The Lego Case

1. What were LEGO’s main expectations and learnings from the relationship with the Flextronics? Expectations: a. Saving cost by outsourcing to low-cost countries: Prior to outsourcing, LEGO owned and operated production plants mainly in relatively high labor-cost countries, such as the United States, Switzerland and the South Korea. The main reason for this is that LEGO built plants close to its main markets to save transportation cost.

But LEGO finally realized that the reduced labor cost in some labor-intensive countries outweighed the reduced transportation cost. Then they decided to outsource to Flextronics who has production capacity in low-cost regions; b. Subcontracting to Flextronics allowed LEGO to reach the economy of scale as well as reduce production complexity by combining its production with that of other Flextronics’ clients; c. Contracting production to Flextronics can help LEGO eliminate the risk of production price fluctuations. Learnings: a.

LEGO learned from Flextronics the importance of documentation and standardization of the production, which give LEGO Group transparency and often help LEGO manage the challenges of complexity and to identify the stronger and weaker parts and links of the production network. b. LEGO should consider more factors before they outsourcing. Things like Flextronics’ operation style, the cost and time of providing engineering support and training, and variable lead time incurred by global sourcing are really critical for making decisions. 2.

What are the key challenges in maintaining a relationship like the one between LEGO and Flextronics. The key challenge in maintaining a relationship between buyer and supplier is how to reach an agreement that benefits both parties. Take LEGO and Flextronics for example, it’s a big problem for LEGO to solve the conflict between its need for flexible and Flextronics’ more stable and predictable operations. LEGO had wide range of products, including many licensed products like Harry Potter and Star Wars, and each of its products consisted of different unique bricks.

And it’s difficulty for LEGO to make a precise forecast with fluctuating demand. These two points made LEGO over-dependent on flexible production, which is totally against Flextronics’ operation style in which economies of scale is a key phrase. Since both LEGO and Flextronics require a profitable business model, it’s a great challenge to reach agreement that benefits both parties with difference emphasis. Also, LEGO has to consider how to communicate with

Flextronics pertaining to making a clear plan for training and educating their staff so that they can be able to meet LEGO’s efficiency requirement quickly. 3. How can LEGO handle the supply chain complexity to improve knowledge sharing, flexibility and coordination? LEGO introduce a sophisticated planning system called sales and operations planning (SO&P) to its daily operation. SO&P can help LEGO monitor and coordinate different parts in supply chain and provide LEGO the visibility of its global operation, which usually involve numerous outsourcing partners.

Besides, to maintain a good relationship with supplier over the long term, it’s reasonable to invest some resources to help the supplier achieve the level of performance required by LEGO. Through training and educating staff in Flextronics, LEGO can help Flextronics to build production capacity to meet the requirement of flexibility. Also, LEGO can put quality control personnel in factory to monitor production line and prevent quality variation. And frequent communication about production progress, updating issue and feedback is necessary for improving coordination and knowledge sharing.

Building a sophisticated information system is of great help to improve supply chain flexibility and coordination, by conveying information seamlessly, it allows the supplier to get the visibility of sales and inventory and adapt their own production to these information. This can eliminate the situation of overstock and out of stock. 4. What are the key considerations when outsourcing or offshoring production? Discuss them. To make a make versus buy decision, company should first consider the total cost of outsourcing.

This cost should include not only the quotation from supplier but also the cost of monitoring the relationship, cost of providing training, education and engineering support to the supplier and cost of dealing with cultural and operational difference. Outsourcing globally is also subject to ethical and environmental violations. Buying company should conduct a comprehensive investigation of the supplier’s production and related issues like child labor, below-minimum wage and safety production. If the supplier violated any of these laws, it is usually the buying company that became the target of social media and NPOs.

A company’s reputation can be greatly damaged due to the noncompliant supplier. If a buying company outsourcing its production, it may become over-dependent on supplier for production and finally lose the production ability, which may turn out to be a great disadvantage. Company should decide smartly which part of its business is appropriate for outsourcing. Besides, company should consider the variable lead time which is often impossible to control with outsourcing on global scale. Above all, it’s critical for buying company to make a comprehensive cost-benefit analysis to decide in-house production or outsourcing. . Describ the competitive environment of the industry and how it relates to LEGO’s choices? A number of toy companies had built production plants in China, statistic show that 90 percent of the world’s toys are made in China. This means many of LEGO’s competitors have price advantages over LEGO and it’s hard for LEGO to survive in some developing countries, which have relatively low purchasing power. That lead LEGO make the decision to outsource its production to Flextronics who have production line in low cost countries.

Competitors in toy markets are also compete for decreasing lead time which is critical in the eyes of customers. Customers usually don’t like to wait for long to receive the order, especially during the time before holidays when toys are brought as gifts for their kids. Variation in lead time often annoyed customers and triggered in market share losing. Since it’s difficult to control the lead time concerning to LEGO’s complex products with Flextronics’ stable and standardized production and operation style, LEGO decided to source back its production task.