Manufacturing Issue: As was the case with sourcing, the Lego Group gained limited advantage from its scale in the way it organized its production facilities. The company ran one of the largest injection-molding operations in the world, with more than 800 machines, in its Danish factory, yet the production teams operated as hundreds of independent toy shops.
The teams placed their orders haphazardly and changed them frequently, preventing operations from piecing together a reliable picture of demand needs, supply capabilities, and inventory levels. This murkiness led to overall capacity utilization of just 70 percent.In such a fragmented system, long-term planning can be exceptionally difficult. Day-to-day operations were often chaotic.
Operators routinely responded to last-minute demands, readily implementing costly changeovers. That the Lego Group’s production sites were located in such high-cost countries as Denmark, Switzerland, and the United States put the company at a further disadvantage.Overcoming:1. In October 2004, Jørgen Vig Knudstorp was appointed as Kjeld Kirk Kristiansen’s successor. Kristiansen, who was the grandson of the founder Ole Kirk Christiansen, had been the president and CEO of the LEGO Group since 1979. Jørgen Vig Knudstorp was only the second person outside the founding family who held the position as CEO, and his primary task was to steer the company back on track.
“I don’t have any miracle cure,” he explained as to how he would put an end to the financial turmoil. “LEGO shall first and foremost drop its arrogance.We have been too sacred with our own virtues, not open enough, and not willing to listen to what other people say. We shall now listen to customers and consumers; simply drop the sacredness. We must be aggressive in the market; work closely with retailers; and manage LEGO very tightly, also financially.” Accordingly, a strategy titled “Shared Vision” was soon implemented, and was defined around three core principles:a.
“Be the best at creating value for our customers and sales channels.”b. “Refocus on the value we offer our customers.” c. “Increase operational excellence.”2.
In 2008, as the LEGO Group announced that it would phase out the cooperation with Flextronics, the process of sourcing back the production was initiated. This was embarked by the LEGO Group taking over the control of the Kladno factory in the Czech Republic in February 2008. Flextronics was still in charge of molding LEGO products at two sites in Hungary (Sarvar and Nyíregyháza) and one site in Mexico (Juarez) until July 2008 when the LEGO management affirmed that these would follow suit of the site in the Czech Republic. In Hungary, LEGO concentrated its activities at the Nyíregyháza facility by taking over the plant and its work force.During first quarter of 2009, the Juárez production moved to a new site, fully owned by the LEGO Group, in North Mexico in Monterrey, and the site was up and running in the second quarter of 2009.
3. Cutting the number of elements and colors in production made it easier to take the next step — rationalizing production cycles. The team started by halting the time-honored practice of making every machine available to produce any element, an approach that necessitated constant, costly retooling. Instead, the team assigned specific molds to specific machines, and set up regular four- to 12-week production cycles. The group then deemed that sales and operations would set orders at a regular monthly meeting, reducing the need for constant changeovers.
4. The leadership team also clarified decision rights to ensure that schedules made sense for the enterprise as a whole. For instance, it would no longer be acceptable to make manual changes in a molding machine without informing the finished-goods packing team, an important consideration since different kits are packaged in different boxes. Clearer descriptions of rights and responsibilities made it more difficult to dodge tough decisions, or to make them without considering their impact on other departments. As a result, the company was able to sidestep many potential production glitches.5.
The team also considered the manufacturing footprint. The Lego Group had already outsourced 10 percent of its production to Chinese contract manufacturers, but the team decided against sending more work to Asia. Instead, building on its successful experience moving some production to Kladno, Czech Republic, the company concluded that it could actually boost efficiency by locating its factories near its most important markets. A plant in Eastern Europe would get products to European store shelves in three to four days — an important consideration given that Europe accounts for 60 percent of the company’s sales and that 40 percent of sales take place during the Christmas season.6.
The Lego Group also needed to move its distribution channels closer to the customer — and to lower its bloated distribution costs. First, the number of its logistics providers was cut from 26 to three or four — enough to ensure resilience and gain greater economies of scale while still encouraging competition among the suppliers. This step alone saved more than 10 percent in transportation costs. But consolidating logistics providers really just brought the Lego Group in line with what many of its competitors had done years ago. However, the company was able to leapfrog the competition by redesigning its entire distribution system.7.
Although many companies have taken manufacturing to lower-cost markets and to contract providers, surprisingly few have done the same with distribution, although identical advantages exist. The Lego Group phased out five centers in Denmark, Germany, and France and created a single new center in the Czech Republic, to be operated by DHL. “Putting all your eggs in one basket” might sound like a poor strategy to reduce risk, but consolidated distribution made inventory easier to track and made stock shortages far less likely. It also brought the Lego Group closer to Europe’s largest population centers, decreasing the average distance to market.
8. With a new value chain in place, the Lego Group could act with the understanding that customers had differentiated needs. The company’s marketing team followed the examples of other consumer packaged-goods manufacturers, working more closely with the largest retailers to conduct joint forecasting, inventory management, and product customization. Those big-box and chain stores that made up the bulk of the Lego Group’s market would receive marketing support as well. The company would continue to deal with smaller sellers, but on more regular and standardized terms.
The company further minimized the cost of serving each account by providing discounts for early orders and refusing to ship less-than-full cartons.
