The Lego Group: an Outsourcing Journey Case Analysis

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

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
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Other advantages of the partnership included: 1. Economies of Scale 2. Experience in standardizing and documenting procedures 3. Reducing the complexity of the LEGO production 4. Competencies in plastics manufacturing 5. Capabilities in low-cost regions
The overarching idea was that supply chain collaboration would lead to cost-savings and help improve LEGO’s competitive market positioning.
The three year agreement between LEGO Group and Flextronics was designed to minimize production cost fluctuation risk through locked-in pricing. Responsibility for the production plants in Denmark and Switzerland were transferred to a Flextronics plant in Hungary. Operational control of the LEGO Group’s Kladno site in the Czech Republic was also handed over to Flextronic. The Enfield plant in the United States was closed in favor of a newer and cheaper Flextronic plant in Juarez, Mexico. All of these changes were enacted towards reaching a 80/20 outsource vs. in-house production ratio.
Surprisingly, this partnership dispelled the myth that outsourcing is the best cost-saving production option. The outsourcing actions led to even further complexity coordinating and controlling the network of production facilities. There was difficulty ensuring a reliable and seamless transfer of production knowledge

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