Innovation Close-up: LG Electronics

Last year, LG Electronics spent $1.2 billion to market its latest batch of flashy devices, including the LG Cookie, a $200 touchscreen phone that helped cement LG's status as the world's third-largest handset maker. But if you want to see the next big thing at LG, skip the phone store and go to the loading dock. LG, which leapt to No. 7 on this year's Most Innovative Companies list, is building a better supply chain.

Until recently, LG management let each division cut its own deals with suppliers such as TSMC (TSM), a Taiwan-based chipmaker. That meant a procurement manager at the handset unit in Seoul didn't know how much his counterpart at a flat-screen TV factory in Mexico paid for chips from the same foundry.

Today no one at LG can issue a purchase order without clearance from the office of "procurement engineering." By centralizing purchases, LG has cut more than $2 billion from its annual $30 billion shopping bill. "Innovation could bring sustainable savings," says Thomas Linton, a 20-year IBM (IBM) veteran purchasing manager who became LG's first-ever chief procurement officer in 2008.

The change in procurement is part of a grander push by Chief Executive Nam Yong to shake up a siloed company where managers seldom shared their ideas. Since taking over in January 2007, Nam has hired six foreign executives, including Linton, for C-suite roles.

When Linton arrived, LG had a mishmash of processes developed over the years for 115 factories and subsidiaries around the world. He merged them into a single 50-page procurement manual. He has also been working more closely with suppliers such as TSMC. In early 2009 the company forecast strong demand from China for wafers, the silicon disks used to make chips. Linton quickly locked in supplies, saving $1 billion, according to the company.

Linton's team has found other savings. By buying aluminum instead of higher-priced copper for the guts of electrical goods such as home appliances, purchasing officers saved $25 million in 2009. "LG's cost competitiveness is pretty strong, particularly in its appliance business," says John Park, an analyst at Daishin Securities in Seoul. "That will help the company's margins for premium products."

The cost-cutting helped LG get through the global downturn better than many competitors. The company posted record revenues and operating profits in the fourth quarter of 2009. In April the Institute for Supply Management named LG the winner of this year's award for leadership and innovation in procurement.

Consumers might not care about such things. But they did notice the LG Cookie's price tag, which was 30% lower than comparable devices when the first model rolled out in late 2008. The company, which has now sold more than 12 million Cookies, couldn't have priced them that low without the innovation at its shipping bays.

With Kevin Cho in Seoul

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