EXECUTIVE SUMMARY

Category: Organization / Structure

Summary
LG Electronics brand recognition in the global consumer electronics market has increased exponentially in
the past two years. The company successfully achieved Global Top 3 status in almost every business area
in the first quarter of this year. Much of this success can be attributed to LG Electronics commitment to drive
Innovation and Globalization.

LG Electronics is re-inventing its global procurement organization from highly decentralized to center-led,
establishing streamline procurement leadership across five business units (companies) and eight regions.
LGEs procurement is currently comprised of 2,200 staff who are part of an 84,000-strong workforce in 115
operations globally, managing US$26 billion direct spend and US$10 billion general spend, led by Tom
Linton, Executive Vice President and Chief Procurement Officer. The profitability of LG Electronics is heavily
dependent on procurements performance and efficiency since its spend represents 80 percent of revenues.
LG Electronics procurement is re-positioning the organization to a new level while maintaining its focus on
high quality manufacturing and becoming a global top brand.

Speed of Transformation
The target among top management and employees is to be number one in every brand category by 2012.
The roadmap to reach number one not only resonates in the companys financial and marketing
measurements but also in key functions such as procurement. This can only happen if the companys
Innovation and Globalization occur at a pace that is much faster than its competitors.

At the beginning of 2008, LG Electronics started to lay out a foundation to centralize its procurement function
and it initiated a 3-year plan to transform global procurement to a fully center-led organization. Such
transformation requires a tremendous amount of teamwork and consensus across multiple functions and
business units. The speed, work ethic and culture to achieve this are very unique to LG Electronics with its
long history as a consensus-driven culture and strong tear-down-rebuild mentality where people get behind
an initiative very quickly once a decision has been made.

Procurement Leadership
Unlike other global electronics OEMs, LG Electronics operation and business is deeply rooted in the hands
of individual business units. Company-driven procurement organizations support an engineering powerhouse
that excels in manufacturing with close ties to R&D at the product level. But while procurement focused on its
delivery excellence inside each business unit, it was also losing the opportunity to better leverage
procurement resources and link key commodities across all companies. The relationship-driven environment
at times lost track of market competitiveness and produced an epidemic of single sourcing and target costing
with a poor selection of competitive suppliers. Being convinced that this was a serious impediment to growth,

-1-
LG Electronics began leveraging corporate resources to establish center-led procurement organization with a
cross-function matrix structure.

Until 2008, procurement in four companies was managed separately with decentralized business units
divided by product lines. For instance, there was a washing machine procurement group, refrigerator
procurement group and other groups in the Digital Appliance company (now called Home Appliance). Now
these groups are integrated into press, injection, electronic and circuit, cutting and mold and die-casting
groups that can manage across both Home Appliance and Air Conditioning companies, guided by global
commodity managers.

Reporting channels also changed. All procurement teams now report to the Chief Procurement Officer,
including direct materials sourcing and indirect and general sourcing. Procurement also plays an important
role in LG Electronics top executive consensus meetings between company brand towers and chief
functional officers which serve as a platform to develop and promote best practices and identify key bottom-
line improvements. Cross functional top management meetings run by the Chief Executive Officer are held
monthly with his direct reports, including the Chief Procurement Officer. Major initiatives led by the CPO are
immediately evaluated and implemented with top level consensus support.

Procurement Capability
Short-term and volume based negotiation tactics are being supplemented with process oriented strategic
cost management and cross-functional collaboration efforts. Global procurement implemented the following
initiatives to enhance its capability and expand its coverage, driving cost management across business
units and other functions, rather than just supporting:
Global Procurement Unified Strategy and Planning
Commodity Sourcing Councils
Corporate General Procurement
Corporate Procurement Engineering
Greater China Procurement Center
Corporate Global Trading
Crisis War Room with Cross-function Teams

Procurement Impact

Procurement drove year-over-year material cost savings of US$4.7 2008 Procurement

billion in 2008. In 2009, LGE procurement is driving close to US$6 US$45B Revenue
US$1.9B Profit
SG&A
billion in savings including direct material and general spend. In General
(22%)
US$36B
direct materials the cost savings rate is expected to exceed 20 COGS Material
(58%)

percent in 2009. Procurements financial impact on the corporate 80%

bottom line is projected to be US$30 billion from 2008 to 2012. At Revenue (2008) US$ 45 Billion
Savings (2008) US$ 4.7 Billion
this level, procurements influence in driving material cost rate, Saving Plan (2009) - Material US$ 5.1 Billion
Saving Plan (2009) - General US$ 0.3 Billion
SG&A and effective supplier management is fundamental to the
Saving Plan (2009) - PE US$ 0.4 Billion
-2-
success or failure of LG Electronics in the years to come.