Apparel Sourcing Intelligence - Worldwide

Li & Fung turns factory support services into business unit

Li & Fung announced the launch of a Vendor Support Services business unit on January 6, as it continues to diversify its revenue from buyer-paid commissions on procurement and improve relations with its buyer clients.

Its announcement stresses the new unit’s potential role in improving factory compliance (a ” new business unit to focus more intensely on factory and worker safety following recent tragedies in the garment industry”). But the unit is also ” an integral part of Li & Fung’s new three-year business plan to be unveiled during the Company’s annual results announcement in March 2014″, though the firm stresses that “revenue generated from Vendor Support Services is a small part of the total revenue”

L&F has had mixed success in diversifying away from making money on buyers’ commissions for goods sourced, as prices for Chinese garments in its core US market have fallen, a joint venture with Walmart has been wound down, and attempts to move downstream into marketing in the US and Europe have generated substantial write-offs. It has been widely criticised in the industry for sloppy factory audits.

It has long expected kick-backs from factories: a practice that Clothesource, like many of our clients, regards as downright unethical. The new unit appears specifically charged with increasing income from this source, but presenting it as a step forward in ethical trading., though it also seems intended to help improve factories’ ability to meet buyers’ increasing demands

It adds product-testing, provision of logistics support to factories and  “other practical input” to its existing range of “support services” (which some might call “opportunities to squeeze suppliers further”) that include compliance, safety training and audits, trade credit services, the handling of letters of credit, product liability insurance, fabric, trims and accessories procurement, product development and technical and operations support.

The new unit will  led by Group Chairman William Fung, which implies it will probably be more than just an exercise in making more money from suppliers. William Fung is probably not merely cynical when he says that ““Many of our vendors have told us they welcome our skills, expertise and services to help them tackle the [industry’s new] challenges and upgrade their operations. We will continue to ensure that the provision of such services conforms with our customer agreements…and we view this new initiative as…an important component of our efforts to improve sustainability in the global garment industry.”

But he is clearly as motivated by the challenge of a world where “more garment production is moving into emerging economies and when credit for factory owners is tighter than ever” and sees it as L&F’s ” responsibility is to play an even bigger role in bringing about and speeding up systematic, positive change in the industry” through its “services to the 15,000 factories in our vendor base to enhance their competitiveness, operational efficiency and ability to comply with ever-tougher health and safety requirements”.

The prospect that this might allow the firm to offer a better service to buyer clients, which suppliers, rather than L&F pay for,  has undoubtedly not evaded William’s notoriously shrewd eye.