Nice & Easy

Outsourcing allows LG Gulf to manage its rapidly growing logistics operations in a cost effective and accurate way.

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By  Neil Denslow Published  September 6, 2005

|~|LG-Electronics----5forweb.jpg|~||~|LG Electronics Gulf’s warehouse in Jebel Ali is a surprisingly small affair. Covering just 4000 m², the building does not seem big enough to support one of the fast-growing electronics companies in the region, especially one which holds more than US $30 million’s worth of stock in Jafza. The facility is also unexpectedly low-tech, without any racking, let alone IT applications such as handhelds or a warehouse management system. However, the company is able to support its rapidly growing operations with a cost effective and accurate supply chain by outsourcing much of its inventory management to third party suppliers. “Our logistics process is very simple, and we do not want to make it complicated,” explains Agnelo Fernandes, manager, logistics & sales administration, LG Electronics Gulf. “Our inbounds are completely managed by our head office, and, as far as our deliveries to customers are concerned, we look to keep the responsibility with the warehouse companies, so it is all outsourced.” The Korean conglomerate makes a wide array of products, ranging from DVD players and mobile phones to air conditioners, refrigerators and robotic vacuum cleaners. Its business and volumes are also growing rapidly, up 30% in each of the last three years, even though it geographical coverage area is shrinking. “When this company was first established in Jebel Ali [in 1996], it covered the whole of the Middle East and Africa, but now we are just covering 10 countries, and this number is falling annually,” notes SK Oh, LG Electronics Gulf’s managing director. The area covered by LG Gulf comprises the GGC, Pakistan, Azerbaijan and Armenia and Afghanistan. Despite this wide geography, however, the company only has a limited number of customers as it only supports one or two distributors in each of these markets. The company also handles logistics for LG’s offices in Iran and Iraq, which are two fast growing, if channelling, markets. LG Gulf generally follows logistics policies laid down by the company’s central head office in Korea. The regional affiliates around the world play a key role in defining these policies, however, with the logistics managers from each of them meeting once a year to draw up a list of key performance indicators (KPIs) that their work will be assessed against. “The logistics manager will be evaluated by the results of this year’s accumulated actions,” explains Oh. “If the actual accumulated logistics cost ratio is improved compared to last year’s, and the base targets for the year have been achieved, then the logistics manager can get a good evaluation because they have made a good contribution to the company.” The KPIs cover all of the various different stages of the supply chain, including both work done inhouse and by third party. The key assessment criteria are delivery accuracy, data accuracy and, particularly, cost, which is measured as a percentage of sales revenues. “Under the core KPIs, there are also several different elements,” adds Oh. “Under cost management, for instance, we can break it down several factors, such as our own inhouse warehouse costs and our third party warehouse cost, also our inbound logistics cost and our outbound logistics costs,” he explains. “Then, the logistics manager can break down the factors into more details. For example, inbound costs can be divided into loading and unloading cost, the customs clearance fees, and the transportation fees from the port to our warehouse and the third party warehouse,” he continues. LG’s attempts to keep on top of its supply chain costs begin at the procurement stage, as the company has created an internal market in order to create competition between different manufacturing units. In total, the company has 17 different manufacturing sites spread around the world. A subsidiary can buy goods from any of the plants, based on which is able to offer the best rate. LG Gulf accordingly orders only half of its products from Korea, with the rest coming from a range of countries, predominately China, India and Indonesia, but also including Turkey and Egypt. “We mainly buy goods from our headquarters in Korea, as there are many factories there in several areas,” says Oh. “However, we need to consider the total cost effectiveness, which means we need consider the logistics cost as well [as the manufacturing costs].” The company places its orders using its inhouse developed supply chain management system, which is the backbone for LG’s entire supply chain. All of the product and sales managers in the company around the world have to keep an up-to-date six week purchase plan in the system, which is then used by the various manufacturing plants to plan their production. Once an order is placed, it can be manufactured within 20 days. Transportation for the finished items is organised by a central global office in Korea, which receives an automatic shipping notification whenever an order is made. Larger goods are shipped by sea to Jebel Ali, while smaller items, especially mobile phones, are flown in. Even for the biggest items though, there is still a short turnaround, as it takes just 17 days’ sailing for goods to travel from Korea to Jebel Ali. “The total supply chain — from placing the purchase order to getting the delivery — is very quick,” says Oh. The goods are shipped to Jebel Ali in full containers. If a distributor has already ordered the products inside, perhaps for a large customer, then the container is transported to them without the goods inside being touched in Jebel Ali. In these kinds of sales, LG Gulf effectively acts an agent for the distributor, just handling the paperwork rather than the actual goods. “If we have an order and the shipment has arrived, then we get the goods out of the port and cross-dock them. There is no warehousing involved,” says Fernandes. “All we do is just the documentation and the coordination with the customer and supplier.”||**|||~||~||~|Alternatively, if there is no immediate customer for the goods, then they are put into storage. This is a key task for LG Gulf’s local operations, as the logistics department needs to juggle goods between a number of different 3PLs, its own warehouse and the free storage available at the port. “We try to make maximum use of the free time available in the port,” says Fernandes. “Then we decide which warehouse to store [the goods] in… by basically looking at the space available across the different warehouses, and the timeframe in which the costumer will want the order.” Only 20% of the goods LG Gulf receives go into its own warehouse. These are mainly small high value items, such as mobile phones and DVD players, which the company needs to keep securely. The larger items, including fridges, TVs and air conditioning units are held by 3PLs in Jebel Ali, predominately Barwil and GMT Logistics, as well as Transworld and Consolidated Shipping. Using this variety of suppliers gives LG greater leverage when negotiating rates, but more importantly, it also ensures that no single facility becomes overwhelmed. “We have stocks at different places to have a speedy delivery of requested items,” says Fernandes. “By contrast, if we had all of our stocks in one place, then we would have 10-15 customers all lined up waiting, as it would be very difficult to meet their requirements.” The 3PLs’ main task is to hold the items and then pick them for the customers’ orders. Little in the way of value added services is required by LG, aside from a small amount of stickering and labelling, as the goods are generally manufactured with a customer in mind. These items can then be customised as required at the factory. The distributors’ orders, which they collect themselves, are also normally fairly large. This therefore simplifies picking, as goods are shipped by pallets or containers rather than at the unit level. “The goods usually come in containers and then go out in containers,” Fernandes notes. LG Gulf keeps track of these movements through a daily stock report, which it receives from each of the 3PLs. The company also confirms its inventory levels by regularly counting the goods held by its logistics partners and also in its own facility. “We do a physical inventory count in our warehouse and in the third party warehouse every month,” says Oh. “Although, unfortunately, in the case of the third party warehouses, we cannot count 100% [as they hold so much], so sometimes we do random sample inventory counts instead.” A key consideration in terms of stock control is long term inventory, which LG keeps a close eye on. This can be an expensive problem for the company, as aside from representing wasted manufacturing capacity, unsold goods will also generate large storage bills, if they are left to sit in a 3PL’s warehouse for months on end. “Long-term inventory can be the biggest enemy for a company’s operations,” says Oh. To limit its exposure to this problem, the company imposes strict rules on its stock levels. This ensures that the inventories of a particular line do not exceed US $500,000, which rarely happens, and that the amount of long term inventory is always less than 5% of the company’s total stock. “If we do have long-term inventory in the warehouse, then we will be facing problems with the cash flow, so customers are then offered price reductions to dispose of these items,” Oh adds. The third party warehouses are also holding inventory on behalf of LG’s branch offices in Iran and Iraq. These are important markets for LG, but the security problems in these countries force the company to hold stocks in Jebel Ali rather than closer to the market. Operating in these countries also presents a number of other challenges, notably the lack of banking infrastructure, which LG gets round by more freely offering credit. “The Iran and Iraq markets are huge… but our customers there face finance problems,” says Oh. “For instance, sometimes they cannot open LCs [letters of credit] properly because of their banking facilities problem, so we will support them. Probably, we will release the goods to the distributors, but the payments will be done by us. After that, we will then collect the money from the Iranian and Iraqi distributor directly [in cash].” A further problem was caused by the large and long-term orders that were being placed by the two branch offices in Iran and Iraq. Because different LG manufacturing units would fulfil these orders, shipments would arrive at Jebel Ali at the same time, which would then overwhelm LG’s logistics operations. As such, the Gulf office has now taken a more proactive approach to controlling the branch offices’ orders, so as to spread out deliveries more effectively. “We could not control the purchase orders [previously], but after we faced big logistical problems, we made the decision to get involved in their purchase orders,” says Oh. “Now we are strictly monitoring the orders given by our Iranian and Iraqi customers.” How long the Iranian and Iraqi operations will be run out of Jebel Ali will also be key to the future development of LG Gulf’s inhouse logistics operations. In particularly, plans are being drawn up for a new 7000 m2 warehouse, which would operate alongside the existing facility, to better support these two markets. Such a move would obviously require a high investment and go against LG’s outsourcing philosophy, but it may be forced upon the company by the market demand. “It all depends on the businesses in Iran and Iraq,” says Oh. ”If they stop using our logistics facility, then we do not have any reason to construct a new warehouse looking at current data trend. However, the branch office managers and the customers in Iran and Iraq have not made yet a decision whether or not they will still keep using our facilities,” he adds. ||**||

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