from strategy+business issue 48, Autumn 2007
Rebuilding Lego, Brick by Brick For further information: Keith Oliver, London: email@example.com Edouard Samakh, London: firstname.lastname@example.org Peter Heckmann, Düsseldorf: email@example.com Booz & Company
reprint number 07306
Lego art by Sean Kenney Photographs by Matthew Septimus
by Keith Oliver, Edouard Samakh, and Peter Heckmann
features s+b case study
How a supply chain transformation helped put the beloved toymaker back together again.
features s+b case study
Keith Oliver (firstname.lastname@example.org) is a senior vice president in Booz Allen Hamilton’s London office. He previously headed the firm’s work in global operations and has specialized in supply chain management for more than 40 years.
n the surface, the Lego
Edouard Samakh (email@example.com) is a principal in Booz Allen’s London office. His work focuses on operations strategy, restructuring, and supply chain management.
Peter Heckmann (firstname.lastname@example.org) is a vice president in Booz Allen’s Düsseldorf office. He leads the firm’s European operations and specializes in procurement and supply chain management.
Editor’s Note: The LEGO Group spells its trademarked brand name and its company name in uppercase letters. We have followed standard editorial style for company names that are not acronyms, and capitalized only the first letter.
Also contributing to this article was Booz Allen Hamilton Senior Associate Georgina Grenon.
Group didn’t look as if it was in trouble. The fourth-largest toymaker in the world at the time (today it is fifth-largest), the Lego Group sold €1 billion (US$1.35 billion) worth of toys in 2004, ranging from its snap-together bricks for young children to Mindstorms, a line of do-it-yourself robot kits for older kids. Even in the digital age, its toys maintained a surprisingly firm grip on the market and seemed to adapt well to changing tastes. The company’s steady stream of new products routinely generated three-quarters of its yearly sales. Popular enthusiasm was so great that in 2000, the British Association of Toy Retailers joined Fortune magazine in naming the company’s classic bricks “the toy of the century.” But the Lego Group’s financial performance told another story. Despite its extraordinary hold on the imagination of children around the world, the Billund, Denmark, company was in trouble. The Lego Group had lost money four out of the seven years from 1998 through 2004. Sales dropped 30 percent in 2003 and 10 percent more in 2004, when profit margins stood at –30 percent. Lego Group executives estimated that the company was destroying €250,000 ($337,000) in value every day. How could such a seemingly successful toymaker lose that much money? Some observers speculated that the Lego Group had overdiversified its product line with moves into such areas as apparel and theme parks. Others blamed the exploding popularity of video games or pressure from low-cost producers in China. Although there was some truth in these hypotheses,
many other factors impeded the success of the iconic global brand, including its innovation capabilities and its supply chain. The company leadership knew it had to address those problems, and that the supply chain posed the most immediate opportunity for improvement. The Lego Group’s supply chain was at least 10 years out of date. Poor customer service and spotty availability of products were eroding the company’s franchise in key markets. Speedy attention to the supply chain, the leaders reasoned, would not only buy them time to deal with the other challenges, but could help set in motion a virtuous circle of improvements that would support subsequent changes in the rest of the company. And it would address head-on one of the company’s most pressing challenges. Having established itself in an era when supply chain management was a matter of moving boxes from...
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