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LEGO GROUP: AN OUTSOURCING JOURNEY

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Ngoc Trieu

on 21 January 2014

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Transcript of LEGO GROUP: AN OUTSOURCING JOURNEY

LEGO GROUP: AN OUTSOURCING JOURNEY
Group2

design by Dóri Sirály for Prezi
Contents
Introduction about LEGO GROUP
Main Points
Conclusion
Tran Thanh Mai
Trieu Duc Anh Ngoc
Nguyen The Anh
Nguyen Ngoc Bich
Vu Manh Linh
Pham Van Nam

1. Introduction
-Prologue about Lego Group
2. Main Points
- Introduce: Products and Market & Dealing with Crisis
- Learning from offshore
- Financial Situation
- Epilogue
3. Questions & Answers
1930s – 1950s

The lego Group began in the workshop of Ole Kirk Christiansen, a carpenter from Billund , Denmark, who began making wooden toys in 1932. In 1934 , his company came to be called “ Lego”, from the Danish phrase leg good , which means “ play well”
It expanded to producing plastic toys in 1947

1960s – 21st century

Since the 1960s, the Lego Group has released thousands of sets with a variety of themes , including town and city , space , robots….
In May 2011 , space shuttle endeavor mission STS-134 brought 13 Lego kits to the international space station , where astronauts will build models and see how they react in microgravity, as part of the Lego Bricks in space program. The results will be shared with schools as part of an educational project

2004 – 2009

An adventure journey through five years from 2004 to 2009 have taught Lego Group – one of the fifth largest toys company in the world an expensive lesson about managing the global supply chain effectively
Lego signed a long-term contract with Flextronics
But 3 years after the contract was signed, Lego management announced that it would phase out the entire sourcing collaboration with Flextronics.

Introdution
Founder: Ole Kirk Christiansen, Danish Carpenter
Manufacture his wooden toy designs
“Good play” enriches a child’s life.
2009 – 5th the largest manufacturer of toys in term of sales
Revenue: 11.7Billion DKK = $2.1B
Profit : 2.2B DKK = 0.39B USD
Workforce: 7000 employees
Management:
1 CEO + 1 CFO
5 executive vice president :
Market Product
Community
Education and Direct
Corporate Center
Global Supply Chain

Product and market
Main Product: LEGO BRICK
1st introduced in 1958
Philosophy of Lego brick: It would stimulate creative, structure problem solving curiosity & imagination
Lego play that is fun, creative, engaging & challenging
All the same time

Product segmentation
1st Pre-school products – Youngest People
2nd Creative building
3rd Play themes – airport, hospital, racing trades
4th Licensed product – build up around movie – book ( harry Porter, Star wars…)
5th MINDSTORM NXT – Robot kit
6th LEGO Education
7th LEGO Game Product Line
Place/ Distribution
130 countries
Largest country – US – 2007 – 30% REVENUE

DEALING WITH CRISIS
In 2004, radical changes took place within the LEGO organization as a consequence of a major internal crisis.
Net losses DKK 888 million in 2003 and DKK 1.8 billion in 2004.
Sales had fallen 30% (2003) and 40% (2004)
The main reason was falling at the confidence in its core product — the LEGO brick.
Fallen down at traditional market, LEGO focused on new market: computer games, clothing. This act of diversification had resulted in vast complexity and inefficiencies.
In October 2004, Jørgen Vig Knudstorp was appointed as Kristiansen’s successor, he explained as to how he would put an end to the financial turmoil : “We have been too sacred with our own virtues, not open enough, and not willing to listen to what other people say. We shall now listen to customers and consumers; simply drop the sacredness”
New Vision – “Shared Vision” with 3 core principles:
“Be the best at creating value for our customers and sales channels.”
“Refocus on the value we offer our customers.”
“Increase operational excellence.”

Learning from offshore
Trouble Marriage
The outsourcing collaboration was cancelled after merely three years
The marriage between Lego and Flextronic makes Production’s network more complex
80% outsourcing , 20% in-house
Unpredictable demand with Flextronics’ business model  demand uncertainty fluctuated with plus or minus 30percent (While 60 percent of the LEGO production was made in the second half of the year)

A Bounded New Start

Relationship between Lego and Flextronic are breaking after 3 years.(in 2008)
Fail in new start because Flextrolic just cuts cost and reduces complexity. They do not focus on core value of Lego.
In 2005 Lego introduces S&OP ( sale and operation planning), it focus on sales, production and product development , it do not mix with Flextronic.
Each of them have responsible different places. Eg: Lego control of the Kladno factory in the Czech Republic. Flextronic controls Hungary(Sarvar and Nyíregyháza) and on esitein Mexico(Juárez). It effects to common process production.

Group Finance Structure
Marketing and products :Markets& Products(M&P) has global responsibility for product development, marketing and sale
Community ,Education and Direct : is responsible for direct contact with consumers via brand retail stores, online sales, and mail order. In addition, this business area handles contacts with fans and the development of new business concept saimed directly attend-users. And it is this unit that is responsible for the Group’s development, marketing and sale of educational materials
Corporate Centre : covers thread mini stratify service departments: IT, Human Resources, Corporate Communications, Corporate Governance & Sustain ability and Corporate Legal Affairs
Global Supply Chain : is the business area responsible for the Group’s supply chain from procurement and production to shipping and distribution to the retail trade
Corporate Financial :responsible for financial management and controlling as wel las follow upon business planning and strategi cinitiatives.

Learning

There is a need to monitor and coordinate the different production facilities roles, capacities and responsibilities in relation to the supply
Standardization of mindsets, operations and production is used more strategically to overcome and manage the multitude of complex issues deriving from a global production network
Building competences, training and education of staff takes more time than moving technology
Outsourcing isn't always the best solution for cutting costs and reducing complexity; it might even complicate matters instead of simplifying them
Understanding one's own processes and structures is key to optimizing them in order to manage the constant change of market demands and attain competitive advantage
LEGO was expecting a contractor (Flextronics) to know more about its operational activities and processes than LEGO itself
Documentation of work processes, communication lines and interfaces between production activities is indispensable for the coordination, transparency and control of global operations. It contributes to identifying strengths and weaknesses of the production network

Advantage & Disadvantage
Advantage
Leverage on the Community Effect
Enlarge demand
Segmentation of the demand
Increase the willingness to pay
Enhance customers loyalty
Increase Brand Awareness

Disadvantage 
Costs of production of customized goods
Imitation
Not applicable to alone young users
Confusion of demand
High Development Costs

Thank for listening
Q&A
Question 1
What were LEGO's main expectations and learnings from the relationship with Flextronics?
Expectations:

• 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

• 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

• Contracting production to Flextronics can help LEGO eliminate the risk of production price fluctuations.

Learning

• There is a need to monitor and coordinate the different production facilities roles, capacities and responsibilities in relation to the supply

• Standardization of mindsets, operations and production is used more strategically to overcome and manage the multitude of complex issues deriving from a global production

• Building competences, training and education of staff takes more time than moving technology

• Outsourcing isn't always the best solution for cutting costs and reducing complexity; it might even complicate matters instead of simplifying them

• Understanding one's own processes and structures is key to optimizing them in order to manage the constant change of market demands and attain competitive advantage

• LEGO was expecting a contractor (Flextronics) to know more about its operational activities and processes than LEGO itself

• Documentation of work processes, communication lines and interfaces between production activities is indispensable for the coordination, transparency and control of global operations. It contributes to identifying strengths and weaknesses of the production network

Question 2
What are the key challenges in maintaining a relationship like the one between LEGO and Flextronics?
+ Focus the core competence of the enterprise
+ The new supply chain should be agile
+ Significant risks associated with Loss of control and Loss of innovation

Question 3
How can LEGO handle the supply chain complexity to improve knowledge sharing, flexibility and coordination?
- Flexibility:
• Product standardization : in order to adjust the fluctuation ( Ex : The Lego mini figure policeman was reduced from 16 to only 4.)
• Develop contigency plan : mitigate the supply chain risks by considering various alternatives
- Knowledge sharing :
• Bring in local experts to maintain a high level of communication with product facilities abroad
• Create global educational and training programs among this local leaders spread competencies of Lego among the factories
- Coordination :
• For the initial Phase, outsource a new function may give more succesful results
• Develop an initial and external monitoring system in order to identify potential weakness and strengths that will shape the future strategies.
• Identify the performance indicators of in-house production facilities in order to compare with the prospect partners in the future.

Question 4
Discuss the key considerations when outsourcing of off-shoring production.

The most important thing when deciding to outsource of offshore production is finding the right partner. In many cases companies decide to commit some of their activities to other companies that apparently seem to be adequate but it turns out that they have different necessities. As in the LEGO case study the partnership did not turn out to be appropriate and instead of helping the company to come out of the crisis, it worsen the already troubled situation. Company should screen out the possible candidates for a partnership in terms of quality, effectiveness and efficiency, time adequacy, transportation opportunities and other criteria they value.

Question 5
Describe the competitive environment of the industry and how it relates to LEGO's strategic choices.
LEGO is one of the major players in its industry as it is the world’s largest manufacturer of toys in terms of sales. The environment is highly competitive and recently was largely affected by the financial crises. Since 1958, LEGO’s core and original product, composed of bricks with interlocking tubes, has represented competitive advantage for the company. However, as the company operates in an extremely competitive and ever-changing environment, it decided to re-innovate itself by extending its products lines by adapting its unique product to several agreements, widely increasing the consumers target, from a infants to adults.Another strategic choice took by LEGO in order to maintain its status of toy leader,was to start outsourcing almost all of its production activities as the industry’trend dictates
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