Lego Group: An Outsourcing Journey

Carla Simonson

LEGO GROUP: AN OUTSOURCING JOURNEY

Lego Company was created by a Dutch carpenter in 1932. Their vision was to “inspire children to explore and challenge their own creative potential”.  It has grown into becoming the 5th largest toy company.  They were servile issues they went through with outsources the company to Flextronics.  They had branched out into new business opportunities which confused the customers and employees. They had issues with making sure that the right components were in stock.  

Management decided to offshore and outsources a major chuck of LEGO’s production to Flextronics, a large Singaporean eclectics manufacturing services provider.  By outsourcing LEGO was presented with some unexpected challenges of aligning the season production with Flextronics’s business model which made supplies uncertain.  They saw that they were producing too many parts in far too many shapes and colors which was increasing their stocking levels and reducing their profit margins.    

The issues with LEGO in 2004 were unreliable in its supply chain which could not compete with nature of the LEGO business.   The increasing variety of colors and shapes LEGO elements was a threat.  The challenge is to ensure that the right components were constantly in stock.    Inventory piling due to forecast errors and seasonal demand fluctuations.   High number of components required heavy investment in molds.  The solution was made to limit growth in number of product components.   The US production capacity was shifted to Mexico.  Also outsource the production capacity to subcontractors like Greiner or Weldenhammer.

         Radical changes took place within LEGO organization that drew the company near bankruptcy.   Lego Company has over 11,000 suppliers and pursuing a strategy which was based on growth by focusing on totally new products.  This was one of the causes for dropping the revenue and about losing confidence of its core product, LEGO bricks.   Furthermore the diversification had resulted in vast complexity and inefficiency with confused the customers and employees.    This at the same time faced difficulties in more competitive and dynamic market.

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In the area of distribution the analysis uncover the need for the major changes in how the company approached its retailers.   Lego decided to focus on the large retailers to sell its products.  This helped drive down the cost of distribution and provide a more overview of the demand.   The European DC facilities were centralized in Jirny, Czech Republic and the operation was outsourced to DHL which controlled the world except North America.      Reduced supply chains complexity by centralizing DC.