The Lego Group: an Outsourcing Journey Case Analysis

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The LEGO Group:|
An Outsourcing Journey|
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8/2/2012|

Introduction
2004 began an especially difficult period for The LEGO Group, which entered into a financial crisis resulting in a deficit of 1.8 billion DKK ($294.9MM USD). The internal turmoil lasted through 2009 as the leading toy manufacturer, famous for the signature LEGO brick, nearly went bankrupt. This experience was a first-hand lesson in the negative effects of not having a stable and organized supply chain design.   Effective supply chain management is essential for a manufacturing firm to successfully coordinate the flow of materials and information with demand (Krajewshi, Ritzman, & Malhotra, 2010). A fundamental element of supply chain management is supply chain design, which is particularly important for major activities such as plant or capital investments and divestments, product mix portfolio, inventory and outsourcing, suppliers, vendors, and distribution. The LEGO Group recognized the significant inefficiencies and costs within the design of their supply chain and focused much of their restructuring efforts on this aspect of their organization as they struggled to return to profitability. Background

The LEGO Group is a privately held Danish multinational corporation founded in 1932 by Kirk Kristiansen and still owned by the founding family. Its name is derived from an abbreviation of the Danish words “leg godt” meaning “play well (Delingpole, 2009).” The organization is primarily focused on the development of children’s creative potential through play and learning. With over 11,000 employees and sales in over 130 countries, LEGO Group is the third largest toy manufacturer after Mattel and Hasbro(The LEGO Group, 2012). Following World War II, plastics became available in Denmark. LEGO purchased a plastic injection molding machine in 1947 to create the plastic version of LEGO bricks (they were originally wooden), and then expanded to pursue the idea of a toy system where various toys would be included in a line of related products. Items such as doll furniture were also developed as LEGO Group looked to enter different markets. During the 1970’s the foundation of the company’s manufacturing facilities and research and development department were established to keep the manufacturing methods up to date. A LEGO production plant was opened in Enfield, Connecticut in the United States. This growth enabled The LEGO Group to continue expanding their product offering over the decades to eventually land at 6 product segments by 2007: pre-school products, creative building, play themes, licensed products, mindstorm NXT, LEGO Education, and LEGO games. The consolidated portfolio was meant to reflect the need for more challenging stimulation as children grow and develop. Key Problems

This expansion was not well managed and a host of factors developed leading to the decline in 2004. First was a loss of confidence in the core product, the LEGO brick, as the company continued to diversify its product portfolio. Significant forecast errors driven primarily by unpredictable seasonal demand fluctuations led to inventory issues where LEGO lacked one component or held too many of another in stock. The global toy environment was uncertain as regulatory and safety standards increased and toy recalls were prevalent. The company suffered from the negative impact of unfavorable exchange rates, and was bound by cultural norms where talking about profits was considered taboo (Shwartz, 2009). Last, but most important was the complexity of LEGO Group’s supply chain. The organization had more than 11,000 suppliers to coordinate, distribution operations in high cost countries, significant diversification in the product portfolio which accelerated production costs, and no documentation or standardization of processes (Larsen, 2010). At the peak, LEGO Group had nearly 7,000 different components to produce, many of them slight variations of the next (16...
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