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

Strategy o Transparent Business Strategy & Business Model Alignment Flextronics vs LEGO Economies of Scale vs Flucuating Demand o 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 manner o 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 needs o LEGO needed flexible and responsive production to handle seasonal fluctuations and demand uncertainties o Flextronics method designed to optimize economies of scale through predictable, uniform production schedule o LEGO did not recognize the "uniqueness" of their products and needs in relation to Flextronics' expertise in standardization

WHAT CAN LEGO DO?

Written Documentation o Documentation of all supply chain processes o Consistent through entire company o 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 Processes o S&OP - sales and operation planning Integrates and coordinaties all the production facilites roles and responsibilites Costs?

WHAT CAN LEGO DO?

Standardization o 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 Goals o Branded factories switched to Regional Markets o 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 processes o 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?