We have heard about the Internet knocking out the middleman in thesupply chain. While this may have contributed to unemployment, it has,nevertheless, helped the consumer in that it has lowered the prices ofmany goods. At the same time, the Internet has not threatened themiddleman to the point of "extinction". What we do not often hear isthat the Internet has also been creating work for some types ofintermediaries. Hong Kong-based trading agent Li & Fung is an example.The Internet has been able topull in suppliers and buyers to trade and collaborate with each otherat a global level, who might have, prior to the Internet's commercialemergence, been limited to working mainly on a regional basis.However, it has created a more complex operating environment for theseplayers. The fact that they are now far more accessible viaInternet-enabled channels and hence, have more companies to negotiateand deal with, has made it more difficult than ever to identify thebest ones to do business with. What adds to this complexity is thatthe Internet has motivated end product makers to widen their sourcingof components across a wider geographical spread. In turn, thecomponent suppliers depend on their own set of global suppliers, andso on. It is this complexity that has opened up opportunities forcompanies such as Li & Fung.
At its core, Li & Fung plays the role of the traditional middleman,except that it has done this on a far greater scale that is onlypossible through the use of IT. Li & Fung wants to be a one-stop shopto "matchmake" its customers with suppliers. To its customers, Li &Fung shoulders the responsibility of ensuring full shipment of theirorders. To its suppliers (especially its top-tier business partners),Li & Fung is the entity they take orders from and answer to. Over theyears, it has specialised in helping customers source for supplies,and is now leveraging more on IT to hone its specialised skills evenfurther.
Say, a large US retail chain is looking for a party to supply ashipment of shirts made according to its specifications. There areumpteen places worldwide where shirts are manufactured. But instead ofsourcing for reliable suppliers on its own, the retailer can rely onLi & Fung to source on its behalf, negotiate a good deal, and optimisethe supply chain in order to have its supply of shirts delivered ontime and according to specs.
Li & Fung's strength stems from its intimate knowledge ofsuppliers--big and small--throughout the world and its ability toco-ordinate and influence them. This puts it in a position where itcan stitch together a network of suppliers to satisfy orders fromanywhere, whether from a retail chain in the U.S. or a Japaneseelectronics firm.
Li & Fung has links with more than 7,000 suppliers in 40 countries. Ithas more than 4,000 employees dedicated to the task of travellingthrough these countries to "manage" the suppliers--securingmanufacturing capacities, monitoring quality and so on--whilemaintaining close relationships as well as hunting for newsuppliers.
The American chain not only saves the time that it would have spent ifit had tried to put together a supply chain on its own, but also isnow able to concentrate on what it does best, which is marketing andselling the garments it has sourced from Li & Fung.
Rat Race
It was the pressure to reduce time-to-market as well as enhance thevalue of the final products that had nudged Li & Fung to implement asolution that would improve the transparency of the supply chain toall participants. Currently being implemented with Li & Fung's leadingsuppliers, the solution is expected to enable the participants todrastically improve their capabilities to, say, respond to suddenchanges in customer requirements or a disruption at any point in thesupply chain. Li & Fung chose to partner Microsoft to help it developand implement this solution. The first phase of the implementationstarted last May.
There was much paperworkbefore Li & Fung implemented this solution with its top-tiersuppliers. "We receive purchase orders (POs) from our customers viavarious methods: EDI, e-mail, fax and so on," says Albert Ip, Li &Fung's IT director. On most occasions, order information was manuallytyped into Li & Fung's central database and transmitted on to varioussuppliers concerned. Many of these suppliers would then have to againtype in the relevant bits of the orders from Li & Fung, and that wouldbe forwarded to their own suppliers. Apart from being time consuming,that system of paperwork has been prone to inefficiencies that stemfrom mistakes made whenever data is wrongly re-entered into thesystem.
Furthermore, the use of EDI is time consuming and expensive. "This isbecause a lot of the programmable codes for the order cannot bere-used for other customers," says Ip. There are hassles with e-mail,fax and flat files as well. "With e-mail, fax and flat files, we havehad to either manually upload or re-type the data into oursystems."
In addition, there were gaps in the supply chain. Each of theparticipants might not have a full picture of what the others aredoing or even what the final product would be. These gaps wouldsometimes slow down communication between the participants. Often,many components go into the final manufacturing process. If forinstance the component suppliers were not well-informed of shipmentdates of the final products, they may not have the incentive to giveextra attention to secure ample supplies. Sometimes, without knowingwhat the final products were, component suppliers would also not beable to suggest alternatives if supplies were short. It is importantthat the activities of all the supply chain participants move in sync.If one goes out of step, the chain might end up getting clogged. Andthis is why there has been a need to improve transparency to allinvolved in the production process.
Let us get back to the example of our U.S. retail chain. In thetraditional supply chain, there is no compelling reason for the shirtmaker to tell the button manufacturer that the shirts are for saleduring Christmas. In other words, the component supplier lacks fulltransparency of the entire process. The shirt maker might just simplysay, "I need 100,000 buttons of type XYZ by this date." However, ifthe button manufacturer knows what the final product is, it has theopportunity to offer the shirt maker a button that is especiallysuitable for a shirt of the type that is on order. Also, if acomponent supplier has a complete picture of the retailer's order, ithas the opportunity cross sell or offer products that are especiallysuitable for this order.
Transparent Links
Li & Fung, with the help of Microsoft, has implemented a solution thatwill help it dramatically increase the transparency of the supplychain to all participants as well as enhance connectivity rightthrough it. Says Mimi Ho, senior director (enterprise group),Microsoft Hong Kong: "Our supply chain automation solution will bringin the additional benefit of increasing the visibility of the customerorder information at the supplier end."
"The solution comprises twomajor components: the Li & Fung Trade Gateway that is a centraldocument exchange hub and application integration agent in Li & Fung,and the Supplier SCMTalk solution, which will enable smooth andefficient transactions between Li & Fung and its suppliers who will beable to exchange order information, product specs, accounting andadvanced shipment notices with the gateway.
The gateway interface runs on Microsoft's BizTalk Server and SQLServer 2000 running on Windows 2000 platform. VisualStudio.net toolswere used to develop the applications. Customers can submit purchaseorders, requisitions and any other trade documents through variousformats such as EDI, fax and Microsoft Excel or Word files to Li &Fung. The gateway will convert the documents in XML and integrate thedata into the Li & Fung order processing system.
Suppliers of Li & Fung can install off-the-shelf SCMTalk packages(which runs on BizTalk) to hook into Li & Fung's gateway. By doing so,they will be able to enjoy a full picture of the size, specificationsand status of the final customer's order, as long as they implementthe necessary applications. "It makes the supply chain transparent andthe processes are seamless," says Ho. The participants put themselvesin a position where they can react instantly to, say, a sudden changein specifications or a disruption at any point in thechain."
The solution also helps customers better prepare themselves for thearrival of goods. "Say the products at the factory are almost readyfor delivery," says Ip. "The factory has to report to Li & Fung forpacking instructions: the number and size of cartons, in what coloursand so on. Once we get an update on these things, we add in our owninformation, and transmit it on to the customer." This enables thecustomer to plan for the arrival of goods. The final-product factorysimply needs to feed this data into its SCMTalk solution, whichenables Li & Fung to instantly read it. In other words, the customertoo is seamlessly linked to the manufacturing supply chain. "Duringthe days before we partnered Microsoft, a customer would receiveinformation from various sources on the status of thegoods," says Ip.
Stretching
The fact that the underlying protocol of the whole solution is in XMLmeans that the solution can be stretched out to reach into banks andlogistics companies. Suppliers can also opt to have their SCMTalksolution integrated with their in-house IT systems, such as ERP oraccounting applications. "We have partnered with a Hong Kong-basedsystems integrator called Eastpro that can undertake the integration,"says Ip.
Ultimately, Li & Fung hopes that all its suppliers rely on SCMTalksolution and the Internet to improve the supply chains. Adds Ho: "Allthe data will appear in Excel format, which is the most popular toolfor SME suppliers, regardless of the format that the customer hasused. As a result, suppliers can take advantage of basic systemfunctionalities with Internet access and Excel alone. Of course theywill need SCMTalk if they want to further extend the chain orintegrate with in-house applications."
The Great Conversion
Getting 7,000 suppliers hooked on to this system is a challenge. "Theproject was initiated in March this year...and the gateway at Li &Fung has already been completed," says Ho.
Ip adds: "We will implement the solution with our suppliers in phases.We will start with our key suppliers. Once they are hooked up, we willmove on to the next tier and so on."
The first phase, comprising 10 suppliers, is likely to be completed bySeptember. It is, of course, easier to motivate the key suppliers asthey do a lot of business with Li & Fung. Says Ho: "We're hoping thatsmaller suppliers will get excited and jump on to this solution asthey begin to see the benefits accruing to the earlyadopters."
The challenge indeed is to get the word spread out far and wide. Thereare two forces at work that are likely to push its implementationamong Li & Fung's network of suppliers.
First, there is the motivation: the benefits that a supplier canexpect to enjoy by having the right connectivity. Second, there is thefear of losing out.
It is obvious that it will be less cumbersome for Li & Fung to workwith suppliers that are already hooked up on to this seamless supplychain solution.