Saturday, March 23, 2013

Is the sourcing middleman obsolete?

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.