Globalization, specialization and coordination: the case of Li & Fung In this chapter we have used Adam Smiths original example of a pin factory as an illustration of the concepts of division of labour, specialization and coordination. These forces play not only at the local level of a factory, however, but also at the global level. This is shown by the case of Li & Fung, a Chinese firm that was called a surprising world leader in supply-chain management by The Economist: Li & Fung used to introduce Western retailers of clothes, toys and the like to the sweatshops of China. As such, it was no different from countless Chinese firms . . . But when Victor and William Fung, the brothers who today run the family business, sat down to think about globalization and what it means for Asia, they came up with a winning new strategy for their company. To them, globalization meant above all specialization, and specialization brings complexity. If supply chains of companies once consisted of five links, they might soon have dozens, or even hundreds, they surmised. Somebodys got to pick up the pieces and bring them back together says William Fung, the younger brother which is what Li & Fung is now doing, to all appearances better than its rivals in the West. It works like this. Say, a European clothes retailer wants to order a few thousand garments. The optimal division of labour might be for South Korea to make the yarn, Taiwan to weave and dye it, and a Japanese-owned factory in Guangdong Province to make the zippers. Since Chinas textiles quota has already been used up under some countrys import rules, Thailand may be the best place to do the sewing. However, no single factory can handle such bulk, so five different suppliers must share the order. The shipping and letters of credit must be seamless, and the quality assured. Coordinating all this is the challenge of globalization . . . And this requires knowledge. Village women with sewing machines in Bangladesh are not on the Internet. Finding the best suppliers at any given time, therefore, takes enormous research so much, indeed, that companies are increasingly deciding that it no longer pays to do it in-house. Instead, they outsource the knowledge gathering to Li & Fung, which has an army of 3600 staff roaming 37 countries (a machete in one hand, a laptop in the other, as Victor Fung likes to caricature them) for the purpose. In this sense, Li & Fung is itself a product of specialization. A company that focuses entirely on optimizing supply chains for other companies is a recent phenomenon. With an annual turnover of about $19 billion in 2015, Li & Fung has evolved into the worlds leading consumer goods sourcing and logistics company. It now employs some 25 000 people working in more than 300 locations in over 40 different markets, managing and coordinating a network of 15 000 global suppliers. 1.Suppose you are a Saudi prince and studying economics at Oxford University in the UK. Your family sends you a very large monthly allowance to cover tuition and other expenses. In fact, this allowance is more than ten times the average allowance of the other students. Do you think that you would still have an economic problem? Why? 2.Suppose you are an American student and you are about to obtain your MBA and start looking for a job. An economist would say that you are about to enter the job market. Compare this market with the tin market that is described in the text. Is the job market for MBAs also an example of an ideal market? Is price a sufficient statistic for this market? Discuss the latter question from the point of view of both employers and those seeking employment. 3. Box 1.10 describes the success of a company named & Fung. What exactly is & Fungs business? Who are & Fungs customers? After having read Chapter 1, including Box 1.10, what do you think is the main point that the case brings forward? 4. In Box 1.6, it is argued that the rise of the Internet has cut the cost of communication so much that firms will be inclined to outsource more than before. Do you think this is true? Do you see an implicit assumption, made by the journalists of The Economist, that is highly relevant but which is not mentioned in Box 1.6? Discuss.

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