Day 32, Friday Oct 8th, 2010

The bright sunny weather continues. It always surprises me as to how much the morning weather impacts my overall mood for the day. Today is a special day for two reasons - one of which is interesting to me - the session on Balanced Scorecard by its co-developer Prof. Robert Kaplan. The uninteresting part to me is the Lobster Reception and dinner - some of you may be wondering why this is uninteresting - because I am a vegetarian !

Unfortunately for us the session by Prof. Kaplan had to be postponed, as his flight coming into Boston was delayed. The good news is, we will have the session on Monday Oct 11th.

Today we have two sessions - the first one is a fascinating company - Li & Fung from Hong Kong. This is a company built purely on the basis of Operational capabilities. Victor Fung, the CEO of Li & Fung used to be a HBS professor in the early 1970's, before he was called back to  Hong Kong by his father to breathe life into the company, which was started in 1906 by Victor's grandfather.

Li & Fung is the largest export trading company and an innovator in the development of supply chain management. On behalf of its customers, primarily US and European retailers, they work with an ever expanding network of thousands of suppliers across the globe, sourcing clothing and other consumer goods, ranging from toys to fashion accessories.  Victor quickly realized that "pure trading" is a sunset industry. He capitalized on three assets that they had: (a) knowledge of the region - primarily Asia, (b) understanding the customer product needs, and (c) their ability to do dispersed manufacturing. Of course, English language was a key asset  when dealing with their customers.

In the last few years, the product options have gone through the roof and the life cycle has become much shorter. What this did was the following:

• Put tremendous pressure on the supply chain
• Results in higher stock outs in the stores - as it is almost impossible to predict the demand patterns
• Forces higher mark downs - resulting in lower or negative margins.

Li & Fung realized that the key to ensure customer benefits was to be more efficient in the supply chain - which also meant they had to pretty much customize the value chain to each customer. They are almost like the fab-less chip maker in the semiconductor industry. They don't own any factories, would you still call them a manufacturer ? Maybe , because they end up doing many of the steps a manufacturer does - except for the actual manufacture of the goods. They became go good at it, that in 2009 they clocked US $14b in revenues with profits of over US$500m.

The key to efficient retail business is to get the "right product in the right place at the right time in the right quantity". Easier said than done ! The critical steps to achieve this are forecasts, inventory management and responsive supply chain. Supply chain can be judged by two characteristics - their efficiency and their responsiveness to market needs; Which kind of supply chain to use depends on the kind of products - if you need to produce functional products you need an efficient supply chain; if you need to produce innovative products then you need a supply chain which can adjust very quickly to market needs. The reason is linked back to forecasts - it is relatively easier to forecast demands for functional products, whereas it is more difficult to forecast demand for new and innovative products.

The key take way is this :  short life cycle products like apparel, PC's, toys, etc, need to be managed differently compared to long life cycle products like food. In the case of the former, the emphasis is on responsiveness and not efficiency. Li & Fung built a very successful global business around its supply chain capabilities. Another important message here is, the intermediaries are not dead - their role and how they are organized changes over time.

The second case today was on ethics and responsibility to customers. H&R Block, a large tax-preparation company in the US was in the horns of a dilemma. The realized that their close competitor was going to announce a product, which could potentially woo away many of H&R's customers. Though H&R could also introduce a similar product, the CEO felt that it is not in the best interest of their customers. There are two aspects here - one, there is an information and knowledge asymmetry between H&R and its customers, and second is case of more transparent disclosure.

There was a debate on whether the government could legislate - and this argument will continue till the cows come home - as there is a limit to how much the government can legislate. In fact, Canada has gone one step further and advertises that, while the government will try to legislate where needed, there will always be unscrupulous businesses who are faster than the government - and hence "buyer beware".

The question of fairness in business has also been widely researched. What is fair, widely varies on whether you are buyer or seller and many other demographics. If your business is built on fairness then it is critical to understand the customers view of fairness - and you may be in for a surprise.

If you know more than the customer, then you have a higher responsibility - which is the opposite of "buyer beware", and acting responsibly in such situations is always good in the long run. It is very difficult to separate legal and ethical issues, one primary reason being the law is founded on ethical principles.

The leadership qualities and the value system gets tested when organizations face an ethical question. And the behaviour in such situations differentiates a great company from a good company.

Since Prof. Kaplan's class was cancelled, there was excess time available - and guess what I did - played basketball ! Okay, okay - I cannot reach the basket even if I jump three feet, but I did get to touch the ball a few times. It was good fun.

More later ...