#67 1995 · Li & Fung (Victor Fung) · Supply chain and tradingpreserve-optionality
Li & Fung capped itself at 70% of any factory's business, on purpose
the problem
Relying too heavily on one factory is a risk that cuts both ways
background
A company that sources goods through independent factories rather than owning them faces a dilemma in both directions. Take too little of a factory's capacity and you're a minor customer with no leverage, first to be bumped when a bigger order comes in. Take too much and the factory becomes dependent on you alone, loses the outside relationships that keep it sharp and innovative, and its problems — a bad quarter, a cash crunch, a quality slip — become your problems too, because you have nowhere else to go on short notice.
Victor Fung's answer wasn't to diversify suppliers in the usual sense — spread orders thin across many factories to reduce risk. It was to manage a precise range with each one: enough of their business to matter, never so much that either side stopped needing anyone else. The company was, in effect, deliberately declining available volume to preserve the very independence that made its partners worth working with.
the move
Rather than maximize the share of any factory's output it controlled — the obvious way to lock in capacity and pricing power — Li & Fung, under chairman Victor Fung, deliberately kept its own purchases within a band: never less than 30% of a given factory's business, enough to matter to them, and never more than 70%, enough to leave room for other customers. Above 70%, the factory loses exposure to other clients' new ideas and techniques and Li & Fung risks inheriting the factory's problems as its own; below 30%, it isn't a big enough customer to command attention or negotiate.
the payoff
The discipline let Li & Fung orchestrate a network that grew to a reported 15,000 factories across more than 60 countries, sourcing several billion dollars of goods a year without owning a single factory itself — a model management scholars later named "network orchestration" and Harvard Business School turned into a teaching case.
what came after
The 30/70 discipline became a textbook example of what business scholars call network orchestration — coordinating a vast web of independent producers without owning them — and Li & Fung's model, built on walking away from business on purpose, is still taught as a counterpoint to the instinct to capture as much supplier capacity as possible.
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references
- [1]What Does It Take to Compete in a Flat World?Knowledge at Wharton, 2007knowledge.wharton.upenn.edu
- [2]Li & Fung shows its mettle in flat worldSouth China Morning Post, 2007scmp.com