

Quality Control Operations

Source: Case authors

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EXHIBIT 10 - OVERVIEW OF A HOME TEXTILES COLLECTION PLAN

EXHIBIT 11 - OVERVIEW OF A HOME LIFESTYLE COLLECTION PLAN

Source: Case authors

Source: Case authors

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EXHIBIT 12 - HOME TEXTILES AND DECORATION MARKET TRENDS

EXHIBIT 13 - THE HOSPITALITY OPPORTUNITY

Source: Center for the Promotion of Imports, Netherlands Ministry of Foreign Affairs

Source: Case authors