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Saturday December 8, 2012

Entrepreneurs must know what is hard and soft dollar

ON YOUR OWN
By TAN THIAM HOCK


LAST week, thanks to Khazanah, I had the opportunity to meet my supply chain idol, Dr Victor Fung of Li & Fung in a roundtable discussion at The Petroleum Club. Having done a few Harvard Business School (HBS) case studies on Li & Fung, I was curious to learn more from the ex-HBS professor. I was not disappointed.

Victor and his brother William built a multi-billion US dollar organisation by merely being a service provider in a global supply chain. Acting as a middleman, they connected the factories in China with the major buyers of the western world, earning a buyer's commission.

They were successful because they were highly efficient in managing and integrating thousands of Chinese factories into a complex supply chain with thousands of demanding customers on the other side. They were profitable because they hold no inventory and as such was risk-free. To me, this is the perfect “middleman” business model.

When asked about the diminishing role of SMEs in supply chains, his advice was simple. Be the best in class in your niche business and look for a supply chain where you can integrate your business into and be a team player in your chain. If your supply chain team wins against the other teams, then all the players in your team survives comfortably with the most value attained.

Using the analogy of a drinking glass in his hand, the production cost of the glass of US$1 finally ends up in Europe being sold to a consumer for US$4. So out of the total value chain of US$4, he described the production dollar like earning the hard dollar whereas the remaining distribution dollars in the value chain as the 3 soft dollars. It is much easier to earn an extra 50 cents from the 3 soft dollars than to extract 10 cents savings from the production hard dollar.

Every entrepreneur should have a clear understanding of the total supply chain that he is involved in. He must know which is the hard dollar and where are the soft dollars. Always adapt your business model towards the soft dollars and watch your margins grow.

With the presence of so many eminent businessmen and economists around the table, I did not have the opportunity to present my analogy of the corrupt politician and the big retailer. Both have the nose to smell out the soft dollars. The left nostrils of the corrupt politicians and their business cronies just add their fat margins or so-called commission onto the hard dollars and make their customer, normally the government, pay a higher price. They have successfully expanded the soft dollars along the value chain.

From the other nostril, the big retailers, normally the hypermarts and convenience stores squeeze their suppliers for more margins since they are heavily discounting the market price to stay competitive. It is a brutal business out there as the retailers control the last consumer touch point and as such is able to extract soft dollars from the brand owners at will.

If your brand is not in the top three in market share, I suggest you look for an alternative distribution channel. Take your brand direct to the consumers. Direct selling and opening your own shops have been hugely popular for many years but the next big distribution channel is e-commerce.

With the development of advanced Internet tools and mobile handsets, young consumers are adapting quickly to shopping online. Door-to-door logistics and big logistic centres will expand to cater to the growing needs of the new e-commerce era. Can you spot the hard dollar and the soft dollars in this business model?

Victor also emphasises on the supply demand mismatch which results in high wastage. Most of his customers delay purchase decisions to the last minute to ensure accurate buying of products that they can sell. The whole process of purchase order to delivery has been shortened from 3 months to 4 weeks. To stay relevant to the changing needs of its customers, Li & Fung is working towards a 3-week order to delivery cycle. Factories have to stay nimble and be as flexible as possible to support this evolving global supply chain phenomenon.

Among his many social responsibilities, Victor is an economic and business advisor to the Chinese government. Because of rising labour costs, the highly-successful low-cost manufacturing model in China has moved to other developing countries. When asked about the need to move the industries to higher value add models, he answered with a question. Where are you going to find employment for these 150 million low-skilled factory workers? Big country, big problems indeed.

I wanted to proudly claim that we have no such problems in Malaysia because none of our citizens are willing to work in these tough low-paying jobs. We import Bangladeshis and Indonesians to earn the hard dollars. Why bother with the hard dollar when you can earn soft dollars in the civil service which incidentally I would proudly add, has the highest civil-to-private sector employment ratio in the world. Victor could just learn a thing or two from our successful economic business model.

I also wanted to ask him for some insights into how our Malaysian SMEs can find the soft dollars when the GLCs dominate all the supply chains. Unfortunately, I was concentrating so hard trying to follow his rapid train of thoughts that I was lost in translation and became abnormally tongue-tied.

Hopefully Khazanah will extend another invitation to me when Victor comes round to Kuala Lumpur again. I got snippets of wisdom that you will not get to learn from Harvard Business School.

To access earlier articles of On Your Own, log on to www.thiamhock.com. Honest comments welcomed and approved.

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