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    Lego Group Supply Chain Management Transformation Essay

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    In the recent times world-wide economic system has become extremely volatile and was vulnerable to a battalion issues. One such illustration is the latest fiscal crisis. Such volatility creates a assortment of challenges to little and big endeavors around the Earth. One of the biggest challenges for fabrication companies is to cover with quickly increasing globalisation and competition. The solutions require the development of agile and rapid supply webs in order to cut costs and fitting demand. Manufacturers are going more cognizant of supply concatenation direction. This consciousness shifts the focal point from internal logistics efficiency to the external web of relationships between assorted parties in the supply concatenation.

    The well-known Danish plaything maker LEGO has non been unsusceptible to these alterations. LEGO has faced major challenges, which required drastic alterations within the organisation. This included a transmutation of the company ‘s supply concatenation direction system. LEGO Group had to cover with likely the most important fiscal crisis since the company was founded in 1932. LEGO ‘s crisis was non clearly seeable from the exterior. In fact LEGO had maintained trade name acknowledgment. This earned them the rubric “ Toy of the Century ” from the British Association of Toy Retailers and “ Fortune ” magazine. LEGO was the 4th largest plaything maker in the word and had sold US $ 1.35 billion worth of playthings in 2004. In malice of this success, the company was losing money since 1998. LEGO had assorted internal operational issues. This included a complex and uneffective supply concatenation, which at one phase consisted of 11,000 contractors. In an effort to turn to this job, in 2004 LEGO board of managers set a end to cut 20 per centum of logistic costs. This resulted in the hazardous determination to outsource a major portion of the production to Flextronics, a Singaporean electronics fabrication services supplier. LEGO besides established a individual distribution centre in the Czech Republic operated by DHL. ( M. M. Larsen, T. Pedersen, D. Slepniov 2010 ; K. Oliver, E. Samakh, P. Heckmann 2007 ; J. A. Cooke 2009 )

    Such a hazardous determination involved a long-run relationship with Flextronics that was non without challenges. In this research paper an overview of challenges and solutions of the instance company LEGO Group will be presented. The chief focal point will be on LEGO ‘s supply concatenation direction system transmutation, which was a major measure towards success. The undermentioned research inquiries will function as guidelines for this paper:

    What challenges did LEGO Group face and what determinations were made to turn to those jobs?

    How did Supply Chain Management transmutation helped to cover with these issues?

    In this paper we will foremost research the Supply Chain Management ( SCM ) constructs. Next the instance company LEGO Group will be introduced. We will so show overview of the challenges that LEGO Group has faced. The focal point of this paper will be the SCM determinations that were made to cover with these jobs.


    The globalisation is increasing competition and organizing new conditions for carry oning concern. This requires companies worldwide to quickly react to their clients ‘ demands and develop merchandises. These companies must besides use information engineerings in supply concatenation coaction ( J. S. Arlbjorn et Al. 2006 )

    Such conditions increased the importance of logistics and SCM function within organisations as it can go a major competitory advantage. Normally, the major betterments in logistical maps may non be needed within the organisation itself. It may be more good to analyse the organisation ‘s supply concatenation. This involves assorted mutualist parties. SCM co-operation is deriving in major strategic importance and normally includes such features: co-operating is based on terminal user demands, long term co-operation and high trust between histrions in the supply ironss or webs, shared hazards and benefits, cross coordination on assorted degrees between companies, shared visions and similar company civilizations. The advantage of such close co-operation is a more crystalline supply concatenation. This can take to cut down lead-time, lower uncertainness, optimisation of stocks and higher capacity use. ( T. Skjoett-Larsen 2000 )

    The construct of SCM frequently represents the broader position of logistics as its chief map is to guarantee the smooth flow of stuffs from providers to organisation and so out to clients through the operations within the organisation ( D. Waters 2003 ) . The intent of SCM can be described as to take redundancies and communicating barriers through coordination, monitoring and control maps ( D. Power 2005 ) . The supply concatenation normally consists of different organisations and procedures, which are aimed to guarantee the smooth flow of stuffs from the initial provider to the terminal client. In many instances, makers get their stuffs from a big figure of providers and sell to different clients, which is the instance with LEGO Group.

    In figure 1, you can see an illustration of the supply concatenation around a maker. Materials move from several grades of providers though organisation to several grades of clients, such as jobbers, retail merchants and terminal users.

    Figure 1: Supply concatenation of maker ( D. Waters 2003, 9 )

    The plaything industry is one of the oldest originative industries in the word. However, C. Y. Wong, J. S. Arlbjornand J. Johansen in their survey named “ Supply concatenation direction patterns in toy supply ironss ” ( 2005 ) province that such originative concern is really seasonal and volatile with strongly fluctuating demands, really short and specified merchandising Windowss every bit good as short merchandise life rhythms. Furthermore, the plaything industry can be described as intensely competitory on pricing and invention, where retail merchants frequently start viing with their providers. The writers conclude that most retail merchants and makers use a “ push ” concern theoretical account. This theoretical account includes low use of engineering and information sharing every bit good as slow execution of supply concatenation enterprises.


    LEGO can be surely defined as one of the most celebrated trade names in the plaything industry. The Danish company ‘s playthings are enjoyed worldwide by kids and grownups likewise, who use 1000s of different pieces to build edifices, automatons and other plaything. In 1932, Ole Kirk Christiansen, a Danish carpenter founded a company named LEGO ( Danish words “ Leg ” and “ Godt ” , intending “ drama good ” ) . Originally a carpentry concern for furniture, LEGO began bring forthing kids ‘s playthings in 1934. The company presents itself by saying: “ It is LEGO doctrine that “ good drama ” enriches a kid ‘s life – and its subsequent maturity. With this in head, the LEGO Group has developed and marketed a broad scope of merchandises, all founded on the same basic doctrine of acquisition and developing – through drama. ” In figure 2 the nucleus edifice blocks of LEGO Group are presented. ( M. M. Larsen et Al. 2010 ; LEGO Group, Corporate Communications 2009 )

    Figure 2: The LEGO Company ( LEGO Group 2010 )

    Prosecuting such a doctrine, LEGO has grown enormously since its constitution. By 2009 the company was the universe ‘s 5th largest plaything maker in footings of sale with 290 Million US Dollars in grosss and about 7000 employees around the Earth. The LEGO brick which is perchance the best known plaything was foremost introduced and patented in 1958. It has since so represented the nucleus success and image of this company. With two merely bricks there are 24 different combinations and with six there are 915 million possibilities. This enables illimitable creativeness. As antecedently stated, before LEGO brick was named as “ Toy of the century ” by Fortune magazine and subsequently by British Association of Toy Retailers every bit good. ( M. M. Larsen et Al. 2010 ; J. Tidd, J. Bessant 2009 )

    hypertext transfer protocol: // % 20Us/Media % 20Assets % 20Library/Logos % 20Bricks % 20and % 20Generic % 20images/ts.20120125T101709.2x4brick_red.jpg

    Picture 1: Lego brick ( beginning )

    Metameric merchandise classs include:

    Pre-school merchandises – for the youngest kids, who had non started the school yet, includes LEGO DUPLO merchandises.

    Creative edifice – sets or pails of LEGO bricks without instructions.

    Play subjects merchandises – the merchandises with peculiar narratives, such as airdromes, rushing paths and infirmaries, including LEGO City line and BIONICLE.

    Licensed merchandises – related to films and books, such Harry Potter, Star Wars and Indiana Jones.

    MINDSTORM NXT – programmable robot kit.

    LEGO instruction – merchandises that are developed for educational intents.

    LEGO Games – new merchandise line started in 2009 for board games.

    LEGO operates in over 130 states worldwide. The company ‘s largest market in the U.S. , with together Australia, New Zealand and UK accounted for 30 per centum of gross in 2007. Despite changeless challenges and turning popularity of consumer electronics, LEGO is go oning to spread out. ( M. M. Larsen et Al. 2010 )

    Crisis and solutions

    In the late 1990 ‘s, the company started to hold troubles. This resulted in a major crisis and about ended in bankruptcy by 2004. LEGO was losing immense amounts of money every twenty-four hours, estimated at economic losingss of 375.4 1000 U.S. dollars per twenty-four hours since 1998. When gross revenues dropped 40 per centum in 2004, it was clear that extremist alterations had to take topographic point. There are many guesss, why such a well-known and antecedently successful company started running on enormous losingss. ( M. M. Larsen et Al. 2010 )

    One possible ground was increasing competition in their chief merchandise country. This was riotous at its nature. One such illustration is the Canadian company “ Megabloks ” . This company offers a broad scope of edifice playthings at a extremely competitory monetary value. Besides, the increasing popularity of computing machine games reduced the demand for traditional plaything. Another possible factor was the complete variegation of merchandise line as LEGO moved into more countries like subject Parkss, dress, vesture, telecasting and even computing machine games. Such variegation was a consequence of, as the company claims, a loss of assurance in their nucleus merchandise – the Lego brick. The increased complexness of merchandise portfolio confused non merely the clients, but employees every bit good. ( M. M. Larsen et Al. 2010 ; J. Tidd, J. Bessant 2009 ; K. Oliver et Al. 2007 )

    It was mentioned before that LEGO GROUP had around 11,000 providers, which was twice the figure that Boeing used to construct its aircraft. Such inefficiency and inflexibleness was shortly recognized and attending was directed to the supply concatenation, which was 10 old ages out of day of the month. Furthermore, low quality client service and merchandise handiness decreased the value of company ‘s franchise. Jorgen Vig Knudstorp, freshly appointed CEO, stated: “ From my position, the supply concatenation is a company ‘s circulation system. You have to repair it to maintain the blood fluxing. ” ( M. M. Larsen et Al. 2010 ; K. Oliver et Al. 2007 )

    It was acknowledged that work outing jobs related to planetary supply concatenation could construct a strong base for major alterations in the organisation. This could besides be the needful measure frontward towards cost-effectiveness and an improved concern theoretical account. However, such large alterations are non easy to implement and presented important challenges for LEGO Group

    Transformation of supply concatenation direction

    LEGO Group decided to optimise their supply concatenation in order to cover with the most important crisis in the company ‘s history. LEGO realized that it was dragging behind retail giants such as Wal-Mart and Carrefour. These companies had invested immense sums of resorts into sophisticated and efficient supply concatenation direction systems. LEGO Group started losing the competition to companies, which optimized their costs and provided just-in-time services to its clients ( K. Oliver et Al. 2007 ) . Transforming such a mammoth and complex supply concatenation every bit good as taking the inefficiencies was a really ambitious end. Keep in head that by 2004 company had around 7000 employees working chiefly in two mills and three packaging centres, located in different states. Further issues and alterations within different countries of supply concatenation direction will be discussed, including merchandise development, distribution and fabrication.

    Merchandise development

    Product development and invention was highly of import for LEGO as it presented the nucleus of what this company was truly approximately. Changes in this field were hard to implement. This was in portion because of its delicate nature and inside opposition from employees. LEGO ‘s development lab called “ Kitchen ” was steadily bring forthing new advanced merchandises and thoughts. However, direction realized that new merchandises were returning less net income and cost more to bring forth. Developers and interior decorators did non account for production and supply concatenation issues, in their designs. Consequently, the assortment of assorted constituents and characteristics every bit good as merchandise complexness became overpowering and started to do major jobs in fabrication and distribution. LEGO bricks and other elements came in more than 100 colour tones. LEGO sets became progressively luxuriant with 1000s of different figures. ( M. M. Larsen et Al. 2010 ; K. Oliver et Al. 2007 )

    Such cost uneffective creativeness caused jobs like big stocks. This was because of seasonal demand fluctuations and short bringing times. Furthermore, big sum of constituents and merchandises required big investings in casts, while merely 30 merchandises generated 80 per centum of company ‘s gross revenues. Therefore, LEGO decided to drastically cut down the figure of constituents and characteristics. This decreased costs in the supply concatenation and created a better chance for production outsourcing. Management revised a figure of day-to-day solutions in order to cut the costs, simplify production and extinguish inefficiencies. The pallet was decreased to around 50 colourss. A major decrease in assortment of plagiarists, constabulary officers and other figures was recommended every bit good. Furthermore, resin-sourcing analyzes helped to cut its rosin costs in half and cut down supplier figure by 80 per centum. Simultaneously, LEGO Group ‘s operational squad created cost matrixes and revised set of regulations refering creative activity of new colourss, constituents and telling of new stuffs. Such measure helped merchandise developers to take more cost-efficient solutions and acknowledge the restrictions. ( M. M. Larsen et Al. 2010 ; K. Oliver et Al. 2007 )


    Another country of LEGO ‘s supply concatenation that required major betterments and cost decreases was distribution. At that clip LEGO served 1000s of smaller shops with a great duty. This came at a really high monetary value, although those stores accounted merely for one tierce of its gross. Company had increasing sum of stock list and lost gross revenues, because of multiple-tier stock list system to function smaller clients from different distribution centres. The redefined distribution policies had to be developed in order to avoid dearly-won little bringings and labour costs associated with “ pick-packing ” in the distribution centres. ( M. M. Larsen et Al. 2010 ; K. Oliver et Al. 2007 )

    In order to function clients in 130 states around the universe, LEGO had 11 warehouses and distribution centres in high-cost states like Denmark, France, Germany and Switzerland. LEGO besides employed 55 transit suppliers for inbound and outbound cargos. In order to travel its distributions closer to the client and cut down detonating transit costs, the company defined clear service policies. This helped to switch the focal point to major retail ironss. This besides provided for more accurate demand prognosiss, reduced complexness and surely the costs of distribution. Furthermore, LEGO Group decided to centralise its distribution by shuting five distribution centres in Europe, and making a individual distribution centre near Prague in the Check Republic. The state was chiefly chosen because of a high handiness of skilled low cost labour. LEGO leased big edifices from the commercial Realtor ProLogis. LEGO besides decided to outsource operations to third-party logistics company – DHL supply concatenation. ( M. M. Larsen et Al. 2010 ; K. Oliver et Al. 2007 ; J. A. Cooke 2009 )

    By 2007 a freshly consolidated distribution centre was functioning all of LEGO ‘s markets except the U.S. , where Exel Inc. was responsible for distribution operations. Such alterations reduced the complexness of supply concatenation, simplified the stock list optimisation and decreased mean distances to the market. This lead to increased client satisfaction and significantly reduced overall logistics costs. Despite the outsourcing, LEGO maintained close coaction with its bearers and still makes many determinations. The consequences of such coaction are reduced negative effects of market seasonality. Furthermore, by using developed Web-based transit direction system LEGO was able to alter the cargo programming and better burden consolidation. ( M. M. Larsen et Al. 2010 ; J. A. Cooke 2009 )


    The improved production in the supply concatenation was likely the most of import and complicated measure. The challenges came from the manner LEGO organized its production installations and the complexness of fabricating operations. In some manner helter-skelter production operations resulted in low 70 per centum of overall capacity use. There were 100s of independent production units within the installations that could put their orders in any mode. This was frequently without equilibrating supply capablenesss, stock list degrees and demand demands. Consequently, such disconnected system did non back up long-run planning and resulted in high costs and low efficiency. Furthermore, the production sites were located in high-cost states as Denmark, United States and Switzerland, while merely 10 per centum of production was outsourced to China. Production sites chiefly operated harmonizing the stigmatization scheme, where, for illustration, Swiss mills merely manufactured DUPLO and Technic merchandises. ( M. M. Larsen et Al. 2010 ; K. Oliver et Al. 2007 )

    One of the first stairss was to put clear production rhythms for machines alternatively of holding them available to bring forth any component at any clip. This attack helped to cut down changeless and dearly-won retooling every bit good as balance production operations. Furthermore, orders were set in the monthly meetings in that manner extinguishing the figure of conversions ( K. Oliver et Al. 2007 ) . However, the major determination refering production operations was to outsource big portion of the production to external packaging and fabrication service suppliers. One of the grounds was to cut the costs by traveling the production from high-cost states. Another ground was to cut down the figure of subcontractors and use the economic systems of graduated table, holding in head that LEGO was bring forthing approximately 24 billion bricks per twelvemonth ( M. M. Larsen et Al. 2010 ) .

    Consequently, the production capacity in Denmark was reduced and sites in Korea and Switzerland closed. LEGO Group engaged into cooperation with packaging service providers: “ Sonoco ” , “ Greiner ” , “ Weldenhammer ” and “ 2B Pack ” . The most hazardous and complex partnership was made in 2006 with Flextronics, a Singaporean based electronics maker. Several merchandise lines, like Bionicle and Technic was still chiefly retained by LEGO, but the higher volume and more simple Duplo and System lines were handed to Flextronics production sites in Hungary, Czech Republic and Mexico. This helped to cut down the distance to clients. However, the relationship was non successful and contract with Flextronics was terminated from January 1, 2009, while LEGO continued with smaller outsourcing contracts. The chief grounds for the failure are connected with delicate nature of plaything industry and could be described in short ( H. B. Dinitzen, D. Bohlbro 2010, 71-72 ; M. M. Larsen et Al. 2010 ) :

    65 % per centum of production had to be done during the 3rd one-fourth of the twelvemonth – chief vacation season.

    Merchandises have a life-time of 16-18 month.

    Gross saless uncertainness is about 30 % .

    In figure 3, the timeline of LEGO and Flextronics cooperation is presented, including ends and challenges. Despite the failure, LEGO Group has learned a batch from this outsourcing effort, which had a positive impact in the terminal.

    Figure 3: The timeline of LEGO and Flextronics coaction ( M. M. Larsen et Al. 2010, 16 )

    In 2008 LEGO started the procedure of sourcing back the production, while the first mill in the Czech Republic was taken over, followed by Hungarian and Mexican installations. In Mexico, LEGO Group finally moved the production to a new works, which started operating in first one-fourth of 2009. The concluding benefits of coaction were connected chiefly with gained experience in assorted operational Fieldss. It helped to set up new installations in Mexico and Hungary, while production units were no longer following branded attack, but alternatively functioning its several markets. Furthermore, LEGO significantly improved certification and standardisation of concern procedures. Standardization resulted in about halved size of constituents, from 12,000 in 2004 to 6000 in 2008. This enabled more flexible, efficient and smoothly running supply concatenation. ( M. M. Larsen et Al. 2010 )


    In the terminal it can be stated that by taking clearly defined and rough restructuring scheme, LEGO Group was able to get the better of the crisis and go one of the successful and largest plaything manufacturers once more. This statement can be backed up by fiscal figures, which indicate that in 2008 and 2009 company reached net income of DKK 315.6 million and 375 million U.S. Dollars, severally. This was the highest in LEGO Group ‘s history. ( M. M. Larsen et Al. 2010 )

    A significantly restructured supply concatenation helped to increase the efficiency of major concern operations every bit good as addition the overall client satisfaction. LEGO managed to make and, in some degrees, even go through its rivals, while still collaborating with biggest retail merchants in such Fieldss as joint prediction, stock list direction and mass customization. However, such transmutations required covering with many challenges, including terminated cooperation with Flextronics. Nevertheless, it gave LEGO valuable cognition about outsourcing operations and its interior features. In the terminal, unsuccessful outsourcing pattern resulted in mills in Denmark, Czech Republic, Mexico and Hungary, which gave the needful supply concatenation flexibleness in order to run into the planetary demands.

    Improved parts of supply concatenation such as merchandise development, sourcing, distribution and fabrication creates a good developed concern theoretical account that serves as a major competitory advantage. Finally, after successful supply concatenation transmutation, LEGO Group can switch more attending to increasing the satisfaction of its clients by developing well-liked plaything for kids and grownups.

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