Li & fung: Streamlines acquisitions and supply base with IT

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Li & Fung Limited utilizes information technology to acquire real-time information from distant factories and to fast-track integration of its acquisitions. The company is a global trading company that supplies high-volume consumer goods including apparel, fashion accessories, home products, handicrafts, sporting goods, and travel goods. It is currently in the middle of its 2008-2010 plan, for which it set a target of increasing in size to $20 billion, from the 2007 level of $11.9 billion. The company has installed ecVision's platform across the spectrum as a single solution that integrates vendor information. The platform supports its internal sourcing teams and its vendors, facilitating collaboration in managing its global supply chain and shipping tasks. The company also has set up the infrastructure for web conferencing between all of its offices. The use of video and web conferencing has increased dramatically, reducing travel and communication costs.

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In a supply network consisting of a buyer, a purchasing agent and a supplier, the buyer can procure the component from the supplier directly and rely on the purchasing agent for complementary services (named direct sourcing (DS), or authorize the purchasing agent to conduct both procurement and complementary services (named agent sourcing (AS). When parties bargain pairwisely, how do their bargaining powers influence the equilibrium procurement outsourcing structure? We adopt the generalized Nash bargaining framework to model the negotiations among the parties, and derive the corresponding equilibrium outcomes under both outsourcing structures by taking into consideration the existence of a component spot market. When two parties negotiate directly, we define their direct negotiation coefficient as the ratio of their exogenous bilateral relative bargaining powers. If they negotiate indirectly through a third party, we define their indirect negotiation coefficient as the quotient of their respective direct negotiation coefficients with respect to the third party. We show that when parties negotiate over both wholesale prices and quantities, the buyer's preference over DS and AS solely depends on the comparison result of its direct negotiation coefficient versus indirect one with respect to the supplier. When the quantity is determined by the buyer and parties negotiate over wholesale prices, the equilibrium outsourcing structure hinges critically upon the magnitude of the purchasing agent's relative bargaining power over the supplier. Interestingly, the preferences of the three parties for DS and AS may be aligned with each other. We also show that it is in the best interest of the buyer to negotiate prices only. Our research identifies endogenous bargaining powers between parties that dictate the equilibrium outsourcing structure. It indicates that the buyer needs to adjust its procurement outsourcing decision accordingly when the bargaining powers of its upstream partners are altered, especially when the buyer's bargaining power is sufficiently large: we analytically show that the buyer's preference is very sensitive to the relative bargaining powers of the purchasing agent and the supplier.
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