Lego Outsourcing

1. LEGO Group – An Outsourcing Journey Presented by : Achintya Arun Avishek Manish Pankaj Prashant

2. Agenda Contents 1 Company Profile 2 Product Profile 3 What went Wrong 4 Reasons 5 Solution: Outsourcing 6 Problems with Flextronics 7 Lessons to be Learnt 8 LEGO’s Success Criteria

3. Denmark Billund 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 bes t ” 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 .

4. Region Revenue 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)

5. 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

6. Reasons

7. Reasons

8. 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

9. 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)

10. 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

11. 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

12. Traditional Vs Centralised DC Source: supplychaionquarterly.com

13. 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

14. 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

15. 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

16. LEGO’s Success Criteria

17. Current Supply Chain Production Site Sub Contractors Processes through Supply Chain Mexico Europe China

18. 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

19. Thank You