To use an agent or not to use an agent has been a question many brands have faced, and while they’re busy weighing their options, agents have been busy working out how to stay relevant in a sourcing world that’s not the same as what they’ve known.
Admittedly endeavoring to revamp its own supply chain and sourcing strategies, Li & Fung may not yet have all the answers, but the company knows any agent maintaining the status quo is dying a not-that-slow death, if it isn’t already six feet under.
As Li & Fung Group CEO Spencer Fung explained in an interview with Sourcing Journal, it comes down to brands’ new demands and how the agent can accommodate that.
“I think the role of the agent definitely has been shifting. In our new Three-Year Plan we are moving away from just the standard service offerings and business model of a traditional agent, and introducing a new supply chain model with new value added services as a solutions provider,” Fung said. If you look at what a retailer and brand needs from their supply chain, the steps they need to take to get product produced actually don’t change all that much, whether it’s the supplier, an agent or their own overseas office that handles it, he explained. What has been changing, with the introduction of more automation and technology, is how to get those supply chain processes done.
“With technology and automation, I estimate that nearly half of what needs to be done will be automated in the future,” Fung said, adding however, that some things will still require a human touch.
“There are certain supply chain functions that no one has figured out how to automate yet,” he said. “Whether it’s done by us or let’s say, another office, it should still be done by a person—most of the time in Asia—but that doesn’t eliminate that step in the process.”
Are brands scaling back on their use of agents?
Despite a tough retail climate and slews of store closures, which, it seems, would see brands and retailers scaling back on engaging agents, Fung said not all brands have been cutting back on their use of agents. It’s actually been quite the reverse.
“People say when you go direct, you actually skip a few steps—you don’t,” Fung said. “Whether you outsource to an agent or use your own offshore office, you still need a team to carry out all the necessary processes and steps. There’s no shortcut.”
What Li & Fung has seen in the past three to five years, in the U.K. in particular, is more retailers “beefing up their direct sourcing teams” in order to save costs. But recognizing that functions must still somehow be done, some of these retailers ended up acknowledging that certain functions are better handled by external parties.
“One thing about the in-house sourcing model is that most people run it as a cost center. There is not enough investment being made in these areas. When you run a function as a cost center, you always want to reduce costs first. Then service comes a close second,” Fung explained. “When you outsource this to an external party where there is an agent and an importer, full service vendor or supplier, their first priority is actually products and service and the second priority is cost. It is a slightly different, but very important point.”
That distinction could be the difference between greater speed to market and staying stuck in the status quo.
“Now that they see the whole world is gravitating towards a faster digital supply chain, and if they’re running the in-house function as a cost center, they may neglect the investment that is required because they’re too internally focused, or maybe because there is a lack of exposure to new, more innovative ways of working. Many don’t know how to speed up the supply chain by 50 percent if they don’t have that experience,” Fung said.
[Read more about what Fung had to say in Part I of this interview: An Exclusive Look at How Li & Fung’s Spencer Fung Plans to Transform Fashion]
According to Fung, some of Li & Fung’s current and new customers have come to the company for help because they can’t keep up with the pace of change in the industry.
“This gives me some confidence that what we are doing now in the industry is actually something quite unique and it could be an opportunity for us to win more business in this difficult climate,” Fung said. “So the speed, innovation and digitalization of the supply chain, is not something a lot of companies are approaching in the same way we are.”
He added, “This is a window of opportunity, because people are waking up to this fact and they have been investing a lot in the retail and consumer area, and now the supply chain is next.”
What’s the agent’s new value proposition?
Because of Li & Fung’s growth in the last 20 years, the company got stuck in one business model and when that business model stopped working for them, it was time to re-strategize.
In its once set business model, the conversation with the customer amounted to: “OK, these are our core agency and principal business models, this is how we can charge and that’s it. There wasn’t a lot of flexibility in terms of options,” Fung said.
“If the customer didn’t like to work that way, the conversation didn’t go much further because we simply didn’t have another business model. We just said, ‘OK, let’s talk again next time,’” Fung explained. “Today, because of how fast the world is moving and because we are focusing on an innovation business model, the conversation is different. Now it’s: ‘These are the services we will provide, this is our basic model, but what else do you want?’”
Li & Fung has been working on new ways to charge for its services. In the past, the company’s basic business model, according to Fung, was like a chef’s menu.
“It’s like ordering from the chef’s menu where the prices are not cheap and it’s $200 for 13 courses. But during those 13 courses, we give you things for free that you didn’t expect,” Fung said. “We actually give you all the bells and whistles.”
Now Li & Fung is offering more of an à la carte menu, where services are unbundled. With this option, customers can get all the services from the chef’s menu or have the choice of ordering à la carte.
“So all of a sudden, the need for service has become affordable at a lower cost,” Fung said. “When you unbundle your services, you still make money charging for those services and there is still margin to be made.”
One value-added service Li & Fung is working to improve is virtual design and sampling, which has been the bane of many would-be faster supply chains.
The problem, apart from the age-old shipping back and forth of first strike-offs and top of production samples, losing weeks and money, is that even as the process goes more digital, too many suppliers are using too many different versions of software and lack of training and adoption has not yet made the digital sampling process efficient at large scale. And when companies are working with up to 15,000 suppliers, as Li & Fung does, getting them all to install certain software and become adept at making digital samples is no small undertaking.
“We think the digital sampling process should be consolidated to a fewer number of service providers who hold this new expertise,” Fung said. As such, Li & Fung has built a team of 100 people doing nothing but digital samples, and in the next two years, that number could grow to upward of 200 people dedicated to that alone. Outsourcing digital sampling in this way could save companies on headcount, space, training and software licensing costs.
“This will become a new service we can price separately, because this represents a new and substantial investment for us,” Fung said.
The agent conundrum and whether to use one has come down to sticker shock for a lot of brands and retailers—and those stickers are especially shocking at a time when sales, profits, revenues, traffic, margins, store counts, EBITDA and the like have been down for so many businesses.
“If you look at the last 20 years, when everybody was doing well, everybody was growing, that was OK because I could offer better services. Now people still want the best services, but they don’t want to pay as much as they used to,” Fung said. “They want to be able to control, themselves, what exactly they get, so this actually is driving us to gravitate towards a new business model where we’re selling more a la carte rather than chef’s menu.”
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