Sourcing Strategy
LG revamps purchasinG and saves biLLions
Commodity teams, centralized purchasing and involvement of buyers in new product development are key to LG Electronics’ sourcing success
When LG Electronics chief procurement officer TomLinton speaks, other C-level officers at the company listen. That’s because Linton has saved the South Korean-based company billions of dollars in materials costs over the last three years by revamping LG’s formerly decentralized purchasing operation into a centralized procurement powerhouse.
Linton is responsible for about $30 billion in directmaterials
spend annually with suppliers, representing about 75 per cent of LG Electronics total sales revenue.
In 2008 when Linton became CPO, the company reduced direct
materials cost by $4.7 billion and then cut costs by about $5.9 billion in 2009. It expects to cutmaterials costs by about $5.2 billion this year. Some of the savings were suppliers reducing component prices because of weak demand during the recession. Butmost of the savings were accomplished because Linton centralized purchasing operations for LG’s five different business divisions (home entertainment,mobile communications, home appliances business solutions, air conditioning) and leveraged the directmaterial spend. That resulted in LG receiving world-class prices fromsuppliers.
Linton also formed purchasing councils tomanage 18
commodities and negotiate contracts company-wide. He also created a procurement engineering group inwhichmembers of his procurement organizationworked closelywith design engineers and suppliers tomake sure the right components are chosen for newproduct designs.
Besides cutting costs,
LG’s restructuring of procurement has also helped the company get newtechnology into products, integratemore functionality into fewer chips andmake the companymore competitive.
LG’s purchasing
transformation journey began in January 2008. Linton’s firstmove was to do a 90-day assessment of LG’s purchasing to identify its strengths and weaknesses.
His evaluation
identified a number of issues that needed to be addressed including:
• Procurement strategy: Quite simply, there was none. Linton said: “Everything was run by division procurement people. There were no procurement policy and no rules.” Buyers could buy fromwhomever they wished
• Decentralized purchasing: Although LG bought billions of dollars ofmaterials fromsuppliers, it did not leverage its purchases as each of LG business unit handled its own purchasing and did not combine purchasing volumes
• No purchasing commodity councils:Manymajor electronics OEMs have commodity councils tomanagematerials such as semiconductors, connectors, passives, connectors etc. LGE lacked such teams
• Procurement engineering: Large OEMs often have a procurement engineering organization to work with engineers and suppliers on technology issues and tomake sure the OEM gets access to new technology being developed by suppliers. No such group existed at LG
A procurement engineering organization is often instrumental
in reducingmaterials costs because they work with suppliers and engineers tomake sure the OEMis aligned with the right suppliers that are developing new technology. They also help steer engineers to suppliers that the OEMalready has long-term relationships with. At LG,members of the procurement engineering organization are degree engineers who work on new product development teams.
Linton said: “I have a procurementmanager in research and development (R&D) and in our design centers. As prototypes are
56 | Annual Edition 2011
www.electronics-sourcing.com
LG Electronics’ chief procurement officer, Tom Linton, has procurement managers in the company’s R&D and design centers
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