Supply Chain Management and Lego

Q1 LEGO’s main expectations and learnings from the relationship with Flextronics LEGO’s main expectation was to optimize its global supply chain by saving cost and reducing production complexity from the cooperation with Flextronics. However, the contract between those two lasted for only 3 years. In the end, LEGO re-took control of plants in Czech Republic, Hungary and opened a new site in Mexico Lessens LEGO received from this unsuccessful relationship are 1) LEGO understands its own process and structure better than before.

They realize the importance and value of documentary and standardization, especially in offshoring production circumstance. 2) Even though all the facts seem that outsourcing is a good way to get rid of crisis, a firm still needs to analyze different options carefully and goes for the one which fits best with the company’s culture, general strategy and specific situation.

Q2 Key challenges in maintaining a relationship like the one between LEGO and Flextronics Different business model is the fundamental reason why it is hard to maintain a relationship with supplier.

In LEGO case, both LEGO and Flextronics are successful in their industry and have their already solid service model, mission and business goal. Flextronics has the reputation of standardizing and documenting work routines as well as processes to move business activities from site to site. In Flextronics business model, standardization and documentary is fundamental, perhaps the priority in offering service. However, LEGO has been in Billund for 40 years and owns a large number of experiences employees. So in LEGO’s plant, normalization of work processes, communications, and interfaces between different departments in production is not emphasized.

Therefore, when LEGO handed over production to Flextronics, Flextronics definitely has issue on producing LEGO’s brick and can’t meet LEGO’s high requirement of reduce complexity. Communications is another challenge in keeping a good relationship, especially with a new supplier. LEGO went for Flextronics after a severe internal crisis, though these two parties had no cooperation before. Obviously, LEGO has very high expectation for Flextronics, also its offshoring plan and looks forward to seeing positive results as soon as possible. Therefore, when LEGO realizes the big gap between Flextronics’s business model and itself, LEGO hastily ends the contract and Flextronics didnt try to save the contract. If the two parties understand each other better and try to fix problem through negotiation, the relationship won’t break up that soon.

Q3 How can LEGO handle supply chain complexity to improve knowledge sharing, flexibility and coordination? There are three options for LEGO. Firstly, LEGO can hire a supply chain management consulting firm for advice on reducing the complexity. Secondly, LEGO can still go offshore, but turn to a third party logistics firm for help. Also, LEGO can do by itself. For instance, LEGO can set up a project management team inside and come up with solutions. However, no matter which approach LEGO choose, it needs to upgrade its documentary and standarlizaiton in work process and communication line in order to improve efficiency and coordination. Currently, LEGO has plants in Hungary, Czech Republic, opens new sit in Mexico and sales products to all of the world. It has to deal with employees, regulations in different culture and it is so easy to lose control if there is no normalization.

Q4 Key considerations when outsourcing or offshoring production Choosing the right supplier and deciding what to be outsourced are key considerations when a firm goes for offshorinng production. Whether a company can satisfy its customers is based on the performance of its suppliers. Companies are looking for suppliers who can provide service on time and meet the specific requirement of quality when outsourcing abroad. Cooperation with a disqualified supplier will end up with longer lead time, poorer quality, and higher cost. Therefore, firms need to assess each candidate supplier cautiously and comprehensively.

Decision on what to be outsourced and how to outsource are also crucial. In the LEGO case, LEGO failed to analyze its current situation and jumped into cooperation with Flextronic too quick. It took LEGO a while to figure out that in-house production and operation upgrade should be the right thing to do after the internal crisis. When assessing the offshoring production, the company needs to think about the all the cost, both indirect and direct, and to combine its specific general strategy and outsourcing plan together.

Q5 Competitive of the industry and its influence to LEGO’s choices The toy-maker industry in general is highly competitive. Normally, toy-maker companies design, manufacture, and market products such as traditional toys, video games, casino games and accessories. Rapid changes of consumers’ taste and rising cost of raw materials, labor and machinery are main challenges faced by toy-makers. As internet, computers, smart phone and tablet computers become common in everyone’s daily life, customers taste shift from traditional toys to computer games, interactive applications on smart device, video games.

Although the unique principle of LEGO’s brick was outstanding and highly prized, the critical changing in consumers taste led LEGO lose confidence in its brick and look for opportunities to broaden its portfolio. Moreover, in searching for lower raw materials and labor cost, many toy-makers have relocated production plants, moving from high-cost countries to low-cost places in Asian, South America and so on. According to the case, up to 95% of global toy production was located in China by 2004. Under the pressure of competition and in order to maintain a competitive price, LEGO chose to close down its factories in Germany, France and South Korea, meanwhile it opened new site in Mexican, Hungary and Czech Republic.