Running head: CASE STUDY #6 1

Case Study #6: Lego Group: An Outsourcing Journey

Robert Kolowitz

May 1, 2019

University of San Francisco

MSIS-675-35

Professor William Kolb

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Executive Summary:

The Lego Group is a privately held, family-owned company with headquarters in Billund,

Denmark, and main offices in Enfield, USA, London, UK, Shanghai, China, and Singapore.

Founded in 1932 by Ole Kirk Kristiansen, and based on the iconic Lego brick, it is one of the

world's leading manufacturers of play materials (https://www.lego.com/en-us/aboutus). The

word "Lego" is derived from the Danish words "leg godt", meaning "play well"

(https://en.wikipedia.org/wiki/The_Lego_Group). In June 2015, the Lego Group became the

world's largest toy company by revenue, with sales amounting to US $2.1 billion. Lego products

have been sold in over 130 countries worldwide.

Lego Group came to prominence through the popularity of their Lego interlocking bricks

which were a commercial success. As Lego Group grew in popularity, they diversified into

multiple product lines encompassing toys, video games, board games, books, magazines, motion

pictures, television shows, children’s clothing and theme parks. The product diversification came

at a cost, particularly in the development of specialized Lego toy sets. The specialized Lego toy

sets did not use common parts with other sets and many have thousands of individual pieces.

Lego Group began losing money in the late 1990’s and by 2004, Lego Group found

themselves in the largest internal financial crisis in the company’s history. Sales had fallen by 30

percent in 2003 and an additional 10 percent in 2004 (Oliver, Samakh, Heckman, 2007). In an

attempt to reduce the complexity of production and organization, Lego Group decided to

outsource the bulk of their manufacturing to Flextronics. Within three years, Lego Group

cancelled the contract with Flextronics and brought manufacturing back in-house.

The Issues:
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Lego Group’s push for diversification was to counterbalance a decline in sales of their

flagship Lego brick product. Lego Group did not calculate the price of materials or the cost of

production for each of their new toy lines and had 130 different color pallets’ for each of their

traditional Lego bricks. Some of the more complex toys such as the Millennium Falcon and the

Taj Mahal have more than five thousand pieces each. The pieces for these specialty lines were

not interchangeable with other toy sets and sales were seasonal. Lego Group’s sales forecasting

ability was poor and they could only predict the sale of a box plus or minus 30 per cent.

Bottlenecks and out of stock inventory issues were common when sales of a particular product

line increased and consumed parts destined for other product lines. To ensure availability, Lego

Group needed to keep excess inventory on hand which created a cost burden. The rise of cheaper

and more efficient toy manufacturers and the move to online sales created a more cost

competitive environment that Lego Group was not prepared for.

Although Lego Group was gaining market share and making record sales, the cost of

each sale was eating profits. The act of diversification had resulted in vast complexity and

inefficiency. Lego Group’s supply chain had not kept up with changing market dynamics and

just in time delivery methodologies (Oliver, Samakh, Heckman, 2007). The Lego Group did not

standardize on vendors, instead allowing engineers to use their vendor of choice. Consequently,

Lego Group had approximately 11,000 suppliers which was almost twice what Boeing used for

its airplane business.

Lego Group had poor documentation of business processes. This became evident as they

began shifting manufacturing and operations to Flextronics. Lego Group was dependent on

Flextronics to discover and document business processes that were key to running the business.
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It was not until Lego Group began laying off long time workers that they appreciated their lack

of documentation for business process and procedures. Loyal employees who had worked at

Lego Group for decades had kept operations running using only institutional knowledge. After

the outsourcing project was went live, Lego Group learned that their seasonal sales swings were

not a fit for Flextronics’ predictive manufacturing methodology.

Data Analysis:

Lego Group needed to address several areas of the business in order to avoid further

losses and eventual bankruptcy. Lego Group’s focus was still on independent retailers in the

1990’s where their competition had moved towards big box retailers. Lego Group’s management

did not anticipate, nor react to changing market conditions with urgency. Instead of diving into

the data to understand why profits were down, Lego Group spent resources on diversification

instead. By moving beyond their core competency of children’s toys and into apparel, theme

parks, TV and film, Lego Group inadvertently created an overly complex and inefficient product

portfolio. These activities were not tied to their business and skill set and consumed management

resources who should have been analyzing the cost structure of existing products to reduce cost

and increase efficiency.

Lego Group’s largest issue was that they were not tracking engineering, manufacturing

and production costs relative to income. Had Lego Group kept a closer eye on their numbers,

they would not have lost so much money. In many ways, The Lego Group motto: “Only the best

is good enough,” prevented the company from taking cost saving measures as they were seen as
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a threat to building quality products. Sadly, many good employees who embodied the company

motto lost their jobs as a result of management’s oversight.

Lego Group’s outsourcing contract with Flextronics was a leap of faith that perhaps a

highly organized contract manufacturer could help sort out the supply chain issues that plagued

the company. Both parties should have performed more thorough due diligence of the business

requirements before final contract approval. If they had, then they would have determined that

Flextronics was not a fit for a company with wildly fluctuating seasonal demand and frequent

engineering changes. Flextronics may have turned a blind eye to these concerns as they were

looking to better understand the plastics industry for their own benefit. Flextronics got paid for

the Lego Group deal and learned much about plastics along the way. Lego Group management

did not truly understand their business and were looking for someone to save them.

The deal with Flextronics did have a silver lining for Lego Group. Flextronics

documented Lego Group’s business processes and shined a light on their supply chain

inefficiencies. At long last, senior management had an appreciation for understanding the details

they had missed for so long. The deal also enabled Lego Group to broaden their operations

during a downturn by leveraging Flextronics’ resources.

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Recommendations:

Now that Lego Group has learned where their problem areas are, they should consider a

different contract manufacturer or multiple regional contract manufacturers for each major global

market. There are efficiencies to be had from contract manufacturers and a smaller contract

manufacturer may be better suited to the seasonal demand swings of Lego Group’s product line.

Business processes have been documented and Lego Group has more knowledge about their

operations. This will ease the hand-off process to any new contract manufacturer.

Placement of manufacturing & distribution sites close to their largest markets could

shorten delivery times and decrease delivery costs. Elimination of niche products can reduce

complexity and single use parts. By reducing the complexity level of products Lego Group can

use more common parts across product lines. Lego Group should consider limiting the number of

colors their traditional bricks are manufactured in. This change should not only reduce materials

costs but also reduce downtime during color changes on their injection molding machinery.

Replacement of their Enterprise Resource Planning (ERP) system with a more modern

one is important to remaining competitive in the marketplace. Many of Lego Group’s ERP

systems are bespoke legacy applications. Implementation of standards in purchasing, reduction

in the number of suppliers, better communication across the business and accountability for costs

of innovation and product development are all areas than need to be refined.

Lastly, divestiture of non-core, non-profitable ventures and a focus on the products that

have and continue to generate profit should be top priority. Lego Group can once again be at the

top of their market if serious effort is put into making the necessary changes to their business.
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References:

About the Lego Group, Martin Vang Sandgaard Jensen, Feb 12, 2015

https://www.lego.com/en-us/aboutus

The Lego Group, Wikipedia, https://en.wikipedia.org/wiki/The_Lego_Group

Lego: Building on a Dynasty, Davies, Sean February 17, 2009, Engineering & Technology

https://eandt.theiet.org/content/articles/2009/02/building-on-a-dynasty/

Lego Group: An Outsourcing Journey, Larsen, Marcus Møller, Pedersen, Torben, Slepinov,

Dmitrij, May 2010, Ivey Publishing / Harvard Business Publishing

Rebuilding Lego, Brick by Brick: Oliver, Keith, Samakh, Edouard, Heckman, Peter, August 29,

2007, Strategy+Business https://www.strategy-business.com/article/07306