LEGO GROUP: AN OUTSOURCING JOURNEY

Olga Grishko, Willie Macatee, Fallon Murphy

LEGO COMPANY OVERVIEW

• Multinational corporation• Founded in 1932 in Jutland, Denmark• 7000 employees worldwide• By 2009, 5th largest manufacturer of toys by sales volume• Products sold in more than 130 countries• Products:

Lego bricks are "core" products "preschool" "creative building" "play themes" "licensed products" MINDSTORM NXT Lego Education Lego Games

THE LEGO MARKET

 

LEGO CASE

• Internal financial crisis in 2004 led management to rethink operations and the supply chain

• Decided to offshore and outsource a large portion of LEGO production to Flextronics

• LEGO signed a long-term contract with its partner to license out as much as 80% of its production

• Outsourcing only led to an even more complex production network

• After 3 years, management decided to phase out the entire sourcing collaboration 

• LEGO was not able to coordinate and control the increasingly global and complex network of facilities as well as communicate production knowledge between the two firms

WHAT LEGO EXPECTED

• Minimized production cost fluctuation risk through "locked prices" in contract

• Reduction of in-house production to "core competencies" of molding and packing processes

• Flextronics' successful reduction of LEGO's production process complexity and improvement in organization

•  Ability to utilize economies of scale advantage

WHAT LEGO LEARNED• Outsourcing to external producers can and did increase

production process complexity• 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• LEGO should have expected large learning curves in

sharing of production knowledge• LEGO's products and production needs were too "unique"

for firms based on extensive standardization• 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

 CONSIDERATIONS BEFORE OUTSOURCING

• Strategyo Transparent Business Strategy & Business Model

Alignment Flextronics vs LEGO

Economies of Scale vs Flucuating Demando  Timeline of Implementation

Educational Transition o  Goals & Benchmarks

Unattainble Goals • Costs

o Location Low cost vs High cost countries Production and Manufacturing proxmity towards

market

CHALLENGES WITH THE FLEXTRONICS RELATIONSHIP

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

• Sharing necessary product knowledge in a consistent and timely mannero Took too long and not executed reliably between the two firms

• Ensuring that manufacturer's business model matches with client's operation schedule and demand needso LEGO needed flexible and responsive production to handle

seasonal fluctuations and demand uncertaintieso Flextronics method designed to optimize economies of scale

through predictable, uniform production scheduleo LEGO did not recognize the "uniqueness" of their products and

needs in relation to Flextronics' expertise in standardization

WHAT CAN LEGO DO?

• Written Documentationo Documentation of all supply chain processeso Consistent through entire companyo Provides clear communication lines o "Production in another country - even within the same

company - requires ten times more documentation than in the company it moved from." 

• Intergration of Work Processeso S&OP - sales and operation planning

Integrates and coordinaties all the production facilites roles and responsibilites

 Costs?

WHAT CAN LEGO DO?

• Standardizationo Three Levels

Upper Level -  Way of thinking, values, attitudes Middle Level - Planning processes, Follow up

processes Lower Level -Hardware and factory layout Adaptability?

• Efficient Factories W/ Acheiveable Goalso Branded factories switched to Regional Marketso Quicker Response to regional demand o Clear  attainable goals w/ attainable benchmarks

HOW WILL ERP HELP?• ERP systems: multimodule software application platforms 

o organize and manage enterprise-wide processeso records every business transactions to tie together and

automate processes• LEGO and its partners would be able integrate financial

information and customer information• ERP would help to standardize and speed up manufacturing

processes• Standardizing its products and facilities will allow LEGO to

optimize a total cost advantage• ERP helps to reduce inventory and duplicate information -

the partners will be able to consolidate data• ERP will improve LEGO's issues with demand fluctuations

and forecasting errors by planning sales and operations processes

QUESTIONS?