LEGO Group Outsourcing Case Study

Introduction

• Focus on LEGO Group's outsourcing journey from 2004 to 2009.
• LEGO, the fifth largest toy maker, faced financial challenges requiring a new strategy.

Financial Crisis (2004)

• LEGO faced a deficit of 1.8 billion Danish Krona in 2004.
• Sales dropped by 30% in 2003 and 40% in 2004.
• Past diversification into areas like computer games, television, and clothing led to inefficiencies.
• Introduction of licensed products (e.g., Harry Potter, Star Wars) complicated the product line.
• New CEO Jørgen Vig Knudstorp took over in October 2004, aiming for a turnaround.

Strategic Changes

• Strategy titled "Shared Vision" to refocus on:
  • Creating value for customers and sales channels.
  • Operational excellence.
• LEGO divested its theme parks and secured an 800 million Danish Krona loan from the founding family.
• Identified supply chain issues as major stumbling blocks.

Outsourcing Adventure

Part 1: Preparing for Outsourcing (2004)

• Comprehensive analysis revealed need for supply chain simplification.
• Efforts to streamline LEGO sets and improve stock management due to forecast errors and demand fluctuations.
• Centralization of European distribution centers in the Czech Republic, with outsourcing in the US and Canada.

Part 2: Partnership with Flextronics (2006-2008)

• LEGO partnered with Flextronics to outsource production, aiming for cost savings and reduced complexity.
• Faced challenges in coordinating a global production network.
• The partnership did not meet expectations, leading to a decision to phase it out in July 2008.

Part 3: Lessons Learned and Fresh Start (2008)

• LEGO began taking back control of production facilities in Czech Republic, Hungary, and Mexico.
• Collaboration with Flextronics, despite its challenges, provided valuable lessons:
  • Importance of understanding internal processes.
  • Necessity of documentation and standardization.

Conclusion

• Post-Flextronics, LEGO experienced a financial resurgence with unprecedented profits in 2008 and 2009.
• Shift to in-house production provided flexibility and control to meet market demands.
• Central question emerged: what did LEGO learn from the Flextronics experience?
  • The collaboration prompted greater transparency and standardization within the organization.

Key Takeaways

• Outsourcing may not always be the best solution; understanding internal capabilities is crucial.
• The experience with Flextronics was foundational for LEGO's future adaptability and resilience.