Today, the term “Supply Chain” refers all too often to an obsolete process with an antiquated mindset, a huge barrier to an efficient, sustainable 21st century process empowered by new-world technologies. This legacy model is forecast-driven, with production planned at least nine months before goods appear in stores, making it a veritable crapshoot in today’s take-no-prisoners marketplace.
Often called “the back end of the business” (the double entendre is not lost on those who are trying to elevate its stature), traditional supply chain is slow, inefficient, and costly, with the inevitable inventory planning mistakes resulting in – you guessed it – big markdowns.
While this process has been disrupted by the fast-fashion players such as Zara, capable of turning out new lines on an almost weekly basis, finding a solution to this conundrum has been much more complicated for multi-brand retailers and their brand vendors.
Well, as the saying goes, the cavalry is just over the hill. The world’s oldest and largest supply chain operator, Li & Fung Ltd, has an innovative, digitized solution that offers a clear path allowing retailers and brands to go beyond their antiquated mindset toward a supply chain that is technologically-enabled, seamlessly integrated, demand-driven, accurate, efficient, and FAST. In short, it is the Supply Chain of the Future. A diverse range of players, from nextgen startup Betabrands and activewear leader Under Armour to legendary-but-on-life-support Sears Holdings is turning to Li & Fung to give them a competitive advantage in this increasingly high-stakes I-want-it-now marketplace.
Radically Transforming a Centuries-Old Model
Spencer Fung wants to change the world. But first, he must finish disrupting the company he runs. The Li & Fung CEO, who was named to his current position exactly five years ago, realized early on in his current job that developing and operating responsible, sustainable, and agile supply chains that meet the demands of today’s rapidly changing retailers and consumers would require a drastic shortening of the production cycle. “We knew the industry was ready for transformation at the back end, and we wanted to be the ones to do it.”
The 45-year-old Harvard graduate knew that the future of the industry, and therefore of his family’s business, lies in taking the brains, innovation, and creative talents in his company and turbocharging them with the kind of speed that only technology can offer, from design to delivery and beyond: “I started embarking on this journey of creating the Supply Chain of the Future. All we knew was that it would probably be largely digitized, and that it would be literally ten times faster.” By divesting non-strategic businesses, and taking the irreversible path of digitizing and speeding up an industry that is woefully behind others, he is leveraging his company’s vast geographical sourcing network against the backdrop of an increasingly complex global trade and geopolitical landscape to better serve large and small clients around the globe in a whole new way.
In 2014, Spencer analyzed where the company had been and where it needed to be in the future. “Early in my career I was working at [auditing, CPA firm] PwC, then I went to Silicon Valley, and started my own e-commerce company, and lived through that initial phase of the digital age in the late ’90s. Then I came back to the family company [in 2001], which at that time was 100 percent analog and traditional. But everybody was happy, doing well and the business was growing, so no one felt the need to change.
“The word e-commerce was thought to be a fad at the time and the word digital didn’t even exist anywhere in the vocabulary of the industry. While retailers soon caught on and started realizing how important the internet was and invested in it, the upstream supply chain, comprised of the factories and the fabric mills, remained very much traditional.”
The Brave March Forward
Before embarking on the journey he was destined to lead, Spencer first had to convince his management team that the world was changing, and that the new economy was real. Rick Darling, longtime Li & Fung executive and now CEO of Global Brands Group, which was spun off from Li & Fung a few years ago, said “For the first year and a half, he [Spencer] spoke a language that none of us really understood — about digitalization, moving quickly, etc. He took the entire management team and the board out to these companies that were the leaders in other industries, like driverless vehicles and food processing from DNA particles. I mean, we were hearing things that were wild.”
What really got the attention of the current management, however, was the concept of time and how quickly technology was transforming established industries like automobiles and food production. The implicit message: apparel was the next industry ripe for disruption. Inspired by the two guiding principles of digitalization and speed, Spencer set about determining what the future would look like. He recalls, “At first we didn’t know anything about the new world we had to explore. We tried many things. We failed many times.”
The Aha Moment
Ultimately, Spencer and his team decided the best way to get the ball rolling with external partners was in digital design and product development. “We knew that the biggest pain points for retailers are sales, margins, inventories and markdowns. Many retailers had painfully slow supply chains and as a result of the fast-changing world, some of them were buying products that didn’t chime with their consumers which affected sales, margin, causing markdowns and accumulated inventory. One of the answers is speed – to reduce the overall lead time – and get the product right closer to time of sale. Factories can’t sew faster. Logistics can’t deliver faster unless you fly in the goods, and that’s costly. So we focused on design and development. Most companies take three to six months to develop concepts and then make decisions about product. There’s a lot of room for reduction of lead time there. So, we looked at the tools that were already out there to digitize product development and design and shortened it from months down to days and some of our customers are doing it within hours!”
Their secret? 3D design. “When we started, we merely replaced physical samples with digital samples. Then we realized there are many different areas downstream to use this digital sample. You can email it instead of express shipping. You can digitize fitting. If you do it well, you can even replace 2D patterns. You can use the photorealistic 3D digital sample for wholesale catalogs, store merchandising or the e-commerce site, eliminating the need for photo shoots and models.”
“We can do a whole line for the brand or retailer so they can save lots of time and money to merchandise the whole store. They can replace the catwalk show months in advance. You can license Gigi Hadid’s face and put it in a digital catalog. We’re still discovering applications for this 3D design. So it’s not just speeding up design and development, it’s changing the entire business model of how retailers can do business in the future, bringing decisions forward that you used to have to wait to do.”
One of their customers went so far as to tell Li & Fung that what they were doing “makes LF relevant again.” (But Spencer Fung is not about to rest on laurels. “When I talk about 3D design, it’s just one of 10 things that we’re doing. Look, in the distant future, 10-20 years from now, we will all have a 3D printer in our home that will be able to print most products. I thought about this future scenario of 3D printing; what will be disrupted? All the factories will be gone. All the agents, like ourselves, will be gone. You don’t need anything but a printer and raw materials. The shippers won’t be needed. But you’ll still need a design. If we hold an advantage in design and digitize that, it can be a potentially disruption-proof process for us in the future.”
Transforming a company is one thing. Tackling industry transformation is quite another. But this is Li & Fung’s mission. Said Spencer: “My first few years, I was struggling to convince my people to change. After I did that, then I had to convince all our partners to change. Not only my retail customers, but also my vendors. Because when you create a new process, the entire supply chain has to use it to gain the full effect.”
Spencer and his team found out very quickly that the biggest obstacle would be mindset, not technology. The C-suite leaders get it, but considerable resistance comes from multiple departments at all levels of the organization. Whether due to a fear of being replaced, or the need to touch and feel physical samples, the pushback is real. But for the supply chain to speed up, this must, and will, change.
Spencer found that one way around resistance is to get companies to change gradually – evolution not revolution. “Pick one brand, or just 10 styles, don’t overthink it; don’t have too many meetings, just dive in. Most of our customers are between $100 million to a $100 billion. We encourage them to start small, but start quickly; don’t try to make this a company-wide project. Show results quickly, then a colleague will see the results and be more motivated to do that. While we work with only a few dozen retailers right now, we are working on more than ten thousand designs using 3D design. There’s a normal bell curve, say 5 percent move ahead very quickly, then there’s another small percentage that is really slow to adapt. The opportunity is with the large middle portion at the tip of the curve, getting them to change.”
Traditional retailers are looking to Li & Fung to help them with product development and sourcing. UK department store Debenham’s, currently undergoing a refinancing and operational retooling, announced in February it was developing a strategic sourcing partnership with Li & Fung that would deliver improved product quality, lead times, margins and working capital efficiency.
Transform Holdco, the new name for Sears Holding, announced in June that it would develop a strong partnership with Li & Fung. Said Greg Ladley, President at the beleaguered retailer, “With increasing volatility in the global trade environment, it’s vital to have a supply chain that is more nimble and flexible while simultaneously opening new avenues for managing product costs.” Ladley added that the new working relationship will “provide us with the necessary global reach, consumer insights, trend analysis and digital design capabilities to enhance our supply chain in real time.”
Fung’s new initiatives have helped Under Armour reduce response time. “The Li & Fung Team has been a key component is the success of the Under Armour Speed to Market initiative,” said Alyssa Rinaldi, Product Manager, Under Armour. “It has saved hours, time and money for the team and for the factories, and we have been able to significantly cut the about of fit samples. We are very pleased…and look forward to continuing to innovate and improve together.”
Luciana Marcicano, SVP at Lands’ End, said the service has had a very positive impact on her company’s business model.” “Li & Fung’s digital service has been beneficial in supporting our efforts to reduce the product lifecycle by 2-3 weeks per proto through the use of 3D samples.”
Li & Fung’s next areas to tackle are those functions adjacent to product design. Trend Engine Platform (TEP) is its online engine predicting the next trend by “scraping,” or extracting data from, 100 websites and more than a few hundred influencers every day, then triangulating the information using algorithms to identify new trends and opportunities. Li & Fung is also developing a materials library to serve high-quality 3D design by providing a database of super-high-quality scans of all kinds of physical fabric. There’s also a module that automatically calculates cost and the impact of design changes during the development process. Spencer is particularly excited about this one: “With the new module we can computer model all costs, including labor, the materials, margin, etc. before it reaches the suppliers, bringing speed and convenience. This empowers the design team to make choices that will work while still being creative and allows the teams to collaborate. No more making 100 styles and having them not meet the cost criteria from the production department. You empower product development to do more that is specifically targeted to customers’ needs.”
The company also plans to add production and capacity modules that help with finding available factories, fabric, etc., potentially cutting a massive amount of time and decision-making out of the process. Ultimately, everything will be digital. Total digitization means taking all the waste and downtime out of the process by ensuring all components – cut fabric parts, thread, buttons, zippers, trims – arrive at the same time to the same place, plus allowing a company to track the process in real time from half a world away.
The organizational impact has been exhilarating. Spencer says, “We’re running this Digital Product Development (DPD) team like a startup. We’re separating them from the corporate bureaucracy. They speak to me on a weekly basis and I’m empowering them to move fast. Because of my startup experience, I know how important it is to do these things fast. Every four to six weeks they come up with something new. It’s pretty exciting for us.”
Transparency is also key. Spencer adds, “Part of our responsibility is to improve the lives of the billion people who work in the supply chain.” He pauses, then adds: “Having a chance to transform an industry is what gets me out of bed every day.”