Sourcing Agreement Between Wal-Mart Stores Inc. and Li & Fung Ltd. Group 1 Siriporn Ongkamongkol 4980511 Wongsakorn Chatamornwong 4980564 Teerakan Kasemchaipipat 4980584 Rerngchai Terdtoontaveedej 5080103 Rakshita Pandey 5080463

Agenda Company Background Why doing alliance Agreement Detail Alliance Analysis Conclusion

Company Background Li & Fung Ltd. Wal-Mart Stores Inc. One of the world outsourcing specialists 80 offices around the world with its sourcing network of nearly 15,000 international suppliers from more than 40 countries and serving approximately 2,000 customers at the present time. Wal-Mart Stores Inc. A world’s largest retailer. Has over 8,000 retail stores both in the U.S. and other countries, generating approximately 401 billion dollars last year. COMPANY BACKGROUND Why doing alliance Agreement Detail Alliance Analysis Conclusion

Why doing alliance Industry Analysis Wal-Mart (Hypermarket industry) Focus on cost leadership Cost associated from complexity of supply chain Li & Fung (Asian-based Sourcing agency industry) Low profit margin business that requires high volume Financial risk Saturation of Asian market Company Background WHY DOING ALLIANCE Agreement Detail Alliance Analysis Conclusion

Why doing alliance Li & Fung’s objective: Wal-Mart’s objective: Expanding beyond its core sourcing operations into higher-margin businesses such as retailing and brand licensing and is looking at more acquisition opportunities in the U.S., Europe and Hong Kong. Wal-Mart’s objective: Redesigning its major proportion of product attainment into a Global Sourcing organization. Expanding to the unexplored market for greater efficiency and employee advancement Creating a global Internet organization. Increase the direct sourcing. Company Background WHY DOING ALLIANCE Agreement Detail Alliance Analysis Conclusion

Sourcing agreement between Li & Fung and Wal-Mart Li & Fung will act as a buying agent to support Wal-Mart’s new sourcing strategy. $2 billion worth of goods supply to Wal-Mart in the first year. Non-exclusive agreement and no obligation for Wal-Mart on the part of shipping volume. Li & Fung is forming a new company, WSG, to manage its account with Wal-Mart. Wal-Mart will have the option to acquire WSG after Jan 1, 2016, price will be set according to the stock market. The agreement can be terminated by mutual agreement. Company Background Why doing alliance AGREEMENT DETAIL Alliance Analysis Conclusion

Alliance Analysis Type of Alliance Company Background Li & Fung’s perspective Strategic alliance with customers Li & Fung gets a lot of profits in term of inventory control, increased product and supply turns, reduction of transaction cost, increase sales, and reduction in out-of-stocks.  Strategic Alliance for buying parity By having more customers, especially Wal-Mart who buys in a big volume, helps Li & Fung to buy the products from the suppliers at a lower expense. Wal-Mart’s perspective Strategic Alliance with supplier Before : Wal-Mart sources the products from many suppliers by itself. After : Li & Fung is now responsible for the products that need to be sourced and delivered to Wal-Mart. Strategic Alliance for buying parity Wal-Mart focuses on bringing the quality products at a lowest price possible. After : Li & Fung helps Wal-Mart to buy the merchandise at a lower price than it can by itself. Company Background Why doing alliance Agreement Detail ALLIANCE ANALYSIS Conclusion

Alliance Analysis Benefits for Li & Fung: Benefits for Wal-Mart: Reputation among investors  Shares of Li & Fung were up more than 10% in Hong Kong. Profitability enhancement  Despite the low profit margin , this business is very profitability due to the high scale of volume.   Benefits for Wal-Mart: Save cost  Wal-Mart expects to reduce the cost on supply chain about 4 - 12 billion dollar within 5 years. Global explosure Wal-Mart can diversify its risk that can happen when there is a high level of tension between China and the U.S. More competitive pricing  Wal-Mart will be able to offer better quality products at lower price. Company Background Why doing alliance Agreement Detail ALLIANCE ANALYSIS Conclusion

Alliance Analysis Effects to stakeholders Wal-Mart’s employees After the deal begins, Wal-Mart combined its three operating divisions; Logistics, Real Estate and Store Operations, under one leadership team. Moreover, the company will also eliminate the roles of market teams out of the company’s position to cut its internal costs without affecting its customers. Wal-Mart’s customers With Li & Fung’s experiences and sourcing networks, Wal-Mart’s customer will get high quality of products in low price. Shareholders As the two big companies signing an agreement together, analysts see more positive positions for the two. Analysts forecast that share price of Wal-Mart will raised from HK$32.05 to HK$ 36.85, and Li & Fung’s will be from HK$ 39.50 to HK$ 43.30. Raising in share price for the two firms will show a higher potential of the companies to grow further in the future and better business conditions of the companies to shareholders. Company Background Why doing alliance Agreement Detail ALLIANCE ANALYSIS Conclusion

Alliance Analysis Reason why Wal-Mart choose Li & Fung Wal-Mart has been the number one importer of Chinese goods into USA, accounted approximately 9.6% of total US import from China. In 2005, 70% of all the products sold in Wal-Mart store were made in China and 80% of all 6000 factories that supplied Wal-Mart were Chinese. Cost of production is low. Li & Fung Ltd has knowledge and expertise concerning Chinese products, manufacturers and suppliers. Therefore, it can supply a wide range of Chinese consumer goods to Wal-Mart. Best Alternative to a Negotiated Agreement (BATNA) Non-exclusive agreement No obligation on purchasing volume Company Background Why doing alliance Agreement Detail ALLIANCE ANALYSIS Conclusion Company Background Why doing alliance? Agreement Detail Alliance Analysis Conclusion

Alliance Analysis Weakness of contract Key success factors Due to the fact that Li & Fung is also serving other companies in retail industry such as Kohl’s, Marks & Spencer and Target, these companies may also gain benefit from Li & Fung’s increased sourcing volume because they may also get the same price of product as low as what Wal-Mart gets. Key success factors Wal-Mart Li & Fung’s ability to offer good deal that satisfy Wal-Mart Li & Fung Quantity of order from Wal-Mart . Company Background Why doing alliance Agreement Detail ALLIANCE ANALYSIS Conclusion Company Background Why doing alliance? Agreement Detail Alliance Analysis Conclusion

Conclusion Current situation Li & Fung August 12, 2010, Li & Fung announced that the result of the first half of 2010 has significantly improved relative to the result from the same period in the previous year. Total profit margin has increased by 30%. Core operating profit has dramatically increased by 55%. Wal-Mart Wal-Mart 2010 annual report published in August, its sale revenue as of fiscal year end January 31 increased by 1% which is lower than the previous years (2009). Depreciation of US dollar ($), resulting higher amount of money paid for imported products. [1 USD = 6.624 CNY (2010), 1 USD = 6.8 CNY (2009)] Company Background Why doing alliance Agreement Detail Alliance Analysis CONCLUSION

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