The Lego Group Case

Topics: Lego, Outsourcing, Toy Pages: 9 (3404 words) Published: October 31, 2011
Founded in 1932, the LEGO Group is a privately held company headquartered in Billund, Denmark. The vision of Lego Group is to “inspire children to explore and challenge their own creative potential”[1] Lego now ranks 4th in the world as a toy manufacturer. The Lego Group employs nearly 9,000 workers and its own product, Lego Brick can be found in over 130 countries. The financial performance of Lego declined drastically through the 1990’s and early 2000’s. In 2004, the company accumulated losses of DKK1.9 billion.[2] Therefore, Lego tried to implement some changes in order to cut the production cost and reverse the poor situation. In the last step of the process of restructuring Lego’s supply chain, the Group tried to close some of its’ own factories in Korea and Switzerland, upgrade the procurement process and outsource 80 percent of the production. Prior to outsourcing to Flextronics, production plants were located in high-cost countries including Denmark and Switzerland. Apart from the famous Brick, the company entered into other industries including computer games, clothing, licensed products and television. The product diversification was very large since they lost confidence in their core product. This catalyzed inefficiencies and confusion for customers. The result was a disastrous net loss and forced the company to find solutions to cut the cost and recapture the market share. In 2009, the Lego Group ended the outsourcing contract with Flextronics as they claimed that it would be more optimal for them to manage their global manufacturing set up. They gain back the control over its production plants. Now, they need to adapt to the changing demand on their own and to maintain the relationships with different small external suppliers. As they focus on the internal production now, they need to re-think the structure and the production process. This paper will analyze issues facing LEGO, mainly with the global supply chain, and then examine various alternatives and recommendations for LEGO. Segmentation

Before the Group outsourced, it took a few actions to prepare for it. First, LEGO shifted its attitude towards retailers. It focused more on the larger retail chains rather than small outlets as they are having a growing dominance in the world toy market. This can help them to foresee a more reliable demand and reduce the distribution cost. Second, the distribution facilities were centralized. Five European facilities were grouped together to one in the Czech Republic, which handled customers in Europe and distribution centers throughout the world. The Group outsourced the operation to DHL Solutions. Also, the Group outsourced the distribution in The US and Canada to Excel Inc. Third, LEGO changed its traditional production method. Before, each factory operated according to different brands of the Group. Each country’s factories were specialized in one brands’ production only. However, this method shifted to looking for external partners for larger production and reallocated the production to countries that fulfill the need of market responsiveness and cost-saving criteria. Therefore, the Group moved its European market, which accounts for 60% of the sales of whole company, to Czech Republic and Hungary. They took over the capacity transferred from by cost of production. Besides, the Group also moves its US production site to Mexico, so as to meet the demand of North American market that contributed 30% of company’s sales. Lastly, the Group went for outsourcing by targeting large subcontractors, including Sonoco, Greiner, 2B Pack and Flextronics. However, the Group did not outsource all the product lines. It kept Technic and Bionicle to in-house production while outsourcing Duplo and System as they are of high-volume production. Corporate Structure

The managerial structure is imperative to the success of any company. LEGO Group used to be a family-controlled firm where the Kristiansen family...
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