Sourcing Strategy 6 5 4
fabless. They design andmarket the chip, but rely on foundries to build the semiconductor.”
Other chip companies have fabs, butmore of them
are turning to foundries to build some of their semiconductors. One reason is that a new fab can cost $3 billion and a semiconductor companymay decide it makesmore sense to outsource chip production rather thanmake the investment in a new facility and equipment.
As a result, demand for foundry services is rising and
buyers at OEMs need tomake sure that the foundries their chip suppliers use have the technical capabilities and the capacity to handle growing demand.
In some cases, LGE buyers visit and evaluate rawmaterial
suppliers. Copper, gold and othermetals are used in boards, components and enclosures.
Linton added: “We are engaged at themulti-tier level all the
way down to rawmaterials. I encouragemy buyers to visit some of themines that sell to themills that ship to assembly houses.”
Why ismulti-tier sustainable sourcing necessary? It’s all about
an OEM’s brand said Linton: “The DNA or genome of the supply chain is important to the end customer.” End customers have becomemore socially and environmentally conscious and want to be assured the company whose name is on the product is also socially responsible.
Linton said: “The consumer buying an LCD television wants to
know that the TV wasn’t assembled by a 12-year-old in China or that the cobalt used in a battery in a cell phone was notmined by children using their hands.” Ultimately it is the responsibility of the OEMtomake sure that suppliers do business in a socially responsiblemanner.
Trust, but verify
Linton said: “Multi-level sourcing helps an OEM have visibility, transparency and openness in the supply chain. OEMs can’t necessarily rely on their supply chain to do the right thing. You can trust your supply chain, but you have to verify. If you don’t verify, you are going to hurt your brand.”
Linton points to Apple as an example of a
company whose brand was tarnished a few years ago after a keymanufacturing partner was accused of having unsafe working conditions and using child labour in manufacturing Apple products.
Linton adds the trend toward multi-tier
sourcing for some companies is a counter trend of outsourcing. In the 1990s, many OEMs outsourced manufacturing to electronics manufacturing services providers. Often they also ended up outsourcing procurement and lost control of
relationships with suppliers. Now many OEMs 58 | Annual Edition 2011 Cluster source
Besidesmulti-tier sourcing, another strategic purchasing trend at LG is the use of ‘commodity cluster leaders’ whomonitor big picture supply issues concerning commodities. For example, LG has a semiconductor cluster leader. Commoditymanagers for memory ICs,microprocessors, linears and other semiconductors report to the semiconductor cluster leader.
The cluster leadermonitors trends in the overall semiconductor
industry and, as Linton explained: “Ties those commodities together so commoditymanagers thinkmore intelligently aboutwhat is going in demand and supply, in price, and in long-termindustry trends.”
The cluster leaderwould keep commoditymanagers appraised
about trends in various industries such as automotive, consumer electronics and computing and offer analysis on howthe trends can affect semiconductors. They talk to industry analysts, understand whatmarket intelligence firms are saying about semiconductors and changes in semiconductor technology. There is also a cluster leader for other electronics such as printed circuit boards and raw materials. Other cluster leadersmay be added in the future.
Linton said: “If you look at copper, gold, steel and othermetals
used in electronics, they tend to follow the same paths. The cluster leader for rawmaterials can help commoditymanager for copper and gold to have a deeper understanding of what is going on in theirmarkets.”
Linton has transformed purchasing at LG helping to reduce
cost. Butmore importantly, he says, his initiatives have helped make LGmore competitive. He notes that LG in recent years has gainedmarket share withmany products. It is now the second largestmanufacturer of LCD televisions. It was the fifth largest in 2007. It is also the third biggestmaker of cell phones, up from number four in 2007.
Linton concluded: “What I am interested in is how much
better are we than the competition. Are we doing better than Samsung, Sony and Bosch? Are we doing a better job getting our costs down?We are. The proof is we are able to sell our products for less than the competition because we have better material costs.”
www.electronics-sourcing.com
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have taken back materials sourcing and re-established direct relationships with suppliers. However, that was not an issue for LG because the company is vertically integrated.
The transformation of purchasing at LG Electronics into a centralized structure has resulted in nearly $6 billion in materials cost savings in 2009 alone
Linton said: “We are old
school.Wemake our products ourselves.We have 46 factories and only outsource about five to 10
per cent of ourmanufacturing. The rule of thumb at LG is build it yourself and outsource excess capacity where a lot of other companies have gone the other way. Our competitive advantage in terms of supply is that we don’t outsourcemuch.”
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