1. LEGO Group –
An Outsourcing Journey
What went Wrong
Problems with Flextronics
Lessons to be Learnt
LEGO’s Success Criteria
3. Company Profile
• LEGO group was formed by a carpenter
Ole Kirk Christiansen in 1932
• Word LEGO is derived from Danish phrase
“leg godt” meaning “Play well”.
• LEGO was initially producing wooden
• 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
solving, curiosity, imagination.
• Awarded “Toy of the century” by Forbes
Magazine as well as British association of
4. Product Profile
•LEGO was sold in more than 130 countries.
•Major products and market is shown below
LEGO bricks without
LEGO city line,
Built up around
movies or books
US, Australia, UK, NZ
> Than 30%
Central & Southern Europe
Scandinavia, Benelux, Eastern
Europe & Asia
(Source: Case Handout)
5. What went wrong?
• In 2004, a major internal crisis drew LEGO near
• 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
• The company designers were
not factoring in the price of
materials or the costs of
• Two-thirds of the company’s
1,500-plus SKUs were items that
it no longer manufactured
• Lego Group had an astonishing
• Company lacked procurement
• The inventory were being underutilized and finally led to the
wastage of the materials
• Had more than 10 variants of
each of the product
• Every product variant
required different molding
• Diversification into apparel
and theme parks
• Capacity utilization was just 70 percent
• Production teams operated as hundreds
of independent toy shops
• Orders were placed and changed
haphazardly preventing operations from
• Operators routinely responded to lastminute demands, readily implementing
• Production sites were located in high-cost
• Absence of clearly defined service
• Multiple-tier inventory system with local
• Non-availability of the right product in
the right distribution centre
• Supply chain was geared up for custom
deliver to even the smaller retailers
•In business, outsourcing is the contracting out of a business process to
•Outsourcing includes both foreign and domestic contracting, and
sometimes includes off-shoring or relocating a business function to
Advantages of Outsourcing
•It helps focus on core activities during rapid growth periods.
•Cost and efficiency savings.
•Continuity & Risk Management
9. Production Centres
Production Value Chain Model
DUPLO and Technic products
LEGO System Products
For catering to US demand
5-10% of production
(Source: Case Handout)
(Source: Case Handout)
10. Supply chain
•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.
•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.
11. Distribution Channels
•Flexibility towards all retailers made it impossible to manage supply chain
•Decentralized distribution centre pressurized the supply chain more
•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
12. Traditional Vs Centralised DC
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. Lessons to be Learnt
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
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.
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
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.
MATTEL (Top toy manufacturer)
Global Manufacturing Principle
Outsourcing to China
16. LEGO’s Success Criteria
• Documentation of all supply
• Consistent through entire
• Provides clear
Integration of Work
• S&OP - sales and operation
• Integrates and coordinates
all the production facilities
roles and responsibilities.
• Three Levels
• Upper Level - Way of
thinking, values, attitudes
• Middle Level - Planning
processes, Follow up
• Lower Level -Hardware and
factory layout Adaptability?
• ERP would help to
standardize and speed up
• ERP helps to reduce
inventory and duplicate
information - the partners
will be able to consolidate
• Develop a plan for training
• Have Local leader that know
working culture of country.
• Ensure measurable statistics
present for benchmark/KPI
17. Current Supply Chain
Processes through Supply Chain