MMRCDISCUSSION PAPER SERIES

No. 248

Modularity of Flat Panel Display TV and Operation
Management Practices: A Case Study of LG Electronics
Youngwon Park
Manufacturing Management Research Center, University of Tokyo, Japan
Junjiro Shintaku
Manufacturing Management Research Center, University of Tokyo, Japan
Junichi Tomita
Manufacturing Management Research Center, University of Tokyo, Japan
Paul Hong
Information Operations and Technology Management,College of Business Administration, University of Toledo, USA
Gyewan Moon
School of Business Administration, College of Economics and Business,
Kyungpook National University, Korea
January 2009

東京大学ものづくり経営研究センター
Manufacturing Management Research Center (MMRC)
Discussion papers are in draft form distributed for purposes of comment and discussion. Contact the author for
permission when reproducing or citing any part of this paper. Copyright is held by the author.
http://merc.e.u-tokyo.ac.jp/mmrc/dp/index.html

Modularity of Flat Panel Display TV and Operation Management Practices:
A Case Study of LG Electronics

Youngwon Park1, Junjiro Shintaku1, Junichi Tomita1, Paul Hong2, Gyewan Moon3

1
2

Manufacturing Management Research Center, University of Tokyo, Japan

Information Operations and Technology Management, College of Business
Administration, University of Toledo, USA
3

School of Business Administration, College of Economics and Business,
Kyungpook National University, Korea

Abstract : With the rapidly growing global market demand for Flat Panel Display (FPD) TV,
the research interest on such products is receiving increasing attention. However, very little
studies (English in particular) are available in regard to the strategic or operational level
analysis of FPD TV.
This case study explores how LGE has adopted modular product architecture to both PDP and
LCD TV across both upstream and down stream supply chain. Besides, LGE has implemented
unique operational management practices (LG Production System) applying Toyota
Production System. Such integration of product architecture and operational practices has
secured its globally competitive market position. This case study suggests the importance ofintegration of both business model and operational practices for sustainable competitive
advantages.

Keywords : Flat Panel Display, Modularity, PDP TV, LCD TV, LG Production System

Modularity of Flat Panel Display TV andOperation Management Practices:
A Case Study of LG Electronics

Youngwon Park1, Junjiro Shintaku1, Junichi Tomita1,
Paul Hong2, Gyewan Moon3
1

Manufacturing Management Research Center, University of Tokyo, Japan

2

Information Operations and Technology Management, College of Business
Administration, University of Toledo, USA
3

School of Business Administration, College of Economics and Business,
Kyungpook National University, Korea

1Abstract : With the rapidly growing global market demand for Flat Panel Display(FPD) TV, the research interest on such products is receiving increasing attention.
However, very little studies (English in particular) are available in regard to thestrategic or operational level analysis of FPD TV.
This case study explores how LGE has adopted modular product architecture to both
PDP and LCD TV across both upstream and down stream supply chain. Besides, LGE
has implemented unique operational management practices (LG Production System)
applying Toyota Production System. Such integration of product architecture andoperational practices has secured its globally competitive market position. This casestudy suggests the importance of integration of both business model and operational
practices for sustainable competitive advantages.

Keywords : Flat Panel Display, Modularity, PDP TV, LCD TV, LG Production System

1. Introduction
With the increasing use of digital broadcasting and internet broadband, more customers expect
content rich and high density video expression in media. In this context, the main stream ofdisplay is moving away from traditional CRT (Cathode-Ray Tube) to flat panel display(FPD)(Park, 2005).

For a long time it seemed that the commercialization prospect of OLED

technologies was remote, though FPD TV Industry was bloomed utilizing LCD and PDP
technologies. By the end of 2007 Sony was successful in developing OLED TV and testing in
the market by utilizing the OLED technology. The display TV market will intensify
competition with the products using combinations of the LCD, PDP and OLED technologies.
Although the marketing effort of OLED TV started at the end of 2007, itscommercialization success for the large screen market requires overcoming major
technological limitations.

On the other hand, the competitive boundaries of LCD and PDP

have almost disappeared.

Prior to 2000, LCD technology was fitting to smaller screensinstead of the larger screen ones. However, through successful applications of TFT-LCD
technologies from the middle of 2000s, rapid price competition among large screen LCD TV
2

is in progress.
TV assembly manufacturers (quite different from their color TV days) are experiencing
continuous deterioration of their financial performance (Ogasawara and Matsumoto, 2006).
For an example, this trend is quite obvious in price change of LCD panel that is used for LCD
TV. After 2005, continuous LCD panel price reduction caused the drastic drop in terms of thefirm’s operating income rate (top 4 firms) from 19% (in 2004) to 7% (in 2005) (LGEconomics Institute, 2006a). Such downward profit spiral of LCD panel firms has impacted
the performance of FPD TV firms that produce LCD TV.
In a sense, the above changes are explained by the disappearance of the market boundary
between LCD and PDP. More importantly, they are in response to the element of productarchitecture. Product architecture is an essential concept that explains the patterns ofrelationships among functional and structural requirements that satisfy core components of a
product. In terms of interdependence of part design, two classification methods are either
modular or integral. In terms of the extent of standardization characteristics, the organizational
system is grouped either open or closed (Fujimoto, 2003). Particularly, the key word thatsignifies today’s firm characteristics is modularity (Baldwin and Clark, 2000; Aoki and Ando,
2002). With the widespread use of internet in the middle of 1990s the inter-firm relationships
have evolved to be more open and therefore, even the products that had been characterized as
closed-integral product architecture are becoming more open-modular product architecture.
Such environmental changes have impacted FPD industry. In general, LCD productarchitecture of upstream (component suppliers) is close to integral pattern while downstreamarchitecture (LCD TV) adopt modular one (Park et al., 2007b). As a result, the FPD TV prices
charged to ultimate customers have significantly dropped over the years and naturally thepressures to panel prices have been intensifying. Although the upstream component
manufactures certainly feel the heat of such sustained cost reduction, the extent of pricepressures are most obvious to the prices of final TV products.
However, such modularized products must focus on cost reduction through efficient
operations management unless innovation occurs in the fundamental business model level.
This case study focuses on LG Electronics that produces both FPD TV and FPD panel that areheavily affected by modularity trends. Quite different from venture firms that do not maintainany production factories, LG Electronics has difficulty in quickly implementing innovative
business model throughout its supply chains. This study therefore examines how LG
3

Electronics (with both production of FPD TV and panel) have implemented effective
operations management practices. Particularly, this study presents how LG successfully
adopted (1) supply chain management in preparation to global dispersion of the components
manufacturing plants in response to the modularity demand and (2) LGPS (LG Production
System) in manufacturing assembly of electronic products.

2. Product Architecture and Operation Management
2.1 Integral Product Architecture and Modular Product Architecture
Product architecture is an essential concept that explains the patterns of relationships among
functional and structural requirements that satisfy core components of a product. In terms ofinterdependence of part design, two classification methods are either modular or integral. In
terms of the extent of standardization characteristics, the organizational system is grouped
either open or closed (Fujimoto, 2003; Park et al., 2007b). Automobiles take closed integral
architecture with the complex product functions and process structures and naturally they are
not so open with the outside firms.

Source: Park et al.(2007a)
Figure 1 - Type of Product Architecture4

On the other hand, electronic products (e.g., personal computers) are close to open-modular
architecture with clear-cut one relationship among product functions and process structures.
They tend to be more open relationships among firms (Fujimoto, 2003; Nobeoka et al., 2006;
Park et al., 2007a).
With the widespread use of internet from the middle of 1990s the inter-firm relationships
have evolved to be more open and therefore, even the products that had been characterized as
closed-integral product architecture are becoming more open-modular product architecture.
Nobeoka (2006) argues that one factor for strong modularity is in case that the customer needsof product function have reached limitation. Although firms with their continuous productdevelopment efforts introduce new products with higher function, customer needs do notnecessarily require beyond certain level and therefore the process of modularity is accelerated
through product standardization-specialization. For example, customer demands for pixel ofdigital camera are adequate to five million pixel. Firms may introduce new products beyond
five million pixel with heavy investment on R & D but few customers are willing to pay
higher prices for such new products. So called excessive product quality phenomena inJapanese electronic product manufacturers show that product purchasing power no longer
expands if customer needs do not respond to beyond certain price level.

Therefore, firms

focus more on cost reduction rather than new innovative products with excessive functionality
beyond required level of customer needs. Naturally, the modularity trends are accelerated
through the applications of standardization and specialization. Such modularity phenomena
impact market segment not only in local market but also in the global market.

For example,

global mobile phone markets have two market segments—high end market for advanced
nations and low-end market focusing on Brazil-Russia-India-China (BRICS). There are theintegral markets for the customer needs that require high value added functionality and themodular markets for customers that prefer to low priced functional mobile phones (Park et al.,2008).
In some cases, firms may deliberately accelerate modularity process.

Firms that havedeveloped core technology may standardize assembly product and interfaces using their own
technologies and therefore speed up the modularity process. For example, Intel has
standardized its products based on MPU and Cisco did the same for its external network andinterfaces based on Router (Ogawa, 2007). As many players acquire their own innovation5

capabilities through system modules, the relationships between producers of core products andsuppliers of complementary products

rapidly changes and accordingly, modularity tendency

becomes more visible (Song, 2006；Park, 2006). Besides, network technology development
like internet has product architecture become more open modular and yet, even for personal
computers that are regarded as modular products, the core CPU is integral product architecturethat other firms may not easily imitate. Even for modular products, too often many internal
components of the sub-system adopt integral architecture (Nobeoka, 2006). The subsequent
section is devoted to explain the product architecture hierarchy in electronic products that areclose to modular architecture and in particular about product architecture of FPD.

2.2 Hierarchy of Product Architecture in FPD TV
Product architecture is hierarchical, even modular products contain integral productarchitecture in their sub-system level (Clark, 1985; Fujimoto, 2003; Nobeoka, 2006). The
representative study of product architecture of subsystem is on DVD player (Shintaku et al.,2006). In case of DVD player, which is regarded as modular product, integral productarchitecture are used for subsystem which centralized some control elements. LCD products(one of FPD display) also show such patterns. The closer to the upstream components parts,
the more integral product architecture is applied; the closer to the down stream areas, the more
modular product architecture is common (Park et al., 2007b). As below product architecture of
LCD TV is described, LCD TV of downstream includes LCD TV module which is theassembly of the three core components (i.e., LCD panel, driver IC and Back light unit) and thefinal additions of image processing LSI. As seen from the upper structure, it appears that the
manufacturing process is simple assembly of modularized component parts. In reality, it isclose to integral architecture in that LCD panel requires the complex interrelationships among
component parts (Shintaku et al. 2007).
Because of the above characteristics, firms that produce modularized products pursue pricecompetitive strategy through production cost reduction. On the other hand, firms that produce
core components in modular elements tend to exercise platform leadership. In today’s
numerous industries, mutual interdependency of diverse products and widely dispersed
innovation capabilities dictate firms (regardless of their size) to consider the activities of otherfirms for their basic business decision making (Gawer and Cusumano, 2002).
As mentioned above, FPD TV has three kinds--LCD, PDP and OLED. LG Electronics
6

produce both LCD TV and PDP TV in its Factory A. This is possible because of thearchitecture characteristics of FPD TV.

PDP TV is similar to LCD TV in terms of structures.

In the next section, the characteristics of LCD TV and PDP TV are compared and theirdifferences are explained.

Source: Adopted from Shintaku et al.(2007)
Figure 2 - Product Architecture of LCD TV

2.3 LCD and PDP
CRT TV has dominated TV market for a long period.

With the rapid expansion of FPD TV

market, the market share of FPD TV is noticeably increasing.
market share trend since 2006.

Figure 3 shows the FPD

It is predicted that in 2008 its market share would be more
7

than 25%.
Technological characteristics of LCD and PDP are somewhat different, although they bothbelong to the FPD display family. PDP technology became popular in 1997 as firms
commercialized 102 cm (40 inch) size TV for the purpose of public viewing by hanging in thewall (inews24, Dec 19, 2007). At the beginning of 2000 mass production system for its
production was already established in Korea and Japan. At that time LCD technology, having
been successfully applied in small digital technologies (e.g., mobile phone), was being
considered for TV market. By 2005 the serious competition between LCD TV and PDP TV
became quite real in the market. Since then, PDP TV was acknowledged for its cost advantage,smooth video image-presentation and wide viewing screen capacity. In contrast, LCD was not
so appealing to the market because of high cost and the poor viewing quality --particularly at
the time of reproduction of video images. With the successful resolution of such LCD
technological problems the competitive boundaries between LCD TV and PDP TV soon
disappeared.

F PD S ha r e Tr end
20

15

15

8.5

10
5
0

3.9
1.7
2005

5.9
7

10

3.1
2006
LCD TV2007

2008Target

PDP TV

Source : NPD, LGE(2008.2)
Figure 3 - FPD Market Share Trend

Since PDP technology was developed for the purpose of wide screen product characteristics,
it is difficult for the size minimization. In the areas of DID (digital information display) LCD
8

(with the introduction of new technologies) is positioning to replace both interior and exterior
advertising billboards. LCD (although started for small size display) accelerated its movetoward the larger screen through series of technological breakthroughs and therefore by thelate 1990s, the competitive boundaries between LCD and PDP no longer exist. LCD is used in
the wide range from small and medium equipments (e.g., mobile phone, notebook andmonitor) to various IT technological products including medium and large TV.
prospect is that LCD fits to 40 inch TV and PDP is for beyond 50 inch TV.

2008 market

Figure 4 showsthat both LCD and PDP technologies have reached somewhat similar performance standards
except that PDP has relative price and size advantage while LCD maintain its comparative
superiority in terms of weight and bright room contrast ratio.

Source: LG Electronics (2006.11)
Figure 4 – Comparison of LCD and PDP

From the product architecture standpoint, product architecture of LCD/PCD module(located in upstream of LCD TV and PDP TV) has noticeable differences. Compared to LCD
module, PDP module is closer to integral architecture in view of its strong mutualinterdependence of manufacturing processes. PDP is quite effective in reproducing smooth andquality video images since PDP use the principles of analogue phenomena that transform
ultraviolet rays made by high voltage electricity into fluorescent elements. However, if
9troubles in manufacturing processes of PDP panel occur, it is much more difficult to responsethem because of analogue technical constraints (e.g., electric discharge) of PDP (Ogawa,2007).

On the other hand, LCD module assembly is close to modular structure in that key

component parts (e.g., Driver IC and Back Light Unit) of the highly mutually interdependent
LCD panel can be independently assembled without having any serious problems. Therefore,
entire front-end manufacturing processes of LCD module are done domestically, back-end
assembly processes are done in overseas plants. In this way, the differences occur in LCD/PDP(placed in between LCD TV and PDP TV) module architecture.
However, in the final TV assembly processes, complete open modularity is possible if
LCD/PDP modules and other component parts (e.g., image processing LSI chip and cases) arepurchased separately. Because of these characteristics Chinese firms and American venturefirms (e.g., VISIO), without any LCD/PDP module manufacturing facilities, can compete in
US FPD market against major brands such as Samsung, Sony, LG and Sharp. Entry to the areaof component parts close to integral architecture and entire panel manufacturing is not easy.
However, by purchasing all modules and TV component parts, firms can easily supply costcompetitive TV without having any prior TV assembly technologies. Therefore, in the final
TV assembly stage, brand power and cost performance determines the firm’s competitive
advantages.

Table 1 - Modularity and Comparison of LCD and PDP

TV

LCD

PDP

Focus

Modularity

Modularity

Productivity/Cost
competitivenessmoduleModularity

Intermediate
integralpanel

Intermediate
integralparts

High integral(Panel-module
integration)
High integral

Productivity/Cost
competitivenessProcess/Cost
competitivenessQuality competitivenessIn this context, operations management is becoming more important in recent FPD TV
manufacturing processes for the purpose of productivity enhancement and cost reduction.
Most TV manufacturers show losses in their financial statements, it is critical to maximize the10

production efficiencies and minimize assembly costs for profitable FPD TV production. Thiscase study therefore focuses on changes in manufacturing processes in the final assembly lineof LCD/PDP TV among FPD TV.

3. Case Study
3.1. Case Background
Korean FPD TV makers occupy the top positions in terms of global market share. In all TV
global market, Samsung and LG maintain 1st and 3rd place respectively and accordingly, theglobal competitiveness of Korean firms is fairly high. LG Electronics, this particular casefocus firm, has four business units—DA (Digital Appliance), DD (Digital Display), DM(Digital Media) and MC (Mobile Communication). Flat Panel TV belongs to DD (Digital
Display) and it produces both LCD and PDP TV. Panel module that is the core TV module isproduced by LGE’s PDP Unit and its subsidiary LG Displays (changed from LG Philips LCD
in 2008). As of 2008, DD (Digital Display) Business Unit is 31% of LG businesses andtherefore its significance is well-noticed.

Source : IR document of LGE (2008.2)
Figure 5 - Business Area of LGE

In the global market, FPD market share of LGE is rapidly increasing. As of the end of 2007,
its rank is 3rd in all TV market and 4th in FPD market. LGE sold 6.5 millions of LCD TVs and2.5 millions of PDP TVs and maintained 9% of market share (4th) in the world. For PDP (with11its own manufacturing facilities) at the 4th quarter of 2007, LG surpassed Samsung’s SDI and
ranked 2nd in the world market (inews24, 2008. 2.1).

Table 2 - PDP Market Share (3rd and 4th Quarter, 2007) (Based on Market Volume)
Firms'3rd Quarter

4th Quarter

Growth Rate
(Compared to 4th quarter of 2006)

Matsushita

32.7%

36.8%

48%

LG Electronics

27.3%

28.4%

113%

Samsung SDI

28.8%

25.1%

95%

Hitachi

6.8%

6.4%

17%

Pioneer

4.2%

3.2%

-39%

Orion

0.2%

0.1%

80%

Total

100%

100%

62%

Source: DisplaySearch

In 2008, LGE’s goal is to attain 10% market share and therefore is to catch up with Sharpby developing innovative strategic products and concentrating marketing capabilities(ETNEWS, 2008.1.8).

In 2000s, with the drastic reduction in panel price, in addition toeffective marketing and product development strategies, improvement in profit rate throughproductivity enhancement is becoming an important strategic priority.

3.2. Case Analysis
3.2.1. Integration of Panels and SCM system
This case examines integration details of supply chain with LG Displays, the producer of
LCD panels of LG Electronics (LGE). Specifically, it is about integration of panel modules(i.e., the core of TV products) in view of their short product life cycle and long lead time fromcomponent parts suppliers to the finished products. With the continuous TV price decline (i.e.,value-added reduction in supply chain) substantial production cost reduction requires
integration of manufacturing processes of component parts and assembly processes of finishedproducts. Since assembly costs of all products in Korea are relatively expensive, LGEestablished 17 manufacturing facilities worldwide for back-end manufacturing LCD/PDP
module and other TV component parts. (Different from PDP panel that belongs to the family
12

of internal digital display) LCD requires final TV assembly of panels (which are manufactured
by Philips LCD) in Gumi and Paju facilities in Korea, Nanjing in China and other facilities
around the world. This is the background of how LGE has built global supply chain
management by which integration of panel firms and SCM resulted in overall logistical cost
reductions.
This SCM system of LGE is integrated with the ERP system of LG Group. LGE built an
ERP system so that various management information (accounts, production, marketing,product development, customer service) to become business resources can be drifted to thepost of group whole strategically from 1996. LGE introduced Oracle ERP system in sevensections (financial accounting process, production schedule and shipment process, businessprocess, product development process, customer management process, and logistics process)during 3 years 6 months.
At first, in 2001 LGE and LG Philips (LG Displays as of 2008), LG Innotech, and LG
Communications successively introduced ERP system (LG news, 2001.11.14). LGE andaffiliation companies of LGE came to have GSCM (Global Supply Chain Management) andCRM (Customer Relationship Management) at the same time by integrated ERP construction.
In particular, there are advancement business of SCM, BPM introduction of entire company,
and SRM introduction in SCM introduction process of LGE. And advancement work was donein all fields of Supply Chain Planning (SCP), Supply Chain Execution (SCE) of SCM. The
result of part number redesign work to standardize parts information of LGE was reflected in
SRM system and this system was inaugurated in March of 2005. LGE built a global unified
supply network planner for the unified production schedule establishment of whole world
production and sales departments. Transport Management System (TMS) was completed indomestic division in 2005, and Warehouse Management System (WMS) which was alreadybuilt, was spread in service and parts department of America.
On the other hand, the LGE carried out SCM unification with cooperation companies withinside system unification in 2001. LGE developed an electronic document system (XML-EDI)
which could process all duties to occur at the time of business with business partners on
internet and has begun to apply it to all areas of purchasing from August of 2001. LGE with
Korea Trade NET (KT-NET) developed XML-EDI system investing 1,300,000,000 won from2000 to improve inefficient procedures to secure global competitive advantage throughreinforcement of subcontractors. More than 2,500 subcontractors of LGE were connected to an
13

XML - EDI system through internet network by such a system introduction and got possible toprocess all duties on online from order form dispatch, L/C establishment, an article receipt, tax
calculation by the price settlement to occur at the time of materials deal. LGE expected cost
cutting of higher than 5,000,000,000 won in a year not to mention what could go ahead around
30% of work productivity by handling all works on online (ETNEWS, 2001.8.2). The ERP
system which LGE has built until 2001 was operated in web environment, and it was possible
to analyze a market and management information in all business processes with real time, andLGE realized e business through collaboration with subcontractors in operation, marketing,and service.
In 2005, LGE began project to improve existing ERP system by 2010, and to build global
unification systems (Oracle News). In first stage, LGE introduced unified GHRS (Global
Human Resource System) for early decision making from June of 2005 to April of 2006. In
second stage, Global standard ERP was built through introducing domestic production ERP
unification and global standard system of marketing / accounts from October of 2005 to
December of 2006. In third and fourth stage, LGE planned to integrate all of the 11 offshore
production division using Oracle ERP now including in-house system of 65 abroad division
through synchronization between domestic and overseas practice process by 2010 (ETNEWS,2007.8.1). Through Global ERP unification project to unify overseas systems in entire
company, LGE expect that global visibility and cooperation would be increased. In addition,
LGE say that the ability in performing an entire company business plan improves by building
Global SCP (Supply Chain Plan).
Ordering and supply of parts was enabled through SCM system which linked such Global
ERP with a cooperation part company by real time, so that it make LGPS efficient. There arearound 250 cooperation firms for TV part cooperation firms and LGE adopts electronic
Kanban system applying Kanban system of Toyota. As mentioned, LGE introduced in all partcompanies SCM system connected with cooperation firms in 2001, and through G-ERP
information exchange is possible through internet network at real time between LGE andsubcontractors. LGE fixes quantity of ordering now before 15th day and notifies it to parts
companies by real time. Part companies enter production of parts with established partdelivery information before 3rd day finally. Parts companies complete delivery of each TV
module to LGE factory before four hours of LGPS module injection after production on theappointed date of delivery of LGPS. Through such an integrated SCM system, LGE maintains
14

such a collaboration relationship in an overseas advance together.

3.2.2. Efficient mass production through implementation of LGPS (LGProduction System)
One manufacturing facility of LGE produces more than 10,000 FPD TV daily (monthly
production is about 200,000). In general, other firm’s facility produces about 500 TVs per shift.
Japanese Sharp produces 800 TVs in the same time. Besides its facilities in Gumi areas of
LGE maintains both its assembly lines and manufacturing facilities that produces panel
modules. LGE assembles them as final products in Gumi area and 17 other foreign factories
including Mexico (2), Brazil (2), Poland (2), Karzarkstan (1), Russia (1), Thailand, Indonesia,
Egypt and China (2), etc. Such mass global production system is possible throughimplementation of LGPS (LG Production System), which applied TPS (Toyota Production
System) method in their TV manufacturing processes. Five TV assembly facilities adopted
TPS from 2004. It is being implemented both in Korean facilities and other facilities located in
Poland, Indonesia and China.
As shown in Table 3, Case factory which adopted TPS involves 7 lines that assemble PDP
TV, LCD TV, and Monitor—1 stream conveyor line (with slat method), four pallet conveyor
lines and two lines (mini lines that use cell methodologies). Conveyor plays role in pallet sothat it does not have pallet in Stream line, unique line of LGE.
The specifics of Slat TV line configurations apply TPS in the following ways. First, PDP
modules, the core of assembly processes, are completed in manufacturing facilities nearby.
Second, LCD modules supplied from LG Displays and all other component parts also aredelivered in modular forms.

Table 3 - Case plant line organization
Slat method

Pallet method

Cell method

1st line

2st-3rd line

4th line

5th line

6th and 7th line

LCD TV, PDP TV

LCD TV, PDP

Monitor

Big Monitor,

Small lot, Cell Assembly

LCD TVbeyond 60 Inch

TV
Source: Interview Results

Figure 6 shows modular assembly processes (i.e., Front modules Æ PDP/LCD modules Æ
15Chassis modules (TV board) Æ back covers Æ Stand). Different from automobile assemblythat includes pallets TV conveyors act the functions of pallets as well. Since Andon System isprogrammed, the entire work processes are available through video monitors in real time.

Source: Interview Results
Figure 6 - Conveyor Line Process

Sixty eight workers assigned to each line continue the assembly processes in seamlessfashion. By streamlining the module assembly lines into five modules and conveying the pallet,
the overall assembly time is substantially reduced. LGE’s assembly rate per hour is maximum
400 so that the maximum Tact time is 7.8 seconds. Normally they operate production rate of
330 per hour (11 seconds Tact time). (Note: Tact time can be defined as the maximum timeallowed to produce a product in order to meet demand. It is derived from the German word
taktzeit which translates to clock cycle.).
Such LGE’s operational performance is outstanding compared to that of other TV assembly16lines. This is primarily because the number of module processes is reduced to five. Besides,
such level of performance requires solid collaborative relationship with external suppliers andstrategic partners. Although core PDF and LCD panels are a part of this LGPS, the remaining
four modules are all delivered as completely assembled parts and therefore, LGPS as a wholeachieve a very high level of production efficiencies.
The defect rate of the entire manufacturing processes is reduced to 0.7%. The ratio ofinspection among module assembly lines is relatively high. Twenty three workers are allocatedto manage the sizable number of inspection items. The inspection processes are according toincoming materials related inspection standards (RF/ AV 1, 2,3/ Component 1, 2, 3 / HDMi
1,2,3,4 / DTV) and checking TV viewing quality. Pattern adjustments are not applied except
the white balancing adjustment.

Table 4 - Comparison of TPS and LGPS
TPS

LGPS

●A Pull production system●Deciding production volume of each TV(production as to be sold)size setting TV standard time to make a TV
(For example, set normal production time
per one 32 inches in 10 minutes, decide
production volume of one day, put it together
with other TV size, and produce that amounts)●JIT, Kanban system●Kanban system

TPS=Output fixed/ Input variable

LGPS=Output variable/ Input fixed

Source: Interview Results

One group leader is placed by line, and all distance of one line are 130m so that one TV is
produced for every 11 minutes normally. By the way, productivity rises when its distancemakes shorter because frequency pushing Andon button reduces. To make this effectmaximized, LGE is going to let conveyer distance shortened. TV productivity target is15,000,000 sets in 2008 and a ratio of Korean domestic production is 8-10% now. LGE has
plan to raise Poland and Mexican production ratio.
Of course, though LGPS applies TPS of Toyota, it is fundamentally different from principleof TPS in a delivery method of a part. TPS is a production method to minimize stocks by
17

producing it as to be sold basically, but LGPS is the system which makes the change of output
while fixing Input.

4.

Discussion

This case study illustrates how LGE applied effective operations management practices in
the context of product architecture characterized with intense modularity. As shown in LGE,FPD TV/panel manufacturing facilities (with the constant downward pressures of their productprices) are required to implement efficient operations management for cost reduction. Just likemany other modularized electronic products, production facilities are moving into China, India
and other nations that offer low labor costs. LGE has attained efficient cost reduction andproductivity enhancement by implementing global supply chain strategy and adopting LGPS
that applied TPS (Toyota Production System).
However, such operation management practices do not provide fundamental answers to thegrowing business challenges in view of the recent financial results of FPD TV firms. Although
LGE is one of big global five TV makers, its profit rate is not very good.

Long term

struggles with the low profit-generating products exhaust both the senior management and theparticipating workers. Increasingly businesses look for new strategy model that create
substantial value-added products that contribute to the high level profits.
Figure 7 shows that firms create values through product or process innovation. US firms are
relatively strong in production innovation while Japanese firms (represented by Toyota) show
their advantages in process innovation.

The question is whether the value added is actuallyconnected to the firm’s profit performance.
Most of FPD TV assembly makers show deterioration of their profit level. In contrast,
small and medium component suppliers show higher profit level. In a simple comparison of
profit rate of component suppliers and the LCD panel firms, component suppliers do better.
When we compare LCD panel firms with LCD TV assemblers, LCD panel and component
firms show higher profit rate (Sakakibara, 2006). Among suppliers, Japanese component
suppliers (that have original technology know-how) are doing better than non-Japanesecomponent suppliers. In general, the profit level of all firms is becoming smaller and in fact,many firms reported losses in 2006-2007(LG Weekly Economy, Dec 13, 2006).

18

Source: Adapted from Nobeoka et al.(2006)
Figure 7 - Dillema of Value Creation

On the other hand, VIZIO (Note: this firm appeared a few years ago like a comet andoccupied # 1 market position in LCD market in 2007) does not have any FPD TV/panel
manufacturing facilities. VIZIO outsources almost all functions. It buys Korean-made panels
and assembly is conducted in Taiwan. It also sells its products mostly through discount chainsto take advantage of low distribution margin (Maeil Economy, Dec 15, 2007).
From 2nd quarter of 2008, LGE will supply 32 inch PDP module (which is close to integral
than LCD module) to VIZIO (inews24, 2008.1.25). From August 2007 LGE started selling
81Cm (32 inch) TV when many asserted that minimized TV is regarded not so feasible. In asense, VIZIO utilized better business model than better operations management. Even after
achieving product innovation as the first in the world, if it is not related to the firm’s profit
level, it is not so meaningful from the firm’s strategic standpoint.
From the second half of 2007 LGE is strengthening vertical integration and innovation
activities. The leader of digital display business strives for innovative results through vertical
integration among LGE (TV sets, PDP module, core chip), LG Displays (LCD module), LG
Innotech (tuner), LG Micron (PDP back panel), LG Chemical (electronics components) anddomestic supply of the component parts. Other value-adding efforts are the bold adoption ofadvanced business practices in the areas of purchasing and manufacturing technologies andutilization of integrative module design with LG Displays (inews24, 2007.9.2).
The first matter to be considered is profit strategy through product modularity. According to19

the comparative data of prices by inch for the Japanese FPD TV product architecture, theprices drastically change depending on whether image engine is independently developed or
routine chips are used. The highly priced 4 type develops image engine independently andtheir panel is produced within. By the end of 2005, Matsushita PDP TV (bigger than 32 inch)
and Sharp (maximum size of 65 inch) are included as well (Sakakibara, 2006). For the large
screen TV, the range of price reduction is relatively small; however, the development cost isalso very high. However, with the purchase of panels, the final price of TV is set somewhat
lower than when they are produced internally. In a sense, this shows commoditization of FPD
TV and yet, it also demonstrates the price competitiveness of the small and medium size TV(smaller than 30 inch).

Table 5 - Price Comparison of FPD TV Products (Unit: Inch)Engine

Total

Image Engine(LSI)
Dependent

Independent(1)4010.4Yen(3)6780.2Yen

5665.3Yen(n=64)(n=95)(n=159)(2)4012.3Yen(4)8356.9Yen

7137.4Yen(n=32)(n=82)(n=114)4011.0Yen

7510.7Yen

6280.0Yen(n=96)(n=177)(n=273)

Panel
Panel

Purchase

Internal
Production
Total

Source: Sakakibara (2006)

In 2007 LGE made the outsourcing contracts with Taiwanese firms at the volume level ofannual 500, 000 of LCD TV (30~40 inch)(Meil Economy, 2007.12.25). LGE is also
strengthening marketing campaigns in North America, Latin America, Europe, China and Asia
by regions with the budget of one billions dollars. Internal product development is restricted topremium TV larger than 40 inch and all other smaller TV distribution (less than 30 inch) will
be handled by outsourcing (ETNEWS, Jan 18, 2008). With the careful consideration of valueadded of each product, internal production and outsourcing decisions should be made beyond
implementation of effective operations management practices.

20

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