Question

Why do you think it was profitable for Li & Fung to go beyond brokering exports to becoming a supply chain manager, breaking down the production process and sourcing the inputs from various suppliers across many countries?

Short answer

The rising wages increased the opportunity cost of brokering business. The company found a comparative advantage in supply chain management. Hence it decided to become a supply chain company.

Step-by-step solution

Reason behind the decision of Li & Fu

The company was working as an export broker expert in Hong Kong. But the Hong Kong’s rapid growth increased the wages and other input costs of this business. Hence the opportunity cost of this business increased.

The supply chain management business provided lower opportunity costs because of better resource allocation, and the required inputs could be sourced from various countries at lower costs. Thus, the business of supply chain management provided a comparative advantage over the export brokering business.

Therefore, the company decided to become a supply chain manager from an export broker.