Lego Case
1. What were LEGO’s main expectations and learnings from the relationship with Flextronics?
Prior to the Flextronics offshore outsourcing project, LEGO had a very tight control of all the elements of the value chain. Their production plants were expansive and specialized which, in theory, would create a higher degree of standardization. Their Swiss factories only produced DUPLO toys and Technic products, their Danish factory solely produced LEGO System products, and the U.S. facility focused on American demands, while only 5 to 10 percent of the LEGO Group’s total production was outsourced to Chinese manufacturers. The main goal in creating the partnership with Flextronics was to hopefully reduce costs across the board. LEGO Group’s rationale was that by intrusting Flextronics with the majority (proposed 80%) of production, they would be able to cut costs significantly by utilizing economies of scale. Basically, LEGO perceived Flextronics to more efficient as a manufacturer than resorting to in-house tactics. LEGO Group, prior to the Flextronics partnership, had seen it’s worst economic decline since its inception. They saw net losses worth DKK 888 mil. (Roughly $153.7 mil.) in 2003 and lost DKK 1.8 bil. (Roughly $311.5 mil) in 2004. From the period of 1998 to 2004, LEGO Group “had on average accounted economic losses eqivalent to DKK 2.2 million per day” (Larson 5). One of the most simplistic ways to save money (or stop losing money in LEGO’s case) is to cut the cost of production. That was exactly what LEGO had in mind when outsourcing their production. Although it did not go as planned, LEGO learned a great deal from their partnership with Flextronics. Jorgen Vig Knudstorp summed up the partnership by stating, “It takes more time to educate people than we had expected, and that means that we are still more effective in Billund”. LEGO did on anticipate how much of a change would occur. They figured that the only major change would be the cost of the
Prior to the Flextronics offshore outsourcing project, LEGO had a very tight control of all the elements of the value chain. Their production plants were expansive and specialized which, in theory, would create a higher degree of standardization. Their Swiss factories only produced DUPLO toys and Technic products, their Danish factory solely produced LEGO System products, and the U.S. facility focused on American demands, while only 5 to 10 percent of the LEGO Group’s total production was outsourced to Chinese manufacturers. The main goal in creating the partnership with Flextronics was to hopefully reduce costs across the board. LEGO Group’s rationale was that by intrusting Flextronics with the majority (proposed 80%) of production, they would be able to cut costs significantly by utilizing economies of scale. Basically, LEGO perceived Flextronics to more efficient as a manufacturer than resorting to in-house tactics. LEGO Group, prior to the Flextronics partnership, had seen it’s worst economic decline since its inception. They saw net losses worth DKK 888 mil. (Roughly $153.7 mil.) in 2003 and lost DKK 1.8 bil. (Roughly $311.5 mil) in 2004. From the period of 1998 to 2004, LEGO Group “had on average accounted economic losses eqivalent to DKK 2.2 million per day” (Larson 5). One of the most simplistic ways to save money (or stop losing money in LEGO’s case) is to cut the cost of production. That was exactly what LEGO had in mind when outsourcing their production. Although it did not go as planned, LEGO learned a great deal from their partnership with Flextronics. Jorgen Vig Knudstorp summed up the partnership by stating, “It takes more time to educate people than we had expected, and that means that we are still more effective in Billund”. LEGO did on anticipate how much of a change would occur. They figured that the only major change would be the cost of the