LEGO Group – An Outsourcing Journey

Presented by:AchintyaArunAvishekManishPankajPrashant

Agenda

Contents1 Company Profile2 Product Profile3 What went Wrong4 Reasons5 Solution: Outsourcing6 Problems with Flextronics7 Lessons to be Learnt8 LEGO’s Success Criteria

DenmarkBillund

Company Profile

• LEGO group was formed by a carpenter Ole Kirk Christiansen in 1932 Billund, Denmark.

• Word LEGO is derived from Danish phrase “leg godt” meaning “Play well”.

• LEGO was initially producing wooden bricks.• Motto “ Only the best is the best”• Lego Brick was produced in 1958• Bricks made up of interlocking tubes offered

unlimited building opportunities.• Purpose was to stimulate creative and

structured problem solving, curiosity, imagination.

• Awarded “Toy of the century” by Forbes Magazine as well as British association of toy retailers.

RegionRevenue Contribution

US, Australia, UK, NZ > Than 30%

Central & Southern Europe 27%

Scandinavia, Benelux, Eastern Europe & Asia

26.5%

No Segmentation Products

1 Pre school products

LEGO DUPLO

2 Creative Building LEGO bricks without building instructions

3 Play Themes LEGO city line, BIONICLE

4 Licensed Products Built up around movies or books

5 Mindstormnext Programmable robot kit

6 LEGO Education Educational purpose

7 Board game category

LEGO games

•LEGO was sold in more than 130 countries.•Major products and market is shown below

Product Profile

(Source: Case Handout)

What went wrong?

• In 2004, a major internal crisis drew LEGO near bankruptcy

• Accumulated a net loss of DKK 888 mn and DKK 1.8 bn in 2003 & 2004 respectively.

• The Lego Group had lost money four out of the seven years from 1998 through 2004

• It was losing DKK 2.2 mn per day during these years.• The sales had dropped by more than 30% and 40% in

2003 & 2004 respectively• The manufacturing cost, inventory cost were too high and

was difficult to control

• New products were delivering less profit and were more complex

• The company designers were not factoring in the price of materials or the costs of production

• Two-thirds of the company’s 1,500-plus SKUs were items that it no longer manufactured

Product

• Lego Group had an astonishing 11,000 suppliers

• Company lacked procurement compliance procedures

• The inventory were being under-utilized and finally led to the wastage of the materials

Sourcing

• Had more than 10 variants of each of the product

• Every product variant required different molding equipments

• Diversification into apparel and theme parks

Diversification

Reasons

• Capacity utilization was just 70 percent• Production teams operated as hundreds of

independent toy shops• Orders were placed and changed

haphazardly preventing operations from working together

• Operators routinely responded to last-minute demands, readily implementing costly changeovers

• Production sites were located in high-cost countries

Manufacturing

• Absence of clearly defined service policies• Multiple-tier inventory system with local

centres• Non-availability of the right product in the

right distribution centre• Supply chain was geared up for custom

deliver to even the smaller retailers

Distributions

Reasons

Outsourcing• In business, outsourcing is the contracting out of a business process to a

third-party.• Outsourcing includes both foreign and domestic contracting, and

sometimes includes off-shoring or relocating a business function to another country.

Advantages of Outsourcing• It helps focus on core activities during rapid growth periods.• Cost and efficiency savings.• Reduced Overhead• Operational Control• Continuity & Risk Management

Solution

Production Value Chain Model

Development of Molding Machines

Molding

Assembling

Pre-pack

Post-pack

Development Function

Distribution Centres

Cost – intensive

parts

Production Centres

Country Product

Switzerland DUPLO and Technic products

Denmark LEGO System Products

US For catering to US demand

Chinese manufacturers

5-10% of production outsourcing

(Source: Case Handout) (Source: Case Handout)

Problem• The increasing variety of colors and shapes LEGO elements was a threat.• Challenges to ensure that right components are constantly in the stock.• Inventory piling due to forecast errors and seasonal demand fluctuations.• High number of components required heavy investment in molds.

Solution• Limit the growth in number of product components• Outsourced production capacities to Czech Republic & Hungary• The US production capacity was shifted to Mexico.• Outsourced the production capacity to subcontractors like Sonoco,

Greiner , Weldenhammer, 2B Pack and Flextronics.

Supply chain

Problem• Flexibility towards all retailers made it impossible to manage supply chain• Decentralized distribution centre pressurized the supply chain more

Solution• Lego decided to focus on the large retailers to sell its products.

• The 55 European DC facilities were centralised in Jirny, Czech Republic and the operation was outsourced to DHL, which controlled the whole world (except NA).

• The 55 logistics carriers were trimmed to 11 carriers.• The NA DC facilities were centralised at Alliance, Texas and the

operation was outsourced.• Reduced supply chain complexity by centralizing DC• Helped in ease of analysis of demand for its product

Distribution Channels

Traditional Vs Centralised DC

Source: supplychaionquarterly.com

Challenges with the Flextronics Relationship

• Effective coordination and control of various production facilities became too complex for Lego

• Since the outsourcing was done at a very rapid pace, the transfer of production knowledge could not be reliably transferred

• Ensuring that manufacturer's business model matches with client's operation schedule and demand needs

LEGO needed flexible and responsive production to handle seasonal fluctuations and demand uncertainties

Flextronics method designed to optimize economies of scale through predictable, uniform production schedule

LEGO did not recognize the "uniqueness" of their products and needs in relation to Flextronics' expertise in standardization

Three main conditions toy industry faces are: 1. Seasonal Imbalances (Capacity Management) 2. Introduction of new products(inventory Management) 3. Cost-cutting pressures

Outsourcing isn’t always the best solution for cutting costs and reducing complexity; it might even complicate matters instead of simplifying them.

It forces organization to rely on not only outsourcing but also off shoring. Both the things are complementary to each other.

Outsourcing must be a strategic decision. It should not be short term cost reduction strategy.

Long-term strategy should not lock the organization with supplier. With no prior large-scale outsourcing experience, decision to embark on such

an extensive project wasn't practical. More research needed to ensure both firms' operation models could properly

align to accomplish goals.

Lessons to be Learnt

Understanding one’s own processes and structures is the key for optimizing in order to manage the constant change of market demands and attain competitive advantage.

Major standardization needed in all aspects of the Lego company and products Documentation of work processes and other areas is paramount to establishing an

optimal and effective supply chain network and fostering outsourcing collaboration “We have learned that we are more special than we expected to be”. 

This quote of Lego vice president Niels Duedahl points to the fact that Lego was expecting a contractor (Flextronics) to know more about its operational activities and processes than Lego itself.

Ex:MATTEL (Top toy manufacturer)

1 Global Manufacturing Principle

2 Outsourcing to China

3 Strategic Acquisition

4 Innovation

LEGO’s Success Criteria

Written Documentation

• Documentation of all supply chain processes

• Consistent through entire company

• Provides clear communication lines Integration of Work Processes

• S&OP - sales and operation planning

• Integrates and coordinates all the production facilities roles and responsibilities.

Standardization

• Three Levels• Upper Level -  Way of

thinking, values, attitudes• Middle Level - Planning

processes, Follow up processes

• Lower Level -Hardware and factory layout Adaptability?

• ERP would help to standardize and speed up manufacturing processes.

• ERP helps to reduce inventory and duplicate information - the partners will be able to consolidate data.

Build Competencies

• Develop a plan for training and education.

• Have Local leader that know working culture of country.

• Ensure measurable statistics present for benchmark/KPI

Current Supply Chain

Production Site

Sub Contractors

Processes through Supply Chain

Hungary Mexico Denmark Czech Republic

Mexico

Europe

China

Granulate Molding Pre-pack Post-pack DC Customer

References

• http://www.strategy-business.com/article/07306?pg=all• http://www.slideshare.net/9oodness/lego-outsourcing• https://www.lego.com• http://www.authorstream.com• http://www.supplychaionquarterly.com

Thank You