LG Electronics centralizes purchasing to save
CPO Tom Linton wants to cut materials cost by $5 billion over the next three years and believes centralizing purchasing is the way to do it.
By James Carbone -- Purchasing, 4/9/2009 2:00:00 AM
About 18 months ago, the CEO of LG Electronics made Tom Linton an offer he couldn't refuse.
CEO Yong Nam said, "Tom I want to build one of the top procurement organizations in the world. Would you be interested in doing that?"
Linton said he would and accepted the offer, becoming LG's first chief procurement officer in the company's 50-year history. Since January of last year he has been transforming LG's decentralized purchasing operation into a centralized structure, so it can leverage's LG's $40 billion annual spend with suppliers.
So far the results have been encouraging for LG, which is headquartered in Seoul, Korea. About 50% of purchasing at LG is now centralized and the company has been able to reduce its materials cost by 16% in a year. Linton's goal is to centralize purchasing at the rest of the company and reduce materials cost $5 billion over the next three years.
Until last year, most of the LG's spend was handled by the divisions' purchasing organizations. Each division had its own purchasing strategies, processes and systems. LG's divisions include mobile, digital display, digital appliance and digital media. The divisions make a variety of equipment, including cell phones, computers, televisions, home theater systems, appliances and other consumer electronics equipment.
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"One of the core tenets of purchasing is that leverage comes from centralization," says Linton, who has also been CPO of semiconductor makers Agere and Freescale. "The first thing was to begin the whole structure of commodity councils and commodity management."
He formed 18 commodity councils to develop strategies, manage suppliers and leverage the spend among divisions for semiconductors, passives, connectors, metals and other materials.
Before the councils were formed, however, Linton did a careful 90-day review of purchasing at LG and identified a list of concerns that needed to be addressed. They included:
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Organization. There were no commodity councils, general procurement, or procurement engineering functions at LG.
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Cost innovation. Material costs were too high because of too much single sourcing and low level of competitive bidding. Without procurement engineering in place, there was no one to recommend changes in materials, suppliers, processes or design to reduce cost.
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Purchasing activity. Activity-based costing analysis revealed most resources were applied to administrative and not strategic tasks. Administrative work was not automated enough and high in cost.
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Lack of professionalism. A survey of suppliers revealed a need to improve purchasing professionalism.
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Procurement systems. There were 17 systems, almost all homegrown, with no strategic system.
In addition to reviewing purchasing processes and practices, Linton met with commodity managers at different LG divisions for two hours every quarter to discuss technology roadmaps for commodities and suppliers.
"Those meetings were instrumental in pulling the procurement function together because in the first meeting the guys buying DRAMs for different business units at LG would introduce (themselves to) each other," says Linton.
Other buyers purchasing the same commodities but in different business units also met each other for the first time. "As CPO I was able bring all these people together. There was a synergistic effect."
 Tom Linton has some aggressive goals for LG’s purchasing operation, including cutting materials costs by $5 billion in three years. |
 LG Electronics direct materials spend is increasing despite the recession. |
 LG has about 8.5% of the global cell phone handset market with 100.7 million shipments in 2008, according to researcher IDC. |
He discovered that in a handful of cases, there was some effort to consolidate the purchase of some components by two business units. But it didn't happen often and there was "no structure or process on how to go into negotiations, how to prepare, how to train people in cost management and commodity management," says Linton. "All of those things we have put in place in the first year."
Besides establishing commodity councils, Linton also formed a general procurement organization and established a procurement engineering function to work towards reducing cost of existing products and to make sure high cost suppliers and products aren't designed into new LG products.
More standard parts
For new products, procurement engineers push designers to use standard parts or to use less materials when possible. For instance in a new cell phone model, the procurement engineer may suggest a change in the thickness of the class in a display.
For existing products, the procurement engineer may suggest a material, process or supplier change as a way to reduce cost.
"We are encouraging value engineering on current products to reduce cost," says Linton. "On new products the idea is not only to meet cost targets, but to actually drive supplier selection as far up the food chain as possible so that we are designing in the next generation of suppliers we believe are strong and will be competitive and offer the best services."
Linton also saw a need to have a purchasing vice president for China because the supply base continues to grow there and has become such a force in electronics. LG buys about $100 million of material from China.
"I put someone in charge of China, including Taiwan, to leverage the 500 procurement people I have there," he says. "It's better to have one guy in charge of buyers there rather than having them operate independently in our facilities or in our international procurement office."
Linton says the centralized focus will help LG weather the current economic crisis. However, he is concerned that some of LG's 4,000 suppliers may not be so fortunate. "What is happening during the recession is some of the weaker ones are going away."
He says it is happening with disk drives and in the semiconductor industry with memory suppliers.
"This is going to play itself out," says Linton. "What we want to do is hitch our wagons to companies that are strong and capable. Some of them may be going through hard times and will be fine. Others will not be fine," he says.
Checking financials
Linton says LG is evaluating its supply base closely and carefully checking suppliers' financial health. Evaluation includes checking who is investing in capital expenditures, capacity and research and development.
He says the lack of investment by semiconductor suppliers in capital spending is a concern because parts of LG's business, such as mobile phones, are growing despite the recession.
"Some of our phones are actually sold out. We are chasing supply on some things," says Linton.
He adds there also are shortages of some types of monitors because of production cutbacks and low inventory levels.
Linton notes DRAM production has been cut back and supply may tighten in the second half when demand picks up.
But he says that he is confident LG will get all the supply it needs because suppliers have to evaluate which customers they want to devote resources to and are more likely to support customers whose businesses are growing.
"Suppliers are making decisions. They have limited production and tight budgets and are asking themselves who they want to partner with," says Linton. "Who can I hook up with? Who is going to be in this game and continue to grow? What we have going for us is that because we are growing we have upside. So we will get supplier support."
Supplier support will be important for LG if it is to reach Linton's goal of $5 billion in savings over three years as it continues to centralize and leverage its purchases with suppliers.
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