Introduction & Company Overview
Lego is the definition of the household name. The little brick has made itself an essential part of childhood around the world. The Lego Company, a multinational corporation was founded in 1932 in Jutland, Denmark. By 2009, it became the fifth largest manufacturer of toys by sales volume. The company had a workforce of over 7000, and was selling its products in over 130 countries.
The core idea behind LEGO is to develop a line of marketing toys and accessories in the form of interlocking plastic bricks. Because plastic became readily available following the Second World War, Lego purchased its first plastic injection-molding machine in 1947. The plastic ...view middle of the document...
More importantly though was the fierce competition in the toy industry that began to set in. This was made easy partially due to the expiration of the Lego patent in 1989. Companies such as Mega Bloks, Coko, and Mattel all began to produce toy bricks that were extremely similar to those produced by Lego. For example, while the Lego group was the fourth largest toy manufacturer in terms of sales in 2004, Mattel was the largest toy manufacturer that same year. All of these companies operated with great sophistication and were optimizing every cost driver to perfect the provision of in-time service.
An intense push for growth took over Lego. Quick and hasty decisions were being made, many of which were distancing the company’s goals from core product, the Lego brick. On the outside, Lego appeared to be continuing its successful run, but internal financial issues would tell a different story.
The Lego Group had lost money four out of the seven years from 1998 through 2004. Sales were inconsistent over the course, dropping thirty percent in 2003 and another ten percent in 2004. Profit margins in 2004 stood at negative thirty percent. “Lego Group executives estimated that the company was destroying €250,000 ($337,000) in value every day.” (Larsen 2010)
Lego’s attempt to expand and consolidate its portfolio reflected a need to address fears of growing competition, an enhancement of technology levels, and the need for more challenging simulation for children as a result. Inefficient management of this expansion would lead to a major decline in 2004 that almost caused the demise of the entire company. Significant seasonal forecasting errors, inventory issues and a consistent misalignment of supply and demand due to unpredicted seasonal demand fluctuations were some of the causes. Unfavorable exchange and uncertainty created by new regulatory and safety standards caused further complications.
Aforementioned issues were all subdivisions of the underlying issue: excessive complexities and failures within the Lego Group’s supply chain.
“The company had thousands of suppliers to coordinate, distribution operations in high cost countries, significant diversification in the product portfolio which accelerated production costs, and no documentation or standardization of processes.” (Larsen, 2010).
This paper will aim to address the decisions the Lego Company made to address issues in its supply chain, specifically as they relate to the choice to outsource much of the company’s production to Flextronics, issues that arose with the partnership, and important takeaways.
Changes in Leadership & A New Strategy
After decades of being run within the family, CEO Jorgen Big Knudstorp became the company’s first “outsider” CEO. With the onset of the Lego Group’s financial crisis, Knudstorp understood that there were many factors that needed to be considered to truly achieve a company turnaround. He knew that drastic measures would need to be taken during...