1. What were LEGO’s main expectations and learnings from the relationship with Flextronics? Prior to the Flextronics offshore outsourcing project, LEGO had a very tight control of all the elements of the value chain. Their production plants were expansive and specialized which, in theory, would create a higher degree of standardization. Their Swiss factories only produced DUPLO toys and Technic products, their Danish factory solely produced LEGO System products, and the U. S. facility focused on American demands, while only 5 to 10 percent of the LEGO Group’s total production was outsourced to Chinese manufacturers.
The main goal in creating the partnership with Flextronics was to hopefully reduce costs across the board. LEGO Group’s rationale was that by intrusting Flextronics with the majority (proposed 80%) of production, they would be able to cut costs significantly by utilizing economies of scale. Basically, LEGO perceived Flextronics to more efficient as a manufacturer than resorting to in-house tactics. LEGO Group, prior to the Flextronics partnership, had seen it’s worst economic decline since its inception.
They saw net losses worth DKK 888 mil. Roughly $153. 7 mil. ) in 2003 and lost DKK 1. 8 bil. (Roughly $311. 5 mil) in 2004. From the period of 1998 to 2004, LEGO Group “had on average accounted economic losses eqivalent to DKK 2. 2 million per day” (Larson 5). One of the most simplistic ways to save money (or stop losing money in LEGO’s case) is to cut the cost of production. That was exactly what LEGO had in mind when outsourcing their production. Although it did not go as planned, LEGO learned a great deal from their partnership with Flextronics.
Jorgen Vig Knudstorp summed up the partnership by stating, “It takes more time to educate people than we had expected, and that means that we are still more effective in Billund”. LEGO did on anticipate how much of a change would occur. They figured that the only major change would be the cost of the product. They did not foresee the many little intricacies that it takes to synergize to create a working relationship of two brands. Possible oversights include; change in lead times; exchange rate fluctuations, and increased documentation.
LEGO supply chain manager Michael Vaag summarized the documentation process by stating, “Production in another country—even within the same company—requires ten times more documentation in the company that it is moved from” (Larson 16). One plus from the Flextronics experiment was the effect the move had on global expansion. Flextronics was able to provide much needed operating bases in Hungary and Mexico which “provided the Danish company with the necessary impetus for altering its global production network” (Larson 16). 2.
What are the key challenges in maintaining a relationship like the one between LEGO Flextronics? Ideally, the only thing that should change when outsourcing a process is the cost at which the products are produced. Everything else should be in sync. Lead times must be coordinated, proper documentation should be completed, and most importantly, quality should remain the same. While LEGO did not have problems with the quality of the products, they struggled with coordinating very fixed manufacturing cycles with constantly changing demand cycles.
Flextronics’ business model had traditionally been characterized by a “more stable and predictable operations” while the LEGO Group needed “flexible and market responsive business solutions” (Larson 14). LEGO was accustomed to “plus/minus 30% in demand fluctuation which did not mesh well with the stagnant production process of Flextronics. This could lead to dramatic changes in stock given the seasonal demand. In a perfect world, LEGO would have liked “just enough” stock to supply the demand. This was obviously difficult to do considering Flextronics could not rapidly adjust their manufacturing processes based on LEGO’s seasonal demand. . How can LEGO handle the supply chain complexity to improve knowledge sharing, flexibility and coordination?
After terminating their contract with Flextronics after only 3 years, LEGO had to find another solution. They realized that while there needs to be a coordination of the different production facility roles based on their capacity and individual responsibilities that best suits the supply chain. They also realized that this could be more easily accomplished through standardization of ideas, and production. Perhaps outsourcing wasn’t the est solution for LEGO so much as understanding one’s own processes to manage the constant flux in demand. In 2005, LEGO Group created a sales & operations planning process to coordinate the production roles of each facility in relation to the supply. This was a great start in properly managing internal production as efficiently as possible. One way LEGO Group sought improvement of their supply chain was by simplifying their components. Since developing new molds and molding machines for new components can be very expensive, they cut their component portfolio from 12,000 in 2004 to about ½ of that in 2008.
In keeping with the in-house manufacturing directive, LEGO Group must specialize and standardize production based on each individual manufacturing plant. By having manufacturing plants specialize in a specific sector of the LEGO branch (e. g. DUPLO, LEGO, BOINICLE etc. ) this would help drive down the cost of distribution, provide a more reliable forecast of demand, and reduce the overall complexity of the supply chain. LEGO Group took its 5 European distribution centers and centralized them to one facility in Jirny. With the products all coming to one sole DC, this will definitely improve knowledge sharing, flexibility and coordination. . What are the key considerations when outsourcing or offshoring production?
Discuss them. First, we must understand the fundamental differences between outsourcing and off-shoring production. Outsourcing is contracting a 3rd party to carry out a business plan (Flextronics) and off-shoring is carrying out work in a different country to leverage cost and lead-times. When considering either options, a company must weigh the benefits and costs of the outcome. Companies must ask themselves, “do we have the expertise to manage an international supplier? , “are there sufficient cost savings? ”. When a company determines that the rewards outweigh the risks, then they must develop specifications for that supplier. They must coordinate the technical expertise, financial strength, and production facilities of the supplier. How much training is needed to groom a successful plant? Can we trust their managers or do we use our own? Most importantly, are we sacrificing quality in any way? After that, you must maintain a good relationship and not assume that the planning going into the process in just enough.
How often do you have managers check-in on outsourced processes? Managers must constantly re-evaluate the process to make sure it’s beneficial One of LEGO Group’s biggest faults was not having a definitive plan on how much of their components would be outsourced. LEGO’s VP stated, “Whether it is 20 or 10 percent of production it doesn’t matter”. 10% and 20% are very different in the grand scheme of things. They needed to be more definitive in their strategy going into the project. 5. Describe the competitive environment of the industry and how it relates to LEGO’s choices.
LEGO Group was under a lot of pressure considering they were experiencing their worst financial downturn in its history. Within the global toy industry, up to 95% of all toy production was located in China. When 95% of your competitors are outsourcing or offshorring in China, then they must have thought they were “behind in the times”. LEGO realized this, and exacted a “if you can’t beat them, join them” mentality by outsourcing to Flextronics. They were pressured by the competition. Rather than taking a look at what was best for their company they went with the crowd. They figured that the only way to continue on was to outsource.
