Article 47 – Vital Supply Chain

LAST week, thanks to Khazanah, I had the opportunity to meet my supply chain idol, Dr Victor Fung of Li & Fung in a roundtable discussion at The Petroleum Club. Having done a few Harvard Business School (HBS) case studies on Li & Fung, I was curious to learn more from the ex-HBS professor. I was not disappointed.

Victor and his brother William built a multi-billion US dollar organisation by merely being a service provider in a global supply chain. Acting as a middleman, they connected the factories in China with the major buyers of the western world, earning a buyer’s commission.

They were successful because they were highly efficient in managing and integrating thousands of Chinese factories into a complex supply chain with thousands of demanding customers on the other side. They were profitable because they hold no inventory and as such was risk-free. To me, this is the perfect “middleman” business model.

When asked about the diminishing role of SMEs in supply chains, his advice was simple. Be the best in class in your niche business and look for a supply chain where you can integrate your business into and be a team player in your chain. If your supply chain team wins against the other teams, then all the players in your team survives comfortably with the most value attained.

Using the analogy of a drinking glass in his hand, the production cost of the glass of US$1 finally ends up in Europe being sold to a consumer for US$4. So out of the total value chain of US$4, he described the production dollar like earning the hard dollar whereas the remaining distribution dollars in the value chain as the 3 soft dollars. It is much easier to earn an extra 50 cents from the 3 soft dollars than to extract 10 cents savings from the production hard dollar.

Every entrepreneur should have a clear understanding of the total supply chain that he is involved in. He must know which is the hard dollar and where are the soft dollars. Always adapt your business model towards the soft dollars and watch your margins grow.

With the presence of so many eminent businessmen and economists around the table, I did not have the opportunity to present my analogy of the corrupt politician and the big retailer. Both have the nose to smell out the soft dollars. The left nostrils of the corrupt politicians and their business cronies just add their fat margins or so-called commission onto the hard dollars and make their customer, normally the government, pay a higher price. They have successfully expanded the soft dollars along the value chain.

From the other nostril, the big retailers, normally the hypermarts and convenience stores squeeze their suppliers for more margins since they are heavily discounting the market price to stay competitive. It is a brutal business out there as the retailers control the last consumer touch point and as such is able to extract soft dollars from the brand owners at will.

If your brand is not in the top three in market share, I suggest you look for an alternative distribution channel. Take your brand direct to the consumers. Direct selling and opening your own shops have been hugely popular for many years but the next big distribution channel is e-commerce.

With the development of advanced Internet tools and mobile handsets, young consumers are adapting quickly to shopping online. Door-to-door logistics and big logistic centres will expand to cater to the growing needs of the new e-commerce era. Can you spot the hard dollar and the soft dollars in this business model?

Victor also emphasises on the supply demand mismatch which results in high wastage. Most of his customers delay purchase decisions to the last minute to ensure accurate buying of products that they can sell. The whole process of purchase order to delivery has been shortened from 3 months to 4 weeks. To stay relevant to the changing needs of its customers, Li & Fung is working towards a 3-week order to delivery cycle. Factories have to stay nimble and be as flexible as possible to support this evolving global supply chain phenomenon.

Among his many social responsibilities, Victor is an economic and business advisor to the Chinese government. Because of rising labour costs, the highly-successful low-cost manufacturing model in China has moved to other developing countries. When asked about the need to move the industries to higher value add models, he answered with a question. Where are you going to find employment for these 150 million low-skilled factory workers? Big country, big problems indeed.

I wanted to proudly claim that we have no such problems in Malaysia because none of our citizens are willing to work in these tough low-paying jobs. We import Bangladeshis and Indonesians to earn the hard dollars. Why bother with the hard dollar when you can earn soft dollars in the civil service which incidentally I would proudly add, has the highest civil-to-private sector employment ratio in the world. Victor could just learn a thing or two from our successful economic business model.

I also wanted to ask him for some insights into how our Malaysian SMEs can find the soft dollars when the GLCs dominate all the supply chains. Unfortunately, I was concentrating so hard trying to follow his rapid train of thoughts that I was lost in translation and became abnormally tongue-tied.

Hopefully Khazanah will extend another invitation to me when Victor comes round to Kuala Lumpur again. I got snippets of wisdom that you will not get to learn from Harvard Business School.

8 thoughts on “Article 47 – Vital Supply Chain

  1. Dear Thiam Hock, when I get to have my personal rest time, I would indulge some time to reading your article on a weekend… actually sometimes really look forward to read your new article, as you have so much experience we can learn from. with regards to the statement “Direct selling and opening your own shops have been hugely popular for many years but the next big distribution channel is e-commerce”, the e-commerce space has enabled many things to buy and sell online but many times it’s serving local market more than cross country transaction. Particularly, the custom duty and tax structure for import export of various items is still not very understood by most pple and how they would add cost to the business model one wish to employ for cross border transactions. For individual item, it is easier to declare them as gift, but what about bulk items… ?

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  2. The bulk of the retail market is dominated by the hypers and big chain stores retailers whose big appetite can only be afforded by big multinational brands, so how does the local sme fit in and compete?

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    1. Local SME’s will have to go for niche market unless you have a very strong brand proposition that can succeed against the multinational brands. A the end of the day, size matters so better retreat than to square up to big opponents and get bashed up and broke. TTH.

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      1. broken already now having 2nd go at deal direct (last time use distributors but they focus on their big MNC brands neglecting small local brands) but deal direct have multiple opeation issues like logistic, warehousing,..etc!!! madness!!

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  3. Soft dollar? This remind me of some people notably good talkers who like to hang out at big events in order to rub shoulders with corporate figures et al. They will then organize their events e.g. pop concerts and find ways to get big corporations to buy in bulk and earn some handsome soft dollars.

    Hard dollar? More often than not is associated with those sweat shops found in any cheap labor region.

    Whether soft or hard dollar, if there’s a will there’s a way. I guess ultimately it boils down to survival and relative advantage. If I’m ex-Miss Universe it’s probably easier to find my way to “cari makan” among some well-to-do corporate big wigs. On the other hand, finding a job in a sweat shop could be my only way out of poverty. 😦

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    1. Victor Li probably meant that soft dollars is segment of the business where there is a lot of efficiencies that you can wrench out from the supply chain through superior value propositions.. However, in manufacturing on the other hand, the amount of efficiency gains you can achieved through superior technologies will be limited.. – the rules of diminishing returns will limit how much hard dollars you can earn.

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