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To address these issues, Lego set up a two-track approach. One cross functional group was developed to focus on the overall supply chain strategy, while another was formed to drive those strategies through to execution. What do you say? Send us your comments here

Lego is one of the most iconic brands not only in the toy category, but in consumer products generally. So much so that its connectable construction blocks were named “toy of the 20th century” by Fortune magazine.

But that didn’t guarantee financial success. In fact, in a very interesting case study in the Strategy + Business magazine from consulting company Booz Allen, it turns out supply chain complexity and dated processes almost killed the company earlier this decade – and that a subsequent supply chain transformation helped turn the company and the bottom line around.

Rapidly Changing Market Brings Problems

In the 1990s and beyond, many factors were potentially threatening to Lego’s business. Many kids were spending more time with video games than traditional toys. Knock off products from China were coming to market at lower cost. The traditional retail channels were changing dramatically from small mom and pop toy shops to the major big box retailers – sound familiar?

Lego Group, headquartered in Denmark, lost money four out of the seven years from 1998 through 2004. Sales dropped 30 percent in 2003 and 10 percent more in 2004, to $1.35 billion world wide. Executives estimated that the company was destroying $337,000 in shareholder value every day, despite its lofty position in the toy hierarchy.

The company had been trying to innovate its way to success, launching Lego-based theme parks and video games. But as things got really bad in 2004, it turned out that the best opportunity to turn the ship around was through supply chain excellence.

The article says that, “The company leadership knew it had to address those problems, and that the supply chain posed the most immediate opportunity for improvement. The Lego Group’s supply chain was at least 10 years out of date. Poor customer service and spotty availability of products were eroding the company’s franchise in key markets. Speedy attention to the supply chain, the leaders reasoned, would not only buy them time to deal with the other challenges, but could help set in motion a virtuous circle of improvements that would support subsequent changes in the rest of the company.”

Lego supply chain had been built for custom delivery to the smaller retailers that dominated the market from the time the company was started. Although it had made many positive changes in serving the US market, all told Lego was well behind global competitors in crafting its supply chain for the big-box stores. Lego had also fallen behind to companies that operated with much greater supply chain sophistication, analyzing and optimizing every cost driver to provide just-in-time service to the new retail giants.

With a new CEO on board, Lego decided that among the many problems it needed to work through, fixing its supply chain was the number 1 priority.

Opportunities Across Many Processes

Lego’s analysis showed problems and opportunities across many functional and process areas:

• Product Development: Lego had been introducing hundreds of new SKUs, more focused on product innovation than the impact on supply chain costs. Many new products cost the company money.
• Sourcing and Procurement: Incredibly, Lego dealt with some 11,000 suppliers. It frequently sourced unique (and therefore higher cost) materials, and did little to leverage its total buying power.
• Manufacturing: Production processes and lines were not set up to leverage its production scale, almost operating as a vast series of small, independent toy producers. Long term planning was a rarity, and fire drills common.
• Logistics: There was little distinction in service policies between small mom and pops and the major retailers now accounting for the preponderance of the business.

To address these issues, Lego set up a two-track approach. One cross functional group was developed to focus on the overall supply chain strategy, while another was formed to drive those strategies through to execution. A “War room” approach soon developed, with dozens of people involved. Change management, always an issue, was deemed especially difficult at Lego, a close-knit, family owned company. To address this, executives decided to go with near total transparency – strategies and potential changes were widely communicated throughout the company. The article notes that as slow as this process was, “Working through it had an important benefit: When the teams finally reached a consensus, the decision stuck.”

The key changes to the supply chain naturally follow the issues identified above:

• Simplification: Lego reduced the number existing color options in half, for example, and developed a cost matrix that calculated for designers the high cost impact on the supply chain of changing product colors and shapes.
• Sourcing: Lego reduced significantly its number of plastic resin suppliers, and signed longer term contracts which reduced and stabilized pricing, lowering costs and enabling better planning.
• Rethinking Quality: There was an incredibly strong quality mentality in the company, so much so that cost reducing ideas were regularly scrapped as potentially reducing quality. It also fostered innovation that lost money in the name of being the best. Lego rebalanced that thinking.
• Manufacturing: Lego rationalized production lines, reducing the number of products that could be made on each machine, adding simplicity and reducing changeover costs. It established more fixed production cycles, and better tied manufacturing to the rest of the supply chain. For example, it was no longer acceptable to make manual changes in a molding machine without informing the finished-goods packing team, an important consideration since different kits are packaged in different boxes. While it had some manufacturing in Asia, new facilities were built in Eastern Europe to better service the European market.
• Logistics: The number of logistics service providers was cut from 26 to 4. It also put a distribution center in Eastern Europe to take advantage of lower costs there than in Germany and other major markets – a step few at the time had taken. It also began working much more closely with retailers on joint forecasting and logistics planning.

The Results

The supply chain transformation has led Lego to return to profitability in 2005 for the first time since 2002, and saved the company about $100 million, with more savings to come. Inventory turns have improved by at least 12%.  It has gone from being well behind the competition in supply chain excellence to what it believes is a slight competitive advantage already in some area.

Just as importantly, Lego believes getting the supply chain right was essential to meeting other business challenges. “Getting the right product to the right place at the right time at the right cost was an important early step in grappling with an array of strategic challenges” for Lego, the article notes.