A newsletter where we reveal the insights & stories behind the supply chain of our everyday products
Today we dive into a childhood staple for many of us, LEGO
💡 Fun Fact - “Leg Godt”, the origin of the company’s name, is Danish for “Play Well”
LEGO’s capacity to innovate and create new products was way ahead of its ability to produce and distribute products.
LEGO understood the need to revamp its supply chain and proposed the Shared Vision Plan (SVP). Initiatives such as enforcing stricter rules to service big-box retailers such as Walmart and Toys R Us, consolidating its distribution centers under one facility in the Czech Republic, and moving production to lower-cost countries were implemented over the next decade.
LEGO had an all-important insight through this entire process, which was that its core competency, brick moulding, should not be outsourced. This insight stands to this day.
LEGO recently announced a $1B investment plan to build manufacturing centers near major markets. It announced the groundbreaking of a new carbon-neutral facility in the US to service the North and South American markets. LEGO also announced plans to build a facility in Vietnam to service the Asian markets.
LEGO was on the verge of bankruptcy in 2004. This didn’t stop them, on the contrary, LEGO spent the last 18 years focusing on its core product, restructuring its supply chain, and expanding globally to become the largest toy company in the world.
Denmark, 1932. In the midst of a recession, a carpenter named Ole Kirk Christiansen is having trouble procuring the wood he needs to make furniture. Out of desperation, Ole takes scraps of wood he can find and makes toys for kids. To his surprise, they are pretty popular. Soon after, he pivots his business to making wooden toys full-time. LEGO is born.
Since producing the first set of its famous colored bricks, the Danish toymaker has expanded to sell its products in more than 130 countries — and its revenues today are the highest in the company’s long history.
With such a wide reach, however, LEGO needs a connected supply chain to keep its products moving from the factory to the toy store. Although its supply chain is a well-oiled machine today, this wasn’t always the case.
The year is 1998. France has just defeated Brazil in the World Cup. While France is rejoicing at the Champs Elysees, the story is quite different at another European powerhouse, The LEGO Company. In the 1990s, as their competitors focused on serving the big-box stores, LEGO considered its primary challenge to be brand building — even though their colorful bricks were already among the most recognized toys in the world. By 2003, sales had dropped by 35% in the US and 29% worldwide, culminating a year later in the biggest loss in the company’s history: $300M.
Leading up to the 2000s, the toy industry was simple. Competition for a child's attention was lower, and the toy market consisted of smaller, independent toy stores as opposed to the larger big-box department stores which would later dominate. As competitors diversified into video games and new kinds of toys, LEGO decided to expand its product offering, adding licensed LEGO Star Wars and Batman to their portfolio. LEGO sets also became increasingly complex. The unique product components of these novel sets required more individual brick molds which added to the complexity of product lines. LEGO was failing to properly fulfill demand driving up its obsolete inventory, which quickly became a costly and unprofitable headache.
Suppliers also became an issue. LEGO dealt with a lot of suppliers, more than 10,000 of them. A lack of standardized procurement procedures meant LEGO product engineers were picking their preferred suppliers for the development of new products. A similar situation existed in manufacturing where each production team operated like an independent toy shop. This independent spirit was a hallmark of LEGO’s innovation-driven culture and heritage, yet now it was jeopardizing LEGO’s ability to leverage its size and enjoy economies of scale.
Decentralized distribution and poor forecasting were preventing LEGO from fulfilling its orders with large retailers, such as Walmart and Toys R Us, and they eventually lost precious shelf space to competitors who could meet the stricter and shorter lead times requirements. While other toy manufacturers had begun outsourcing manufacturing to Asia, especially to China, LEGO decided to keep its manufacturing centers close to its main markets. However, this strategic decision began costing LEGO, specifically due to much higher fixed costs and capital investment required for maintaining existing facilities, and building newer ones.
To combat these problems, LEGO implemented what they coined the “Share Vision Plan” (SVP), to reconfigure key aspects of its supply chain. Check out the original SVP slide from LEGO below!
The SVP began by challenging engineers and designers to creatively come up with solutions that repurposed existing LEGO components to create new LEGO products, reducing the complexity and disorder the production of so many new components had caused in its supply chain.
LEGO also looked to standardize and improve its distribution. In the past, LEGO was very flexible, even towards the smaller retailers, and allowed them to create small purchase orders, resulting in labor-intensive “pick packing” at distribution centers. Learning from their mistakes, LEGO enforced stricter rules on the level of servicing for retailers, with a renewed emphasis on larger customers (Walmart, Toys R Us, etc.). This strategy helped LEGO drive down the cost of distribution and provided a more reliable overview of demand.
To further slash logistics costs, LEGO began consolidating all of its European distribution activities under one roof. The majority of LEGO's European warehouses and distribution centers were consolidated into one facility located in the Czech Republic. It was a risky move: Eastern Europe was not necessarily known for this type of operation, said Egil Møller Nielsen, LEGO’s VP of Global Logistics at the time. The company also hired a 3PL company, DHL Exel Supply Chain, to run the day-to-day distribution operations. The main reason behind this decision being the seasonal nature of its sales — 60% occur in the months leading up to the December holidays (even today!). The shift to a single distribution center resulted in savings that helped the toymaker's bottom line. In 2008 the company recorded a nearly 19% jump in annual revenue to $1.8B.
“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 stockouts far less likely. It also brought LEGO closer to Europe’s largest population centers, decreasing the average distance to the market (we all love shorter lead times!)
On the manufacturing front, LEGO moved production facilities from Denmark and Switzerland to lower-cost countries. However, LEGO wanted to maintain proximity to its main markets of Europe and the United States. As such, European manufacturing was moved to the Czech Republic and Hungary.
The final step, or so they thought, was to outsource production. LEGO chose Flextronics as their outsourcing partner in 2006. Over the next few months, control of LEGO's manufacturing facilities gradually shifted to them. Nonetheless, LEGO still wanted to have day-to-day control over two essential parts, molding and packing, which were retained in Billund, Denmark. The goal behind this move was to reduce operational costs, and at the same time learn from Flextronics’ expertise in simplifying operations.
The partnership was not meant to be. In 2008, Flextronics and LEGO’s partnership was terminated. The end of the partnership meant that the factories in the Czech Republic and Hungary returned to LEGO’s ownership. LEGO would go on to build a new factory in Monterrey, Mexico, to transfer production from the Flextronics plant in Juaréz. The Monterrey, Mexico factory is still going strong to this day.
“The all-important thing we learned is that one should know what is the core competence of a company. The molding of bricks is a core competency, and that we should not hand over” - LEGO Group’s Chief Operating Officer, Bali Padda, in 2012
In hindsight, the Flextronics <> LEGO partnership was not very well-suited for a major player in the toy industry. For one, toy products are highly innovative and seasonal, with sales skewing heavily towards the peak holiday season, and most products having a short lifespan. LEGO needed a supply chain partner that emphasized flexibility when responding to market demand, which given how the relationship ended, Flextronics could not offer.
So, what does LEGO’s supply chain look like today?
Step One involves ordering the plastic needed to produce the LEGO bricks from the suppliers.
Step Two is the molding of the LEGO bricks from the sourced raw materials.
The mixture is then heated and molded into the iconic LEGO shape, cooled, and sorted into various bins according to their color. The molding and packaging processes take place in LEGO’s facilities, which include plants across China, the Czech Republic, Denmark, Hungary, and Mexico.
Today, LEGO has factories in Denmark, the Czech Republic, and Hungary, which serve customers in Europe, the Middle East, and Africa; in China, supplying Asia; and in Monterrey, Mexico, which supplies North America.
Step Three: The bricks are decorated and packed.
Step Four: The bricks are then packaged into boxes and shipped to LEGO distribution centers all around the world. Once sorted and organized, the sets are then shipped to retail stores.
Step Five: We walk into the store, or add-to-cart from our device of choice, and purchase a set of world-renowned LEGOs.
With a LEGO set and a bit of imagination, the possibilities of what you can build are endless. And now, the LEGO Group is doing some construction of its own. Earlier this year, LEGO announced that it will break ground on its first U.S. factory. This facility will support around 2,000 jobs in Chesterfield County, Va., and be carbon neutral.
This $1B investment is part of LEGO’s supply chain strategy to once again locate manufacturing near major markets, allowing for lead times of just a few weeks. Going back to its innovation-driven DNA, it’s safe to assume that LEGO is not only building this new factory to serve growing demand in the U.S. but also sees it as a hub to potentially serve customers in Mexico, Brazil, and other markets in South America. What’s interesting about this site is that LEGO will also build a solar power plant to match 100% of the facility’s day-to-day energy needs.
In the near future, LEGO also plans to build a factory in Vietnam to service the large markets in Asia, such as India and the Philippines. The construction of this facility, which also will be carbon neutral, will start in 2024.
LEGO, which is privately owned by the Kristiansen family, was on the verge of bankruptcy in 2004. But rather than fall over like a Jenga tower, it spent the last 18 years restructuring its supply chain, building a bridge to China's growing consumer base, inking strategic licensing deals, and investing heavily in eCommerce.
After getting its development, sourcing, manufacturing, and distribution in order, its focus now is on what it's done best for the last 90 years: making wonderful toys.
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