LG Electronics and The Use of SCM Software - Article Example

LG Electronics: The Use of SCM Software 1.0 Introduction The supply chain management (SCM) process involves the coordination of production, inventory, location, and transportation among all the participants in the supply chain (Hugos 2006). It facilitates the improvement of efficiencies in operation, product quality as well as customer service. The delivery of inventory is a critical part of this process. It has to be planned, coordinated and controlled in no less fashion than other aspects of the process as it is a very important link in the supply chain process – the link between the supplier and the customer. LG requires constant supplies of the goods that it produces in order to fulfil customers’ needs. In order to facilitate this process efficient and effective management of the supply chain is extremely important. Therefore, effective organisation of all parties involved in the supply chain is critical as a result of their role in adding value. In fact, Christopher (2005) indicates that a supply chain is a network that consists of various organisations that play a part in performing processes and activities that adds value to product or service in the hands of the consumer. In order for all parties to achieve competitive advantage in the process, the flow of inputs and components from suppliers to LG’s operations has to be managed in such a way as to facilitate the minimisation of inventory holding cost and the maximisation of inventory turnover. The need for the use of technology to drive improvements and the use of SCM software cannot be ignored. 2.0 Supply Chain Management at LG Management of the supply chain is crucial to the success of businesses that manufacture goods and the internet plays a very important role in this regard. LG Electronics, Inc is a producer of consumer electronics, mobile communications and home appliances (LG 2012). The company’s operations consist of four distinct business units – home entertainment, mobile communication, home appliance, and air conditioning and energy solutions. LG also has an international presence consisting of 117 operations (LG 2012). Worldwide sales in 2011 were USD 49 billion (LG 2012). In order to increase efficiency and effectiveness LG has consistently sought to improve its competitiveness by improving the management of its supply chain. This article focuses on LG’s operations in India and its use of information technology to improve the management of its supply chain worldwide. 3.0 LG Electronics India Pvt. Limited LG’s operations in India spans approximately 30 locations and this is an indication that there is a big market for the company’s products. In fact, Kaul (cited in Kini-Mendes 2011) indicates that there is still a lot of demand that remains untapped – between 50 and 60%. This is an indication of the ongoing requirements of LG’s operations to obtain continuous improvements in the management of its supply chain in order to increase both sales and profitability. LGEIL was established in 1997 and manufactures household and other appliances ranging from washing machines, colour television sets, monitors, refrigerators, air conditioners and microwave ovens (Kini-Mendes 2011). The company also manufactures DVD, cell phones and optical disk drives (Kini-Mendes 2011). In addition to third party manufacturers LGEIL operates two manufacturing plants – one in Greater Noida and the other at Ranjangaon in Pune (Kin-Mendes 2011). The need for third party manufacturers arose in 2002 when LGEIL could not satisfy the demand for its products. These manufacturers produce approximately 25% of LGEL goods and this is an indication that the company’s dependence on suppliers is significant. This leads to the significance of proper supply chain management and the use of information technology Anderson et al (1997) outlines seven (7) principles of SCM. They are: i. development of customer segments based on the services that the customer needs; ii. customisation of the logistics network; iii. identification of signals relating to market demand and the formulation of appropriate plans; iv. differentiation of products closer to the customer; v. strategically sourcing supplies; vi. development of a technology strategy encompassing the entire supply chain; vii. adoption of measures of performance spanning the entire channel This list indicates the importance of technology in the management of the entire supply chain. It is no doubt that technology allows for vast improvements in business operations by lowering the levels of inventory and thus reducing holding costs as well as the resources tied up in inventory. It also results in a reduction in the time spent negotiating with suppliers as the technology helps to bring other parties in the negotiating process together without having them physically present in the same location. 4.0 The Use of SCM Software at LGEIL LG Electronics India was established in 1997 when it initially placed reliance on a manual system which was very time-consuming and tedious (Singh 2004). The company experienced great difficulty in terms of product mix and the time to get the products to the market (Singh 2004). In terms of product mix, the regional markets in India were very diverse and so one product may be popular in one region and not so popular in another region - a model that was in demand in the east of the country may not be popular in the north. In relation to the time factor, products had to be supplied to dealers at the right time and so LG had to facilitate a higher level of control of its network of suppliers (Singh 2004). In addition to that the company was subject to targets in order to facilitate cost minimisation to enable it to compete successfully in a market that was very sensitive to prices (Singh 2004). Furthermore, if problems existed in relation to suppliers they had to be resolve by physically meeting face to face with suppliers (Singh 2004). Therefore, in 2001 LGEIL went through a process of evaluating SCM Software including Oracle since its Enterprise Resource Planning (ERP) system utilises this software. The company selected its own Customer Information Services (CIS) package (Singh 2004). The reason for doing so was the sheer cost involved in customising an off-the-shelf SCM package and the fact that the CIS package was already tailored to LG’s operations (Singh 2004). LGEIL adopted SCM software in 2001. Since the company discovered that off-the-shelf systems could not work without making changes which would prove very challenging to the business the CIS package was brought on stream to help manage the supply chain. The CIS package was already tailored to its use and the two modules which were made to cater to the needs of suppliers (lgesource.com) and distributors (lgdealernet.com) were linked to the company’s ERP systems. LGEIL has adopted Enterprise Resource Planning (ERP) Systems since 2000. An ERP system integrates business functions in the value chain of an organization (Chen et al 2006). A number of LG operations worldwide have benefited from the use of this system in the management their operations. However, these systems have to be implemented in a way that will make them beneficial to the company’s operations. Therefore, the networking environment is very important. In fact, Arindam Bose (cited in Citrix 2012) indicates that the use of MetaFrame Presentation Server has contributed significantly to the success in using ERP in India. A number of benefits have been outlined (Citrix 2012). They include: i. savings of approximately US $105,000 (Rs 50 lakh) annually in bandwidth costs; ii. saving of approximately US $85,000 (Rs 40 lakh) for training users of the system up to three years after implementation; iii. a reduction in the time taken to invoice a customer from 5 minutes to 40 seconds; iv. easier upgrades as a result of the centralization in the management of applications; and v. extension in the useful life of older personal computers The Citrix MetaFrame Presentation Server that LG Electronics India use runs on eight servers of 1.2 GHz P4 based dual processor systems with storage space of 20GB HDD and 1GB RAM. Connectivity is achieved with the use of VSATs and leased lines which connects intel-based desktops including legacy personal computers (Citrix 2003). Bose also believes that if IT solutions are not used then the business will stop functioning (cited in Citrix 2003). LG’s operations in different countries have adopted their own systems in order to achieve success. Singh (2004) indicates that because the CIS modules are linked to the ERP system suppliers are able to obtain information relating to production scheduling and the amount of inventory at LGEIL’s manufacturing plant. In fact, Bose (cited in Singh 2004) indicates that the supplier is able to determine the gap between the physical inventory and the production plan. Therefore, suppliers obtain the information they need that will facilitate the planning of their own production levels in order to meet demand as and when it arises. Suppliers are also able to determine the quantity of their material that was rejected and so this forces them to pay attention to quality. LGEIL is also able to track secondary sales as distributors and area managers enter the sales that distributors make to final customers into the relevant module weekly. Additionally, sales forecasts posted by area managers are used by the relevant module to compute the requirements. In order to determine the materials to purchase (that is, the procurement plan) the inventory at the dealers business is subtracted from the forecasted sales figures. This suggests a win-win situation for all participants in the supply chain. Once suppliers use the information properly they will not lose any significant amount of sales and distributors will be able to fill the demands placed by customers. Since the implementation of CIS the company has experimented with a number of distribution models. However, it was the changes that were made to the companies SCM IT infrastructure in 2008 that streamlined its worldwide operations when it introduced its Global Supply Chain Planning (GSCP) system (Kaul, cited in Kini-Mendes 2011). This also resulted in changes to the company’s transportation functions. GSCP integrated the entire business process from the receipt of orders, production of goods through to its sale to the final customer as well as the inventory system. This system was able to integrate demand and supply. The major difference between GSCP and earlier IT solutions is that it combined supply chain, cost management, procurement, design, supply of parts and production into one process that allowed the company to know the quantities of each product that should be manufactured. This is important as it helps in reducing the level of obsolescence in inventory as well as the number of days sales in inventory. This leads to a reduction in the storage space required for inventory and therefore inventory holding and handling costs. All of the aforementioned factors impact the organisation’s profits positively in the form of less write-offs and handling costs. 4.0 Challenges in Implementation Changes are always beset by challenges and introducing a new system is no different. Bose (cited in Singh 2004) points out that the major challenge was that of getting suppliers on board. Training sessions were held in order to provide a means of motivation. Although the system was designed in Korea some amount of customisation was done in order to bring it in line with the conditions existing in India. This is important as Korea and India have two different cultures and this has to be considered when changes are been made. The cost of training can be a considerable sum. However, it can pay off as it translates into significant benefits for all parties concerned. 5.0 Benefits from Implementation of SCM Software There are significant benefits that were gained from the implementation of SCM in India. All the problems noted under the manual system were resolved leading to fast payment to suppliers; reduction in the cost of communication; resolution to problems associated with product/model mix; achievement of cost minimisation targets; improvements n debt collection; and improvements in sales forecasts. Some of these benefits helped in facilitating additional benefits for LGEIL 5.1 Improvements in how quickly suppliers are paid Suppliers paid quickly SCM utilises the internet and so suppliers are able to get their money quickly. Notification of amounts owed can be made easily. Additionally, these can be verified quickly due to the ease in processing invoices 5.2 Reduction in the cost of communication There was a significant reduction in the cost of communicating with suppliers. The cost was cut by approximately Rs 5 lakh per annum as meeting face to face was no longer an option in most instances (Singh 2004) . The consequential saving in manpower also led to increases in productivity levels resulting in an additional saving of Rs 5 lakh annually (Singh 2004). 5.3 Resolution of problems associated with product/model mix The product/model mix problem which existed under the manual system has also been resolved and so LGEIL has been able to meet the specific demands of the various regional markets. The fact that customers are now getting what they require has resulted in an increase in sales (Bose cited in Singh 2004). This helped in facilitating an increase in sales turnover for the company. 5.4 Achievement of cost minimisation targets One of the major aims of businesses is to cut costs in order to remain or become competitive. Supply chain management focuses on areas where cost can be reduced. Making information available on a timely basis for participants in the supply chain as well as providing a means by which they can input their information is crucial to this process. By implementing CIS LGEIL was able to meet cost minimisation targets and therefore achieve a lower selling price. 5.5 Improvements in the collection of debts The ease with which information relating to debtors can be obtained is a significant benefit to LGEIL. This means that debtors can be sent confirmation using the internet. Communication is easier via this method as all previous communication can be retrieved easily. It also facilitates follow-up and provides a cost effective basis that is highly likely to lead to the timely collection of debts. Collection of debts improves the company’s cash flow. 5.6 Further benefits relating to improved forecast The fact that the sales forecast became more accurate led to additional savings for the company by an approximate Rs 4.5 crore annually. The combined savings from the implementation of the distributor module is estimated at Rs 1 crore annually. The new system implemented in 2008 would also facilitate an improvement in this area due to the higher level of integration that it facilitates. 7.0 Conclusion The management of the supply chain with the use of software has led to major improvements in the way that LG Electronics and its subsidiaries operate. There is still more that can be done in the way of improvements in the supply chain with the use of radio frequency identification (RFID) systems in its operations. According to OAT (2005) LG started investigating the RFID system in 2004 when Wal-Mart and Best Buy made it mandatory for their goods to tagged. RFID allows information to reach the supplier quickly in order for them to respond by replenishing supplies quickly. This system has been used by LG at various locations in the United States and should be encouraged for wide-scale use throughout its operations as it will track demand for its goods n real time. When this is done the necessary measures can be taken to ensure that there are less unsatisfied customers as instances of unsatisfied demand may lead to a reduction in customer loyalty. LG is definitely on the right track in terms of the use of SCM software. The company, however, needs to continue to seek ways to improve the management of its supply chain through continuous innovation. This is the only way that it will remain competitive as it seeks either maintain or improve its position in the market for consumer durables. References Anderson, D.L., Britt, F.E., Favre, D.J. (1997). The Seven Principles of Supply Chain Management. Supply Chain Management Review, 1(1), p. 31-41 Christopher, M. (2005). Logistics and Supply Chain Management: Creating Value-adding Networks. London: Prentice Hall Citrix. (2003). LG Electronics Saves on Costs with Citrix MetaFrame Presentation Server. [Online] Retrieved from http://www.citrix.com/English/aboutCitrix/caseStudies/caseStudy.asp?storyID=9973. [Accessed 10 October 2012] Hugos, M. (2006). Essentials of Supply Chain Management. 2nd ed. USA: John Wiley & Sons Kini-Mendes, J. (2011). Looking Good; LG Electronics India Discusses its Supply Chain Strategy. [Online] Retrieved from http://logisticsweek.com/feature/2011/07/looking-good-lg-electronics-india-discusses-its-supply-chain-strategy/ [Accessed 20 October 2012] OAT. 2005. LG Electronics Goes Live with OATSystems. [Online] Retrieved from http://www.oatsystems.com/news/pr/lg_dec13.html [Accessed 12 October 2012] Singh, A. 2004. Project CIS casts a golden eye on LGEIL. [Online] Retrieved from: http://www.expresscomputeronline.com/20040209/ebusiness01.shtml [Accessed 20 October 2012] Read More