Bringing cost driver and capacity management into Business forecast and planning, Lego

“Bringing cost driver and capacity
management into Business forecast and
planning ”
Business Forecasting & Planning Summit
March 11-12, 2010 | Marriott Hotel | Amsterdam

Egil Møller Nielsen Page 3
Content
• Logistic cost drivers – clear activity based cost think is essential
• Global focus – though S&OP process and knowing limitations of
demand seasonality and fluctuations
• Capacity reviews and Inventory consolidation in details

All have been
tendered & structure
assessed
in period 2005-2008
Logistics operations, Busines-2-Business
Logistics operations, Business-2-Consumer
Global DC footprint & capacity

Strictly confidential
EDC Jirny (Europe) – operation run by DHL Exel
Capacity (storage & handling area)
• Storage profile based on June SP is feasible
• Offered storage capacity goes down from August , as a part of the
flexible VAS area and gates have to be used for outbound
activities.
Performance YTD July
• Total performance 97,7% vs target 95%
Others
• Shared continues improvement program between DHL/LEGO
ongoing under the name “LEAN/First Choice” ongoing with focus
on
– Quality assurance
– Efficiency
– Load & Capacity Planning incl. leveling out
– Skills and training programs incl. mindset
– Shop floor management
5
SPACE (Load of capacity in terms of pallets against offered and threshold) – 12 months ahead
50
100
% of deliveries
75
YTD Total performance* = 97,7%
(target= 95,0% )
*Total performance: Combined warehouse and carrier
Total Performance (pick,
pack shipped in time)

DC Dallas (US) – operation run by DHL Exel
• We have been above offered & close to threshold capacity, which
drives efficiency down and has the potential of hindering DHL
Exel’s ability to receive and ship all customer orders on-time.
• Investigation of capacity expansion for 2010 in progress, as current
capacity (storage and handling space incl. # of gates) isn’t
sufficient for 2010 business plan. Recommendation to be
completed by end September
• Any investment is done by DHL Exel
• Total performance 99,85% vs target 99%
Others
• Shared continues improvement program between DHL/LEGO
under the name “LEAN/First Choice” to be started this Q3. Will
focus on benchmarking to Jirny and will encompass start up of
Visual DC and visual boards
• Improvement workshops and initiatives are in place and will
continue within the LEAN structure
6
SPACE (Load of capacity in terms of pallets against offered and threshold) – 12 months ahead
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Load actual/bottom up 23,486 22,894 19,506 28,790 33,185 42,988 38,080 34,166 32,319 32,011 29,117 26,474
Load top down 41,515 41,190 38,738 35,688 31,715 29,852
Budget Pallets 16,306 17,778 24,360 32,244 31,813 49,286 43,650 43,064 38,056 43,180 40,106 27,646
Offered Capacity 40,800 40,800 40,800 40,800 40,800 40,800 40,800 40,800 40,800 40,800 40,800 40,800
Threshold Capacity 48,000 48,000 48,000 48,000 48,000 48,000 48,000 48,000 48,000 48,000 48,000 48,000
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Load actual/bottom up
Load top down
Budget Pallets
Offered Capacity
Threshold Capacity
DC Pallets (ex GIT)
% of deliveries
90
80
100
YTD Total performance* = 99,85%
(target= 99% ).
*DC Dallas is collect shipper: Shipment ready for pickup by customer
carrier at scheduled time

Global B2C (lego.com) – operation run by PFSWeb and LEGO
• Billund adequate until 2013 (650.000 order lines)
• Memphis inadequate already in 2009 – Solution under
consideration
• Total performance 98,40 % vs target 98 % - Billund
• Total performance 99,59 % vs target 99 % - Memphis
Others
• Reduce pick pack time from 2-3 days to1 day Billund
• LEAN project in Billund
• Setup of new E-fulfillment center in South Korea
• PFS-web has been identified as a financial weak single source
supplier – Plan B is under development
• Project for creation of cost transparency of CED activities has been
agreed upon
* Not including distribution cost
7
% of deliveries
90
80
100
YTD Total performance = 98,40%
(target= 98% ).
% of deliveries
90
80
100
YTD Total performance = 99,59%
(target= 99% ).
Memphis
Billund

The operational KPI’s all covering all major cost pools within logistics
Cost
Impact
Inbound
SKU’s
DC2DC DC
Storage
DC
Blue
Fine
Distrib
OH
Outbound distance
Inbound distance
Weighted Avg Delivery size
VAS activity
Gross Value pr item CBM
Pallet cube utilization
Warehouse efficiency
Warehouse productivity
Negotiated Rates
Oil prices
Exchange Rate*
Inventory turns (incl. peak)
Warehouse space utilization
Operational KPI’s
Volume in
Value chain
Customer
Behavior/VAS
Distance
DC productivity
and efficiency
Storage
Rates
Key Cost
Drivers
Inbound
Parts

The operational KPI’s are visualised
1
2
2
2
2
3
4
2
7
8
10
9
Extract of the monthly distribution cost cock pit
Outbound distance
Inbound distance
Weighted Avg Delivery size
VAS activity
Gross Value pr item CBM
Pallet cube utilization
Warehouse efficiency
Warehouse productivity
Negotiated Rates
Oil prices
Exchange Rate*
Operational KPI’s
Volume in
Value chain
Customer
Behavior/VAS
Distance
DC productivity
and efficiency
Storage
Rates
Key Cost
Drivers
1
2
3
4
5
6
7
8
9
10
11
12
13
Inventory turns (incl. peak)
Warehouse space utilization

Content

Customer
Development:
we can sell 200
Marketing:
the promotion
will sell 400
Manufacturing:
they will
only sell 150
Finance:
we have
budget of 300
Financial Planning
Demand
Forecasting
& Planning
Category
Customer Service
& Distribution
Manufacturing
Customer
Development
Supplier mgmt
Debtor mgmt
one
consensus
plan
What is S&OP (Sales and Operation Planning ) – The generic process
• S&OP is the way the business takes decisions
• S&OP takes sales & marketing ambitions, supply possibilities, customer needs and
financial goals and balances them to create a single, achievable plan
• Improving S&OP is more about Leadership and Behaviour than it is about systems

Sales and Operation Planning Proces (S&OP) – the LEGO way
Demand Review
Capacity Review
Developement Review
Consolidation Review Pre S&OP Executive S&OP
Capacity Review Consolidation Review Pre S&OP
Suggested
Actions
Review of: Inventory Outlook value profile
-Offered capacity -Calculation of pallet profile
-Threshold Capacity -Evaluate capacity utilization
-Demonstrated Capacity -Identfy possible capacity bottlenecks
-Agree suggested actions
Inventory Management

Content

Definitions related to Inventory Management
1.LEGO Standard Pallet Is the Logistic Stock Keeping Unit in a distribution center.
One standard pallet contains a defined quantity of goods by item number.
2. Threshold Capacity. Defines the ultimate upper limit of number of pallets, which can be stored in
a warehouse. Threshold can max be utilized in 3 month. Threshold equals
100 % capacity utilization and slow down the warehouse operation, when
fully utilized.
As guideline threshold equals about 91% of total available pallet positions.
3. Offered Capacity. Define the optimal number of pallets, which can be stored in a Distribution
Center. The level guarantee, that the operation can run undisturbed.
As guideline, but depending of storage system, offered capacity equals about
85% of total available pallet positions.
4. Load. The actual number of pallets stored in the distribution center. Load is also
named ”demonstrated capacity”.
5. Average palletvalue. The average weighted Full Manufacturing Costs for one standard pallet of
goods. The average pallet value is a calculated key figure,- used to translate
stockvalue into number of pallets.

Inventory value Profile is the starting point for inventory management
and capacity control.

Data and Graphs from capacity review
III.09 IV.09 V.09 VI.09 VII.09 VIII.09 IX.09 X.09 XI.09 XII.09
EDC Offered 135 000 135 000 119 000 106 000 106 000 106 000
EDC Threshold 140 000 140 000 129 710 115 540 115 540 115 540
Surge(external) 5 000 5 000
EDC Demostrated 76 080 95 713 100249
EDC offered back 3 month. 120653 128 005 128005
Offered last cycle 128 005 128 005 128 005 119 605 95 796 95 796 95 796
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
EDC-Jirny capacity trend(Pallets)
July. 2009 cycle
EDC Demostrated EDC offered back 3 month. EDC Offered EDC Threshold Offered last cycle
1. Based on inventory Consolidation, the inventory capacity is reviewed once a month.
2. If the capacity is changed, it must be commented in the capacity review as a decision.

Data and Graphs from inventory consolidation.
0
20.000
40.000
60.000
80.000
100.000
120.000
140.000
160.000
Load actual/bottom up
Load top down
Budget pallets
Offered Capacity
Threshold Capacity
July 2009 cycle
Load actual/bottom up 65.000 71.102 81.058 97.731 108.334 129.872 125.032 116.722
Load top down 131.431 131.581 104.951 77.108 70.056 67.914
Budget pallets 86.186 84.488 86.529 96.851 118.415 131.709 138.775 135.209 120.572 102.844 92.039 94.196
Offered Capacity 114.835 117.985 122.935 122.935 128.005 128.005 135.000 135.000 119.000 106.000 106.000 106.000
Threshold Capacity 130.308 133.703 139.038 139.038 144.940 144.940 140.000 140.000 129.710 115.540 115.540 115.540
Flex (Load vs Threshold) 50% 47% 42% 30% 25% 100% 6% 6% 19% 33% 39% 41%
Comments:
1. In general load must be below offered capacity.
2. Load can be between offered and threshold capacity, if period of overload is max 3 months.

How to manage DC capacity and load in the S&OP proces
Starting point:
Available offered and
Theshold Capacity
in DC/EDC
The available space is
Normally the fixed space ,
-contracted with a Warehouse
Provider.
This capacity is always available,
so the focus is more how much
extra space is needed on which
horizon and duration,-and how this
optimal can be provided.
Load budget for new year
Made in September. The
value-profile is converted to
pallets by means of esti-
mated key figure for new
year
The budget gives the
first indication of the capacity
deficit for next year.
No decisions for change of
capacity is taken.
Starting point Budget Monthly capacity review Monthly consolidation
The monthly inventory
Consolidation will disclose
upcoming capacity
problems. Suggested actions
will be send to preSOP to
obtain an executive recom-
mendation
The monthly Capacity
Review will reflect
decisions on change of
capacities.
The capacity review forum
does not take decisions on
capacity changes, but monitor
the capacity situation and the
capacity utilization.
The capacity review can address
Issues to the PreSOP.
PreSOP will send the
Recommendation to
Operation board, which is
the board, who grant or refuse
the recommendations.

“Bringing cost driver and capacity
management into the Business forecast and
planning”
Appendix

Risks related to the inventory peak situation.
The inventory peaks normally once a year. The pallet capacity in the distribution center is normally not
dimensioned to cover the peak situation. Off site rental of additional space is therefore normally needed
for a shorter period . Additional warehouse space has normally to be rented for a longer period, than
the capacity calls for. Vendors of space typically require a minimum rental period, and also require a
certain notification horizon. Also it can take considerable time to find available space to a reasonable
price.
To be able to get additional space in time and on good conditions, it is absolutely necessary to have
the best possible inventory forecast in value and the best possible calculation of the corresponding
Pallet load. Especially when load is close to offered capacity or over,-its crucial to know the potential
calculation uncertainty.
There is several risk factors, which influence the forecast accuracy. These factors have to be considered
and evaluated,-in order to be able to estimate worst case space situation.
• Pallet value for pallet projection. (Must be tracked and adjusted, if trend shows a new level)
• Forecast error
• Non forecasted demand changes
• Supply change decisions (Example to prebuilt inventory/Mitigation)
• Lack of available extra warehouse space in the area.
• High rental costs

Sales and Operation Planning Proces (S&OP) – the LEGO way
Demand Review
Capacity Review
Developement Review
Consolidation Review Pre S&OP Executive S&OP
Capacity Review Consolidation Review Pre S&OP
Suggested
Actions
Review of: Inventory Outlook value profile
-Offered capacity -Calculation of pallet profile
-Threshold Capacity -Evaluate capacity utilization
-Demonstrated Capacity -Identfy possible capacity bottlenecks
-Agree suggested actions
Inventory Management

Pre-SOP in LEGO at a glance
Owner: Ole Fruekilde Madsen
Demand
planning
Supply
plan
PMD
com-
mercial
PMD
Ops.
GSC
Capacity
Demand &
Inventory
managem
ent
CED Ops.
Finance
• Sales representation is critical
component in the S&OP
process.
• Sales representation is critical if
we want to be truly consumer
driven as a company.
• The demand review will be the
critical link to consolidate the
sales perspectives into the
cycle.  Agreed action to
strengthen the market input in
the demand review owned by
Ulrik.
• The pre-SOP should focus on
final consolidation of the
demand versus the supply
funneled via a clear however
practical representation.

Role description for each function in the PreSOP
Pre-S&OP participants - - High level role description -
Clarify demand and scenario uncertainties. Bridge between
BU S&OP, demand review and Pre-SOP
Sales
Clarify supply feasibility to sales plan
FG
supply
plan
Clarify commercial directions of product development
PMD
comm
ercial
Novelty product issues impacting demand/supply
PMD
Ops.
Clarify capacity uncertainties & risk evaluation
GSC
Capa-
city
Global allocation, forecasting & Inventory responsibilityMOD
Clarify CED demand and scenario uncertainties
CED
Ops.
Clarify financial impact of S&OP decisions
Finan-
ce
Owner: Ole Fruekilde Madsen

Calculation of the average pallet value
1. The calculation of the average weighted pallet value is allways done based on actual stock
on hand by plant.
The procedure is as follows:
• The actual stock on a selected date on a selected plant is extracted from
SAP. The extraction is done on item level and the extractionvalues are pieces
and FMC value listed by item.
• Masterdata in terms of pieces per pallet is applied to each item.
• Actual inventory in pallet by item is calculated by converting the inventory in pieces
to pallets via the masterdata(Pieces per pallet).
• All FMC values and calculated pallets are summed up.
• Average pallet value is calculated by dividing pallets with FMC-value.
• Pallet value calculation are done 12 months backwards to disclose seasonal
Variation, and to find a good average value for future projections.
• The actual palletvalue is calculated and tracked each month to monitor variations.
• If Variations shows a consistent trend over some month the projection value is
changed accordingly.

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