Vous êtes sur la page 1sur 3

1. In the pre-outsourcing phase why did LEGO get into difficulties?

What are its rationales for considering outsourcing or offshoring as a solution? LEGO during the pre-outsourcing phase, that corresponds to the period of crisis that the firm faced during 2004, faced many difficulties that were due to different reasons. Probably the most relevant one was the general loss of confidence in LEGOs core product: the brick. In fact the company was trying to enter different markets by diversifying (computer games, television, clothing) and focusing totally on new products, without much success and increasing complexity. They were not ready to withstand the competitive and dynamic market outside their core product, and this all lead to inefficiencies. Moreover LEGO Group during that period relied to roughly 11000 different suppliers to match its differentiated products, increasing the number of components: a very unproductive system not only because of the costs, but also for the difficulties in communication and information distribution which also led to highly confused consumers and employees. One more problem that the firm was facing at that time was the decentralized and very flexible approach towards retailers: the distribution system was costly, complex, without a reliable overview of demand. Besides the internal problems that the firm was experiencing, there was also a disadvantageous external situation on the market: unfavorable development in the global toy market and critical exchange rates of key currencies. Knudstorp, the CEO that decided the upcoming outsourcing, also admitted that the firm was not open enough, and did not analyze the whole market situation properly. The production was not at all consumers based, and the firm was very concentrated on its fundamental principles, forgetting to confront itself with the market reality.

LEGO considered that outsourcing would be a good solution to its problems because they aimed at right-sizing activities in order to reduce costs and try to exit the crisis. The first and the last phases of the value chain of the firm, products development and distribution, were far too much complex: there was a need to change the supply chain, and the approach towards retailers. The main objective was a lighter production portfolio, thus outsourcing was the best solution for the problem: it permitted effective and efficient cost savings, by relocating production to low-cost countries (Czech Republic, Hungary, Mexico); and it also granted economies of scale by subcontracting to large partners and reducing production complexity. LEGO believed it was the best strategy to lock prices over a long period of time, which also eliminated risk of price fluctuations.

2. What should the LEGO board or management team do given the challenges of the company? Should LEGO outsource or offshore or do something different? The main LEGO problems are the costs faced in developing and distribution because of its very inefficient system. a. What are the pros and cons of outsourcing? PROS The main advantage of outsourcing is cost saving. LEGO had 11000 suppliers, and an unfit distribution to retailers: it still needed to acquire the knowledge, and did not have anymore funds to invest in 2004 with the internal crisis that affected the firm. Outsourcing was a good idea because the distribution of information occurring between LEGO and the partners would have helped the firm, without further investments. Moreover by outsourcing the firm avoided risks of price fluctuations. CONS The main disadvantage with outsourcing is the loss of control: in the LEGO case delegating operations to its partners meant closing different plants in Denmark and Switzerland, to move to low cost eastern countries. The attempt to overcome the complexity of LEGO system ended up in an even more complex global manufacturing footprint. The partnerships reveled themselves to be very challenging, especially with Flextronics. The increasingly complicated global network of production facilities and the distribution of information became very difficult to be controlled, as well as the transfer of production know-how to the partner. Furthermore the LEGO group should consider the risk of imitation.

b. List the main cost drivers in offshoring/outsourcing, describe them and their impact on LEGO in the case. The main problem was the seasonal fluctuating LEGO demand, which requires a flexible and market-responsive business, not matching at all the stable operations and achievement of economies of scale within Flextronics. This leads to high administrative and organizational costs in order to work together with the partner. An additional issue was the education of the employees: LEGO soon realized that forming new people was less efficient and meant high costs. 3. What were LEGOs main expectations and learnings from the relationship with Flextronics?

The learnings from a partnership that seemed to be a failure were actually many: even though outsourcing raised different problems, LEGO had the opportunity to learn especially from Flextronics and face its initial issues. First of all, even with its financial constraints, LEGO gained an expanded global operations footprint by learning how to manage the global production network in order to serve international markets and save costs at the mean time (Sales and operations planning). Secondly the collaborations permitted LEGO to better understand its own processes and structures: the knowledge that Flextronics had in documentation and standardization of the production was a valuable lesson for the management as they realized the value of documenting work processes and of the communication lines between different stages and activities of the production. All this lead to greater transparency and control within LEGO Group, that permitted the firm to better manage the complexity of its processes. The outsourcing ultimately meant performance improvements for LEGO.

4. What are the key challenges in maintaining a relationship like the one between LEGO and Flextronics? The main challenge was the complexity in the network resulting from the collaboration between LEGO and Flextronics. It became very difficult to control and to diffuse information: a reliable transfer of knowledge became almost impossible. Moreover LEGO had a fluctuating demand, but Flextronics was relying on a stable production process to exploit economies of scale: combining the models meant changing the systems and adapting to the partner for both firms. The difficulties were in fact too many to be faced, and the partnership ended in three years.

Criteria for LEGO group success are based on a strong building on competencies such as training and education of employees, the ability to statistically measure the benchmarks and the importance of hiring a local leader to understand the local culture and enhance communication and coordination.