12 May 2009

Tom Linton, CPO at LG Electronics, plans to make the firm's procurement function into the world's best. He tells Rebecca Ellinor about his totally new approach

'Life's good', as the LG slogan goes, but buying at the company, is not all that great - yet. CPO Tom Linton is first to admit that, when it comes to purchasing, the 50-year-old technology innovator is behind the times. But he plans to ensure it catches up - and then creates its own best practice.

Linton, who radiates enthusiasm, says a similar transformation at IBM - where he worked for two decades - took 10 or 12 years. He's "just trying to do the same thing in three". Speaking to SM from LG headquarters in Seoul, South Korea, Linton explains his vision.

Source of change

So what was the state of LG purchasing when he arrived in January 2008, what's changed and what are his plans for the future?

"Before I joined there was a small procurement staff who worked for the CFO and each company did its own buying. Sometimes they co-operated, sometimes they didn't.

"I came in with the idea of getting all the companies to work together - to be honest I had to start at ground zero."

Linton found an "epidemic" of single sourcing and close buyer-supplier relationships, which meant less than 5 per cent of the company's spend was competitively tendered.

"The problem is, when you're in a relationship-driven environment it can get stagnant and you lose track of market competitiveness. Even if every year you beg for 3 per cent off, the market could be 10-15 per cent lower, so you've got some serious issues to deal with."

LG consists of five separate companies - home entertainment, mobile communications, home appliances, air conditioning, and a business solutions firm which handles corporate sales. Last year it recorded global sales of $44.7 billion (£30.5 billion). A total of $10 billion (£6.8 billion) is spent on indirects and $26 billion (£17.7 billion) on direct materials. There are about 2,000 people in materials sourcing alone. They are part of an 84,000-strong workforce in 115 operations, including 84 subsidiaries around the world. Many of the issues Linton faced immediately concerned this decentralised set-up.

"The profit and the productivity of the company is heavily dependent on an effective, efficient procurement organisation.

"It takes a CPO to wave a magic wand and say 'we have a huge opportunity if we work together'." Linton saw purchasing as a "green field" and the CPO role an opportunity too good to miss. "I had a blank sheet to build a global procurement structure."

90-day plan

To manage the challenges, Linton allowed himself 90 days to find out all he could about the operation and decide how he would revise it.

"Anybody that becomes a CPO will find their boss knocking on their door on day one asking for money. I said 'give me 90 days' and came back with a report identifying areas that needed to be addressed over time.

"It's important to put together your own assessment and at 30 days my opinions were very different to what they were at 60. By 90 days you've formed an opinion."

He discovered a long list of shortcomings: no procurement strategy or policy; no survey of suppliers asking for their judgement of LG purchasing (which has now been done twice and shown "measurable improvement"); limited or no commodity management; no general purchasing; transactional rather than strategic buying; too many home-grown purchasing systems with no plan to consolidate them; a need to focus on capability improvement (identifying a baseline to improve upon); decentralised buying; no strategy for China; and resources not optimised among the companies.

With colleagues he put together a global procurement strategy and sought support from peers at the chief level, company presidents and his boss, CEO and chairman Yong Nam. Linton, who sits in on all company strategy meetings, then began implementing his purchasing plan step-by-step.

Indirect spend

To tackle the lack of a central team buying indirects, Linton made an unusual move. He persuaded the CEO to reassign 150 LG employees to start a general procurement organisation from scratch.

"Material procurement is pretty well understood but $10 billion (£6.8 billion) of non-material general procurement was totally unmanaged."

Although LG had begun hiring buyers (and continues to) Linton found the pace of recruitment too slow and the potential for savings too good to wait.

"I realised it was going to take forever, so I told the CEO, 'we need to yank 150 people immediately out of their jobs and stick 'em in this thing otherwise it's not gonna get going fast enough'."

To convince his boss, Linton and his existing team examined 17 categories. In just 30 days they identified potential savings of 20 per cent, 30 per cent and 40 per cent.

"It immediately grabbed people's attention: we needed to move quickly because we've been procuring without the involvement of professional purchasers.

"In a recessionary period when sales are weak you have a real opportunity to address cost."

The CEO said 'yes' and they addressed his 'new recruits' last month. Since most had no background in buying, LG ran a "boot camp" over three weeks to provide intensive training - a project he describes as "so much damned fun I can't stand it".

And this is just the beginning. "We'll start with the 150, teach the teachers, and it will grow from there. If you think about a $10 billion spend, 150 people is not going to be enough."

The new buyers will target 222 commodity categories in 48 countries. Meanwhile Linton will take a "control tower" approach to ensure assessments and analysis are carried out correctly and may step in to set common standards for each category.

"I want to save 20 per cent in general procurement. We're not going to get there quickly but I think taking $2 billion out of $10 billion is a reasonable target for a procurement organisation."

Big numbers

In direct materials, Linton is looking to save "a big number", $5.5 billion, which is a billion more than it had originally planned in 2009.

"We're pushing over 17 per cent targets in cost reduction. We have an aggressive strategy."

Since Linton arrived, he's exceeded set targets, having already saved 16 per cent on the $26 billion figure in 2008 - 5 per cent more than hoped.

"If you do the sums you can see the value of us coming in and creating a professional procurement organisation."

One method he plans to continue to reduce costs is by moving away from those cosy supplier relationships.

"Target costing is very popular in Asia, where you ask vendors for incremental cost savings year-on-year. You might say 'I want another 3 or 5 per cent'. But when you go out and bid you might get 10 or 15 per cent savings in the marketplace."

And Linton is fortunate - in the location and business they're in, there's still a market to go to.

"We're in the middle of the action. It's easy to source if you have the right mind to do so."

He's investing in LG's China sourcing capability to increase the skills and responsibility of staff already there. "We do about 40 per cent of our sourcing in China today - the problem is we support that from Korea. We have to raise the capability in China so we can do more from there."

Costing commodities

In addition to this, Linton has established 'commodity councils' to look at spending on common items across LG.

"Previously the appliance company did its own thing, TVs did its own thing, it was really a collection of companies.

"In some cases they pooled their spend. For example, if someone was buying semi-conductors and they were in the same town in Korea they talked to each other, but there was no orchestrated, organised way of doing that.

"I created the commodity councils and pulled people together. I knew there was a problem the first month here when I called a meeting of all the people buying a certain part and they introduced themselves to each other in my office."

He now reviews 18 commodities every quarter, looking at each for two hours.

"I get everyone in my office from the different commodities across the companies and we spend a couple of hours hammering out what we're going to do."

These groups have examined direct materials such as batteries, cable wire, connectors, copper and steel, semi-conductors and LCDs.

"There's going to be a big change in the landscape of electronics in the next few years. Technology's converging like crazy all over the world so it's important to deliver raw capability that can take cost out of anything."

Another LG initiative procurement is involved with is the CFO's 'crisis war room'. At these sessions a representative from each function attends, procurement among them. Its role is to monitor changes in material costs.

"Everybody has additional targets because of the recession. We're tracking our material cost and looking at ways we can be alert to changes in average selling prices."

As with all consumer electronics, the average selling price is constantly shifting. For example, the cost of a TV in the shops today is likely to be down 20 per cent on its price last December. The war room gives this tracking a clear focus and means purchasing is able to react quickly.

"Procurement organisations try to anticipate what that rate of change is and negotiate against targets that match it, but sometimes prices fall faster than expected. In which case you have to have a lower material cost than you planned."

He's also holding summits to tryto head off challenges caused by fluctuations in currency.

"When you're sourcing globally you can get burned. You might save 10 per cent in currency in one country and lose it immediately when it moves against you.

"For example, if you have a lot of copper or steel in your product, that might be wiped out by a sudden change in commodity price."

Linton held a raw material summit in November where he bought in experts from around the world in copper, steel and precious metals to help better inform buyers.

"There's a tendency for people to make decisions with not enough good information. I try to get our commodity teams, executives and everybody as knowledgeable as possible by bringing in worldwide experts to help us with those decisions.

"It's across the board. If you're buying copper you don't want someone sitting in the back room saying 'I think copper's gonna do this', it's more like gambling. Procurement's not Las Vegas, we want to have a predictable strategy - or at least as good as possible."

Joint working

LG competes against and collaborates with other consumer electronics companies. Sony, Panasonic, Toshiba and Hitachi are all among its vendors and, in some cases, LG is a supplier to them.

For example, Samsung, also based in Korea, is a memory component supplier working with LG on liquid crystal displays. Linton adds: "The world is hugely integrated and collaborative when it comes to technology."

In March, LG met with more than 250 of its vendors and vowed to work together more closely to ride out the economic downturn and shore uptheir competitiveness. Speaking at the summit, CEO Yong Nam told suppliers: "Collaboration and partnerships are more important these days as those are ways to allow us to get through the economic downturn and to be fully prepared for the future."

Linton added: "We will continue to invest in technology, innovation and manpower to strengthen the competitiveness of LG as well as our business partners."

At the same event, Linton announced free interest loans to suppliers in difficulty. "We're not a bank, so we're selfish. We're not going to throw money away but if one of our key suppliers is in trouble we want to offer a bridge loan with no interest in order to get them through it."

The firm is also providing training with suppliers on strategic cost management. It involves the two parties working together to find ways of taking cost out, rather than simply negotiating on price.

consensus

To overcome the absence of a procurement policy, Linton is writing a manual, which he calls "The Good Book", and he plans to have consensus from "all the c-level officers and company presidents". He adds: "It's going to be a policy that wires together procurement so we prevent bypass and wildcat spending.

"I have a very short list of what shouldn't go through procurement. It almost has to be so subjective that it's a work of art."

In fact consensus is one thing Linton says he's blessed with.

"Korea is an incredible country. It was in isolation for thousands of years so there's a tremendous amount of teamwork. If there's an instruction to do something, everybody's off doing it.

"There's debate but it doesn't go on forever and there aren't people constantly working against you. The speed, work ethic and consensus to achieve in Korea is the best I've ever seen."

MORE INFO: TOM LINTON'S CAREER PATH

Before taking the helm as CPO at LG Electronics, Linton was CPO of Agere Systems and previously held the same role at Freescale Semiconductor.

He shaped his career during 20 years at IBM, where he was promoted to director of global hardware procurement. In this role he founded and developed technical centres for the company in China, Singapore and Ireland.

After leaving IBM, Linton helped establish E2open Inc, a supply chain software business, where he was corporate vice-president and general manager for south Asia.

Linton has lived and worked in Asia for 20 years.

SMmay2009