Li and Fung Trading Case Study Essay

Li and Fung Trading Case Study Essay

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1. The trading industry is a complex one that involves dealing with many different stakeholders while making strategic alliances with suppliers of raw materials, manufacturers and transporters. A porters 5 forces analysis reveals that the suppliers in this industry (including those that supply raw materials and those that manufacture) are highly fragmented and are high in number. As a result no single supplier firm commands a dominant market share in their respective product markets. Trading companies not only have more negotiation power on the bargaining table but also establish guidelines, which their suppliers must follow. As a result suppliers to this industry do not wield much bargaining power.
The buyers of the services rendered by this industry include large multi national corporations that outsource their supply chain management activities as it is outside their core competencies. Some customers are extremely large volume buyers and as a result have a large amount of influence on the price of these services. The cost of switching between traders is small and the process quick, therefore buyers that are price sensitive are very likely to switch to those traders who can supply the same goods for a lower price. But even though there are many traders in the industry, only a handful have distinguished themselves because of their large global sourcing and manufacturing networks, such companies can even charge a premium for their services as they deliver extremely high levels of value and quality. Thus although buyers in this industry are price sensitive, there is a constant struggle between value for money (quality, timely delivery, customer service) and low cost.
The trading industry lacks any significant barriers to entry t...


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... network allowing them to organize their functions as if they were different steps in the manufacturing process. Typically they will only use 30-70% of the supplier’s capacity thus allowing for flexibility and access to new suppliers. This also prevented suppliers from becoming completely dependant on Li & Fung. Even the contracts that Li & Fung entered into with these companies had a clearly defined exit strategy that gave Li & Fung enough power to drop a supplier without hassle if the need be. In order to improve suppliers’ performance Li & Fung provided them with feedback on their production quality and timeliness, those suppliers that were performing poorly were dropped and new ones were found to take their place. Li & Fung was a “smokeless factory” which did not own any manufacturing facilities but was deeply involved in their management and production processes.

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