The latest earnings report from Li & Fung was
disappointing although not surprising. The report appears to provide further
evidence of the growing trend towards reshoring as well as a trend towards
bringing sourcing activities in-house.
Li & Fung, the largest retail supplier for companies
such as Walmart, Target and many others, announced disappointing earnings for
2012 – net income declined 9.4% to $617m. In fact, the CEO announced the
company would miss its goal, set in 2010, of $1.5bn in operating profit for
2013.
With 60% of its revenue coming from the US, the company
denied it has not lost customers at its sourcing unit, but rather only a
“handful” has opted to source directly. However, one of its largest customers,
Walmart, appears to be making several changes in how it sources goods. In fact,
in January of this year the company announced plans to “significantly” boost
its sourcing by $50bn from domestic suppliers over the next decade. According
to data from Wal-Mart's suppliers, items that are made, sourced or grown in the
U.S. account for about two-thirds of the company's spending on products for its
U.S. business.
Walmart’s international sourcing may be questionable as
well. Last year, Li & Fung announced that Walmart would not be executing
its option to buy a global sourcing business, Direct Sourcing Group, set up by
Li & Fung in 2010 to solely support Walmart's international retail sourcing
operations. That led many to say Walmart was planning to cut out the sourcing
middleman.
Not only is Walmart perhaps looking to cut costs by removing
or reducing the use of the sourcing middleman but also the need to have more
visibility and knowledge of its vast supplier network is maybe another need for
the company. In November 2012, Walmart was the recipient of intense negative
publicity due to a horrific fire in a Bangladesh manufacturing facility in
which a supplier had outsourced a Walmart order to. As a result of this,
effective March 1, Walmart has adopted a “zero tolerance policy” for violations
of its global sourcing standards, and plans to sever ties with anyone who
subcontracts work to factories without the retailer's knowledge.
Other companies such as Apple and Nike have also received
negative press due to manufacturing practices and as such are working towards
corrective measures. Improvements in visibility and collaboration are needed
and are increasingly being adopted by retailers. For many, the reshoring trend
has been beneficial as these companies are perhaps more adept at managing
domestic suppliers. Still, a good bit of retail manufacturing will continue in
Asia and companies such as Li & Fung provide valuable knowledge and
assistance for companies that are in need of such services. Perhaps what is needed
is better collaboration and transparency between Li & Fung, its
manufacturing relationships and customers.
