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Lego Outsourcing Case Essay

1750 words - 7 pages

Answer 1. Companies outsource production of their products for the following reasons: Lack of technical expertise, or expert labor in certain operations; reduce manufacturing costs due to the availability of cheap labor; make less investments in expensive equipment, staff and IT systems; optimize resource utilization and free up management time from outsourced routine supporting activities to focus on its core competencies; and when domestic manufacturing capacity is reached.
Outsourcing is a good strategy for the following situations: Tasks that require specific manufacturing equipment and technical expertise can be outsourced to vendors who specialize in these fields to produce goods ...view middle of the document...

Risk of exposing intellectual property increases which can lead to illegal copying, trademark or patent infringement and production of knock-offs if the barriers of entry are low. Outsourcing firms sometimes lose control of the business processes outsourced. Loss of quality control increases returns of goods. The outsourced vendor can provide sluggish response times coupled with slow issue resolutions. The lead time can be longer and more variable. Outsourcing can lead to problems such as stretched delivery time frames, greater transit times, poor quality of goods, inappropriate categorization of responsibilities, non-receipt of goods, and outsourced vendor’s lack of focus on the outsourcing firm’s customers. The logistics infrastructure in the foreign country can be poor. International transportation is more complicated than domestic ones and involves many intermediaries like banks, insurance companies, freight forwarders, governments of both the countries. Packing should also be excellent as the risk of damage is greater in international transportation. There can be issues pertaining to lingual accent variation and cultural diversity. Although outsourcing most of the times is cost-effective at times the hidden costs involved in signing a contract across international boundaries may pose a serious threat. Hidden costs include unstable currency rate fluctuation, custom clearance, unstable political and economic condition, and social and labor issues. The risk of outsourcing increases when the outsourced vendor sub-contracts some of the outsourced activities and manages the sub-contracted work poorly. Outsourcing abroad can increase unemployment in home country and reduce customer buying power and also result in bad reputation for the outsourcing firm. Thus, a firm should outsource only if the returns outweigh the risks.
Answer 2. In 2004, a major internal crisis drew Lego near bankruptcy and Lego made net losses of DKK888million and DKK1.8 million in 2003 and 2004 respectively. Sales had plummeted by 30 to 40%. The main reason for these losses was Lego had lost confidence and focus on its core product “Lego brick” and Lego diversified its portfolio by entering new areas of business such as clothing, theme parks, television and computer games. This portfolio diversification further complicated the already complex business operations and caused Lego to lose focus on its core competencies. New products were delivering less profit and added more complexity to the supply chain as each new product required a range of unique bricks. Lego sets had grown much more elaborate and complex. Although such intricacy and attention to detail reflected the firm’s culture of craftsmanship, it also reflected its disregard for the costs of innovation. The carefree creativity and attitude of the company designers to design new toys without factoring in the price of materials or the costs of production was not sustainable in the current global toy market, where cost...

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