Who Will Be the Li and Fung of IT Outsourcing?

Have you ever heard of Li and Fung? Are you wearing clothes right now? If so, it's a pretty good bet that one or more pieces came through Li and Fung's supply chain. In the worldwide garment business, Li and Fung is the 800 lb gorilla, and they are light-years ahead of their competitors.

A few years back I did some work with a major clothing company here in the states, and learned about the garment industry supply chain. A couple generations ago the U.S. had a thriving garment manufacturing industry. But that was virtually wiped out by manufacturers seeking cheaper labor in other countries. China and India were the first countries to benefit from these moves, but many other countries in southeast asia, the middle east, and even the Carribean basin have textile manufacturing plants. At first, many of the major garment companies tried a vertical integration approach, where they owned all the pieces of the supply chain. This ultimately proved uncompetitive, since new factories with superior cost and capability were constantly springing up.

Enter Li and Fung, who made the following pitch to the garment companies:

We have thousands of partners in our supply chain that can meet any level of quality you desire. You give us the specs for a manufacturing run, and we'll find the best suppliers at the best price and guarantee the quality of the merchandise. Even better, if you are flexible with the designs (e.g., button shape), we will work with our suppliers to create more economical alternatives for your consideration. Even including our fee, the price will be lower than you will get in-house or from anyone else.

And they consistently delivered on their promise. The China Apprentice has a must read profile on the firm. Excerpt:

So what gives L&F their advantage in supply chain management? The Li and Fung Research Center explains that the company has seven principles forming the pillars of supply chain management. The research group says the key is that the “supply chain must be flexible, agile, cost-effective and responsive. Nowadays it is more common for companies to collaborate in a global context where each of them focuses on its core competency and outsource the rest.” L&F has taken its core competency to the extreme by perfecting the science (and art) of outsourcing. The company follows the following principles to assure it stays at the leading edge of supply chain management theory and practice.
• Be customer-centric and market demand driven;
• Focus on one’s core competency and outsource non-core activities, in order to develop a positioning in the supply chain;
• Develop a close, risk- and profit-sharing relationship with business partners;
• Design, implement, evaluate and continuously improve the work flow, physical flow, information flow and cash flow in the supply chain;
• Adopt information technology to optimize the operation of the supply chain;
• Shorten production lead time and delivery cycles; and
• Lower costs in sourcing, warehousing and transportation

Read the whole thing!

So what does this have to do with I.T. outsourcing? The New York Times today ran a story titled Outsourcing Works, So India Is Exporting Jobs. It turns out that the same pattern of labor arbitrage that hit the garment industry decades ago is repeating itself in the I.T. outsourcing industry. And it looks like the major Indian outsourcing firms are leading the way. Today they are taking the approach of building their own centers in various geographies. Who will be the first to take the Li and Fung approach, and when? From the NYT article, it looks like Infosys Technologies is leading the current trend, but no major player seems to be focusing on the partnering model yet. Maybe Li and Fung should get into outsourcing....



Photo of silk factory in Uzbekistan courtesy of upyernoz at Flickr